Commercial finance companies have in recent years become a favorite option for entrepreneurs seeking small business loans. Commercial financing institutions generally charge higher interest rates than banks and credit unions, but they are also more likely to approve a loan request. Most loans obtained through finance companies are secured and the assets used as collateral can be seized if the entrepreneur defaults on the loan.
Consumer finance companies make small loans against personal assets and provide an option for individuals with poor credit ratings. Commercial finance companies provide small businesses with loans for inventory and equipment purchases and are a good resource of capital for manufacturing enterprises. Insurance companies often make commercial loans as a way of reinvesting their income. They usually provide payment terms and interest rates comparable to a commercial bank, but require a business to have more assets available as collateral.
"In general, finance companies want to see strong assets to back up a loan and will monitor those assets much more carefully," one expert told Entrepreneur. "For that reason, they can loan more against the assets. So chances are a smaller business might get a larger loan from a finance company" than from a bank. Paola Banchero of Kansas City Business Journal noted that commercial finance companies have also grown because they are more flexible in arranging loan repayment schedules than are banks. Whereas banks typically require a seven-year repayment schedule on term loans and 15-year schedules for loans on commercial property, finance companies may extend payment schedules up to 10 years for term loans and up to 25 years for loans on commercial real estate.
Finance companies have experienced sustained growth throughout the 1990s. By the end of the decade, finance companies had become America's second largest source of business credit, behind banking institutions. Larger commercial finance companies often offer small business owners a variety of lending options from which to choose. These include factoring, working capital loans, equipment financing and leasing, working capital loans, specialized equity investments, collateral-based financing, and cash-flow financing. Some also offer additional services in connection with those loans, such as assistance with collections.
Commercial finance companies come in all shapes and sizes. The size of the firm usually has some bearing on the exact services it offers. The nation's largest finance firms (The Money Store, AT&T Small Business Lending Corp.) have established networks of offices across the country, and they sometimes offer lending services that even banks do not. For example, The Money Store—which made more than 1,700 loans worth $635 million in fiscal year 1996—offers loans to entrepreneurs looking to take ownership of a franchise, an option that is not available at all banks. But as Entrepreneur 's Cynthia Griffin noted, "in addition to the mega players, the commercial finance industry is populated by hundreds of smaller firms." These firms generally make asset-based loans, providing services to small business owners who are unable to secure loans from their banks.
Andresky Fraser, Jill. "Show Me the Money: You Can Look for Money in All the Wrong Places." Inc. March 1997.
Banchero, Paola. "Financing Fight: Nonbank Lenders Want Nothing More Than to Take Business Away from Traditional Banks." Kansas City Business Journal. 10 October 1997.
Griffin, Cynthia E. "Breaking the Bank." Entrepreneur. March 1998.
Kuehner-Herbert, Katie. "Asset-Based Lending: Whole Different Ball Game." American Banker. 3 January 2006.
Prins, Ruth. "From the Frying Pan to the Fire?" U.S. Banker. December 1997.
Sherman, Andrew J. The Complete Guide to Running and Growing Your Business. Times Books, 1997.
Smith, Sharon. "Techno Mecca: The Use of Factoring and Commercial Finance Companies." Accountancy. September 2000.
Hillstrom, Northern Lights
updated by Magee, ECDI
Reconstruction Finance Corporation
RECONSTRUCTION FINANCE CORPORATION
RECONSTRUCTION FINANCE CORPORATION. After the 1929 stock market crash, the banking system verged on failure. Anxious depositors ran on banks to get their money out; banks had less money to give because they had invested in the collapsing stock market; more banks failed; depositors grew increasingly nervous; and banks continued selling off stocks, which depressed the market even further. In January 1932, on the recommendation of President Herbert Hoover, Congress created the Reconstruction Finance Corporation (RFC), which would use government money to make loans to banks, railroads, and insurance companies. In July, with the crisis deepening, the Emergency Relief and Reconstruction Act authorized the RFC to make loans directly to farmers, states, and public works projects.
