Introduction to Finance

commercial fi nance company
is an organization without a bank charter that advances 
funds to businesses by discounting accounts receivable, making loans secured by chattel 
mortgages on machinery or liens on inventory, or fi nancing deferred-payment sales of com-
mercial and industrial equipment. Some also do lease fi nancing to assist businesses needing 
machinery, trucks, or other heavy equipment in their line of business. These companies also 
are known as commercial credit companies, commercial receivables companies, and discount 
companies.
Commercial fi nance companies, such as CIT Group, Celtic Capital, and GE Capital, 
off er many of the same services as commercial banks for fi nancing accounts receivable and 
inventory. Lending funds based upon the amount of a fi rm’s accounts receivable balances was 
originated by commercial fi nance companies and later was adopted by commercial banks. 
Consumer and business fi nancing can be obtained from fi rms such as General Electric Capital 
and Ford Motor Credit. 
Commercial fi nance companies grew to their present number because they were free to 
experiment with new and highly specialized types of credit arrangements. State laws con-
cerning lending on the basis of accounts receivable were, generally, more favorable to these 
nonbanking organizations. In addition, they were able to charge high enough rates to make a 
profi table return on high-risk loans. Frequently, these rates were far above rates bankers were 
permitted to charge.
In addition to fi nancing accounts receivable and inventories, commercial fi nance compan-
ies provide a vast amount of credit for businesses by fi nancing commercial vehicles, industrial 
commercial fi nance company 
organization without a bank charter 
that advances funds to businesses 
by discounting accounts receivable, 
making loans secured by chattel 
mortgages on machinery or liens 
on inventory, or fi nancing deferred-
payment sales of commercial and 
industrial equipment
10
Astute readers will note that these popular formulas do not take period-by-period compounding into account. The 
true eff ective cost can be determined as follows:
Effective Cost =
(
1 +