A finance company is a specialized institution that provides financial services related to lending, leasing, factoring, asset management, and advisory services. Their core function is to bridge the gap between savers and borrowers, facilitating the flow of funds in the economy. Here are some key functions of financing companies in Saudi Arabia.
Lending services:
The primary function of a finance company is to extend credit facilities to customers. They offer various types of loans, such as personal loans, auto loans, home loans, and business loans. Finance companies often target niche segments underserved by banks, such as small and medium-sized enterprises (SMEs) and individuals with lower credit ratings.
Leasing services:
Lease financing is another major function provided by finance companies. They purchase assets, such as machinery, equipment, or real estate, and lease them to clients for a fee. Clients pay regular rentals instead of purchasing the assets outright, preserving working capital and enjoying tax benefits. At the end of the lease period, clients can choose to purchase the asset at a predetermined residual value.
Factoring services:
Factoring refers to the practice of selling accounts receivables to a third party, known as a factor, at a discounted price. Finance companies act as factors, buying invoices from businesses and assuming the risk of collecting outstanding payments. Businesses receive immediate cash injection, improving liquidity and freeing resources to focus on operational activities.
Asset management:
Asset management entails managing client portfolios; ensuring optimal returns based on risk tolerance and investment objectives. Finance companies employ professionals skilled in portfolio management, securities analysis, and financial planning. They advise clients on suitable investment strategies and select appropriate investment vehicles, such as stocks, bonds, mutual funds, or alternative assets.
Advisory services:
Finance companies provide strategic guidance and consultancy services to businesses and high net worth individuals. They assist in areas such as mergers and acquisitions, corporate restructuring, succession planning, wealth management, and risk assessment. Expertise in industry trends, regulatory requirements, and market dynamics equips finance companies to deliver valuable insights and tailored solutions.
Financial intermediation:
As financial intermediaries, finance companies connect savers with borrowers. They collect deposits from surplus units and channel those funds towards deficit units requiring credit. Through intermediation, finance companies reduce transaction costs, information asymmetry, and search friction between parties.