Hoover was wary of any sort of government intervention in the marketplace. He was slow to propose the RFC because he hoped bankers could solve their own problem, and he never stopped viewing it as a temporary agency. Hoover's chairmen (Eugene Meyer and Atlee Pomerene) insisted on an overly conservative set of guidelines. The RFC's loans carried high interest rates (they did not want to compete with private lenders), and its collateral requirements were extremely rigid. Moreover, RFC-funded public works projects had to pay for themselves (hydroelectric plants or toll bridges, for example). According to Hoover and his advisers, the primary purpose of the RFC was to encourage banks to start making loans again so the private sector could initiate its own recovery. It lent almost $2 billion in its first year, which was enough to serve the immediate goal of delaying a banking catastrophe, but the money did not inspire the expected general economic upturn.
In February 1933 the banking system collapsed again. President Franklin Roosevelt, inaugurated in March, had none of Hoover's reservations about state capitalism. Roosevelt immediately declared a banking holiday and passed the Emergency Banking Relief Act, which empowered the RFC to oversee bank reorganizations and invest directly in struggling financial institutions through preferred stock purchases. President Roosevelt and RFC chairman Jesse Jones continually enlarged and modified the RFC's mission to meet specific needs, and the RFC played a vital role in the evolution of the New Deal. The federal Emergency Relief Administration was modeled on the RFC state grant program, and the Public Works Administration was spun off from its public works division. The RFC also helped to finance many New Deal agencies because its semi-independent status allowed President Roosevelt to work around Congress and to work quickly. The RFC made loans to the Home Owners' Loan Corporation ($200 million), the Farm Credit Administration ($40 million), and the Works Progress Administration ($1 billion). Even greatly expanded, however, the Depression-era RFC ultimately failed in its Hoover-conceived mission of reinvigorating private investment.
During World War II, Roosevelt converted the RFC from a recovery agency to a wartime agency. The RFC and its wartime subsidiaries, including the Rubber Reserve Company, the Defense Plant Corporation, and the War Damage Corporation, handed out $40 billion in loans during the war. The massive defense buildup finally generated the elusive economic recovery.
When Dwight Eisenhower was elected president (1952), memories of the Great Depression, the New Deal, and even World War II were becoming increasingly distant, and the idea of keeping government and business separate regained some of its Hoover-era popularity. Congress abolished the RFC in July 1953.
Jones, Jesse H. Fifty Billion Dollars: My Thirteen Years with the RFC (1932–1945). New York: Macmillan, 1951.
Olson, James Stuart. Herbert Hoover and the Reconstruction Finance Corporation, 1931–1933. Ames: Iowa State University Press, 1977.
———. Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933–1940. Princeton, N.J.: Princeton University Press, 1988.
Reconstruction Finance Corp.
RECONSTRUCTION FINANCE CORP.
The Reconstruction Finance Corp. (RFC) was a U.S. government agency established by Congress on January 27, 1932, to provide financial aid to railroads, financial institutions, and business corporations during the Great Depression (1929–1939). In July 1932, with the passage of the Emergency Relief Act (ERA), the scope of the RFC was enlarged to include aid to agriculture and farms, and financing for state and local public employment works. The RFC, acting as a domestic federal bank, contributed greatly in the recovery effort to climb out of the Depression. During World War II (1939–1945), the RFC was expanded greatly to finance the construction and operation of war plants and to make loans to foreign governments.
The RFC was intended to be an independent, nonpolitical agency. As years passed, RFC funding grew. It began to assume the responsibility for disbursing huge sums of money, and began to become involved in politics. By 1948 congressional investigations of the RFC revealed widespread corruption; in 1952 it was reorganized. As a result of Eisenhower's efforts to limit government involvement in the economy, the RFC was dismantled under President Dwight D. Eisenhower (1953–1961). The RFC Liquidation Act terminated all of its lending powers. By 1957 its remaining functions had been transferred to other agencies.
The RFC was a useful agency during the Great Depression and World War II, as well as during post-World War II recovery in the United States, but by the late 1940s the RFC had outlived its financial stabilization function.
See also: Great Depression