What is a 'Captive Finance Company'

A captive finance company is a wholly-owned subsidiary that finances retail purchases from the parent firm. They range from mid-sized entities to giant firms depending on the size of the parent company. The basic services of a captive finance company include basic card services like a store credit card and full-scale banking. This can offer the parent company a significant source of profit and limit the amount of risk exposure. 

BREAKING DOWN 'Captive Finance Company'

A captive finance company is usually wholly owned by the parent organization. The best-known examples of captive finance companies are found in the automobile industry and retail sector. When it comes to the auto sector, captive finance companies offer car loans to buyers in of need financing. Some examples include General Motors Acceptance Corporation, Toyota Financial Services, Ford Motor Credit Company, and American Honda Finance.

Notably, after the bankruptcy of General Motors in 2009, GMAC underwent a name change to Ally Bank and rebranded as Ally Financial in 2010. Each company represents the financing and credit divisions of the larger brand name automobile manufacturer.

In contrast, retailers use captive finance companies to support store card operations. Store credit cards offer customers various benefits for shopping at specific stores; free shipping, additional discounts, and amplified rewards with every purchase. It also helps the parent company reduce risk exposure. The captive company ends up incurring losses rather than the larger corporation when a customer defaults on a store card or fails to make a payment. This enables the parent company to increase sales and avoid the struggle of outsourcing funds from outside lenders. Furthermore, the larger corporation also receives interest from store cards issued by captive companies.

Advantages of a "Captive Finance Company"

A captive finance company can be a significant driver of sales and profit growth for larger corporations. Customers with store credit cards often have an incentive to spend more at the specific store and benefit from the convenience of owning the card. As for the bottom line, the larger company receives interest payments from past due accounts. This helps fuel earnings growth and profitability.

Loans from a captive finance company can be mutually beneficial for customers as well. Obtaining loans from a captive finance company involves minimal guesswork as rates and payment schedules are often predetermined. Sometimes captive finance companies offer lower loan rates than other types of loan companies. In the auto industry, they can also extend loans to buyers with below-average credit, as they control both the loan and purchase in one sitting.

RELATED TERMS
  1. Captive Value Added (CVA)

    Captive value-added occurs when a corporation creates a captive ...
  2. Back-To-Back Deductible

    A back-to-back deductible is a deductible which is equal to the ...
  3. Finance Charge

    A finance charge is a fee charged for the use of credit or the ...
  4. Credit Card

    Issued by a financial company giving the holder an option to ...
  5. Business Guarantee

    A business guarantee is a credit card agreement where charges ...
  6. Dealer Financing

    Dealer financing refers to loans originated by a retailer that ...
Related Articles
  1. Managing Wealth

    Captive Insurance: A Good Wealth Management Tool?

    Captive insurance companies are legitimate tax structures, but pose risks as tax shelters. Still, they can have financial advantages.
  2. Insights

    How Amazon Financing Works (AMZN)

    Amazon.com offers its customers two versions of its own store credit card, with interest-free financing on designated item categories, as well as an Amazon Visa card.
  3. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  4. Personal Finance

    How Credit Cards Affect Your Credit Rating

    The average American household has four cards, but does that mean more is better?
  5. Personal Finance

    3 New Types Of Credit Cards To Look For

    These three types of credit cards are becoming popular with customers looking to pay less fees and build up their credit scores.
  6. Personal Finance

    Which Home Depot Card Do You Need?

    Got a home improvement project? A Home Depot credit card can help you get supplies to tackle it – but keep in mind these downsides.
  7. Personal Finance

    Why More Millennials Need Credit Cards

    Here's why more Millennials should have credit cards – even though a majority don’t.
RELATED FAQS
  1. What is finance?

    Finance is the study of how money is managed and the process of acquiring needed funds. Personal finance, corporate finance ... Read Answer >>
Trading Center