What is a Captive Finance Company?

A Captive Finance Company is a wholly-owned subsidiary whose function is to finance consumer purchases or finance retail items sold by the parent company. In other words, a captive finance company helps the customers of the parent company finance big purchases. Generally, captive finance companies are specialized companies that are into credit card services, lending services, and other banking services. Captive companies offer to finance to customers of whichever parent company owns them. For instance, a captive finance company owned by a cosmetic company can make loans for customers who need to purchase cosmetic products or require expensive services.

How Does a Captive Finance Company Work?

A captive finance company is a wholly-owned subsidiary that is controlled by the parent company. These types of subsidiaries are established to extend financing to customers of the parent company for big purchases. For instance, parent companies such as Ford, Sears, and General Electric have wholly-owned subsidiaries that they established to extend loans to customers to enable them to make purchases. A captive finance company offers financial services solely to the customers of the parent company. Captive finance companies are commonly established in the automobile industry, for instance, Ford has Ford Motor Credit as its captive finance company, Toyota has Toyota Financial Services and many other automobile companies. These finance companies were created to offer to finance to customers who want to purchase an automobile.

Benefits of Captive Finance

It is important to know that captive finance companies are different from conventional banks and lending institutions. In most cases, these companies do not offer cash loans, rather they offer financing channeled to the purchase of goods and services directly from the parent company. The major benefits of captive finance companies are as follows;

• Captive finance companies offer better loan deals with lower interest rates to customers of a parent company.
• They are accessible to customers and have simplified loan process compared to conventional banks and lending institutions.
• They offer subsidized financial deals with lower risks.
• Captive finance companies also extend financing to customers or corporations with a poor credit rating that might otherwise be turned down by other financial institutions.
• They provide financial solutions to customers, helping them afford the payment for goods and services.
• These companies generate revenue for a parent company and its subsidiaries, they provide alternative means of income.
• Captive finance companies create a synergy between a parent company and other financiers.