For example, in 1996, 37 percent of the small-business owners in America requested loans from banks, and 25 percent of these were rejected. This created a large pool of loan candidates for finance companies. As lending increased, more people defaulted on loans and filed for bankruptcy, which made banks reluctant to continue lending money, especially to small companies that were unlikely to remain in business. Such finance companies as Allied Capital and the Money Store, which specialize in lending to small businesses, began operations as far back as the 1950s and 1960s, but these companies experienced major growth in the 1990s, when Americans started borrowing larger sums of money for both personal use and for their small businesses. Daimler Chrysler Financial Services began operations in 2002. Ford Motor Credit Company began operations in 1959 and manages approximately $150 billion in loans in 35 countries. After recording earnings of $1.8 billion in 2001, GMAC had financed more than $1 trillion in loans on more than 150 million vehicles since its inception. That same year GMAC began offering home loans and soon after branched out further by lending to large and small businesses and by selling insurance. In 1985 the company earned $1 billion in revenues. The following year GMAC expanded to Great Britain, and by 1928 they had issued more than four million loans. General Motors was the first of the Big Three American auto manufacturers to open a captive finance company, establishing branches of GMAC in Detroit, Chicago, New York, San Francisco, and Toronto in 1919. The Ford Motor Company owns Ford Motor Credit Company (FMCC), and Daimler Chrysler owns a finance company called Daimler Chrysler Financial Services. For example, many people who purchase vehicles from General Motors obtain their loans from General Motors Acceptance Corporation (GMAC). Each of the leading American automotive manufacturers maintains an affiliation with a captive finance company that finances the loans on the sales of their vehicles. Under this arrangement the large entity is called the parent company, and the smaller entity is called a subsidiary, or a captive finance company. Some large companies own finance companies that provide clients with loans to purchase goods from the large company. If Bob were to default (fail to make payments) on the loan, the finance company would take possession of his pickup truck. In other words if Bob borrowed $5,000 from a finance company to cover the costs of starting a house-painting business, the finance company might ask that he offer his pickup truck as collateral. Such clients secure their loans with finance companies by offering collateral (by pledging to give the company a personal asset, or possession, of equal value to the loan if payment on the loan is not made). Many finance companies lend to clients who cannot obtain loans from banks because of a poor credit history (the record of an individual’s payments to the institutions who have loaned him money in the past). Finance companies make a profit from the interest rates (the fees charged for the use of borrowed money) they charge on their loans, which are normally higher than the interest rates that banks charge their clients. Unlike a bank, a finance company does not receive cash deposits from clients, nor does it provide some other services common to banks, such as checking accounts. A finance company is an organization that makes loans to individuals and businesses.
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