In addition to banks there are other credit institutions also that advance loans and other financial services. They are as under:
- Savings and loans associations
- Credit unions
- Life insurance companies
- Commercial finance companies
- Sales-finance companies
- Consumer finance companies
Savings & Loans Associations: These lending institutions receive deposits in small amounts which are ploughed back in advancing loans to finance the purchased of real estate. The real estate so bought is mortgaged with the creditor.
Credit Unions: They work on cooperative basis. They comprise those people who are friendly and well-known to one another, e.g the employees of a company. These employees with the cooperation of the employer lay foundation of a credit union, and save up their monthly salaries. Thus a huge fund is pooled and advanced at a nominal interest rate. Such loans are recovered in monthly installments from the salaries of the debtor employees.
Employees use these loans for purchasing durable consumer goods as TV, refrigerators, furniture, etc. The interest earned is distributed to members as profit.
Life Insurance Companies: These companies receive millions of rupees in the form of premium against life insurance policies. The amount so collected finds its way into various investments including the purchasing of shares, bonds and debentures. Purchasing bonds, debentures, and other credit instruments is actually advancing loans to the issuing companies. The life insurance company also directly advances loans to businessmen and manufacturers.
Commercial Finance Companies: They deal in money in two ways:
(i) Buying account receivables.
(ii) Advancing direct loans
(i) Purchasing Accounts Receivable: They purchase accounts receivable at a discount outright in their names. When these receivables fall due they directly collect money from the debtor at a full price. Buying accounts receivable benefits all the three parties. The seller immediately gets cash against selling accounts receivables, the buyer of the merchandise (debtor) gets sufficient time to make the payment and the commercial finance company gets discount as its income.
(ii) Advancing Direct Loans: They directly advance loans to various classes of businessmen including producers, wholesaler, retailers, importers and exporters, and others. These loans are used in purchasing machinery, equipment, raw materials, and merchandise. Since the loans are secured the influence of the commercial finance company increases on the debtor company. Moreover the rate of interest is twice as bank loans, reasons being greater risk and administrative expenditure.
Factor Companies: The commercial finance company discussed above purchases receivables at a discount on a condition that if they are unpaid the seller of the goods will be responsible and return the amount received against the sale of receivables.
However, the factor company offers a greater facility to business firms. It purchases accounts receivables from them without the above condition. If the purchased accounts receivable are unpaid by the customer the factor company will suffer the loss. Hence, it assumes a fairly greater risk, and therefore, charges, comparably a higher discount. The customer who has bough merchandise on credit from the business firm is required to pay the sum directly to the facto company if his part of the bill has been sold to the factor.
Factors also lend money against the security of fixed and current assets as machinery, equipment, and inventory. They cater to the needs of only small business firms. Hence, large companies contact commercial banks for the financial needs.
Sales Finance Company: Many business sell durable consumer goods like refrigerators. TVs cars, and like on installments. In such transactions, an agreement between the buyer and seller is drawn. Sales finance companies deal in busying these contracts. As a result, the seller immediately gets his payment, the buyer continues to pay on installments, and the sales finance companies receive interest income resultant from the installment sales. According to the contract between the seller an buyer, the title of ownership to the goods remains with the seller until the buyer makes full payment of the product. After the contract is purchased the sales finance company assumes the title of ownership to the goods sold. If the customer fails to make his payment the finance company will repossess the product. In case the company finds it impossible to repossess the article, it will refer to the original seller for the recovery of the loss. These companies have flourished the installment sales business. They also buy the contracts of installment sales to business firms busy machinery and equipment.
Consumer Finance Company: They make small personal loans. Before advancing they look into the repaying ability, income, and job security of the applicant. He is required to deposit a certain amount of money as a security.
The company also accepts other types of securities. The interest is charged on monthly basis which is mostly two percent.