Money Management, Part 5

Question 1: Describe sales finance companies and discuss their purpose.

Answer 1: Individuals buying expensive items from businesses frequently rely on sales finance companies. These companies allow people to pay for major purchases on an installment plan. Sales finance companies are important, because otherwise most dealers of items like televisions, automobiles, or furniture would not have the resources, much less the inclination, to sell many items on credit. So, when customers purchase items on an installment plan, the item purchased acts as security; the sales finance company will repossess the item if the customer does not make payments. The risks involved in running a sales finance company are quite large, so these companies tend to charge high interest rates. Their prevalence, however, has led most commercial banks to start financing divisions.

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Question 2: Discuss the advantages and disadvantages of leasing.

Answer 2: Leasing is typically more expensive than borrowing money to pay for a purchase. Lessors require not only interest, but money equal to depreciation and to the risk they are taking in the transaction. Businesses continue to lease, however, because they can thereby avoid using cash resources, and because the costs of a lease may be tax-deductible. Furthermore, leasing means that the company can avoid long-term commitments to assets, and avoid being stuck with things they no longer need and can hardly sell. Still, leases amount to a fixed payment schedule that may be difficult for a business to meet, and the business forfeits any improvement in the value of the asset. For instance, if a business leases some land which subsequently skyrockets in value, they share in none of this good fortune.

Question 3: Describe the public market.

Answer 3: The public market is the collection of thousands of individuals and groups of investors who buy and sell corporation stocks and bonds. Groups of investors may include pension funds, insurance companies, investment trusts, mutual funds, commercial banks, savings banks, loan companies, businesses that invest in other businesses, government agencies, and investment banks. Indeed, many people who have life insurance policies or pensions do not even realize that they have funds invested in American business. Universities, hospitals, churches, and other charitable organizations also frequently invest in business. Most American corporations get their money from the public market, and prefer to do so.

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