Question

Explain what captive sales finance companies are.

Answer 1

Answer)

Captive Sales Finance Companies are financial institutions that offer their services to customers of some retailers in order to let the customers buy the retailer’s products. It is usually wholly owned by the parent organization. The primary purpose of captive finance companies is to fund the products of the parent companies by essentially extending credit to their customers. The best-known examples of captive sales finance companies are found in the automobile industry and the retail sector. When it comes to the auto sector, they offer car loans to buyers who is in of need financing. Some examples include General Motors Acceptance Corporation, Toyota Financial Services, Ford Motor Credit Company, and American Honda Finance. In contrast, retailers use these companies to support store card operations. Store credit cards offer customers various benefits for shopping at specific stores, including free shipping, additional discounts, and various rewards with every purchase. It not only helps the parent compnay to reduce risk exposure but also hels in increasing the sales if the company.

For example - Max wants to buy a car. He likes a particular car and later finds that the automaker owns a captive finance company which can provide him a loan. Therefore he enters into a loan agreement with the company which can finance his car directly from captive finance company owned by the automaker.