A captive finance company is a wholly-owned subsidiary that extends credit to customers of the parent company for big purchases. For example, car manufacturers have captive auto lenders such as Ford Credit or GM Financial that make loans and leases for the specific cars they sell. The goal of these companies is to help make the products their parent company manufactures more affordable to a wider range of people.
These subsidiaries also typically have simpler loan processes and lower risks than banks or other lending institutions. Moreover, these companies can often offer financial deals to customers or corporations with bad credit ratings that would be rejected by other lending institutions because they have a strong relationship with the customer and are less likely to default on a loan.
The captives of large industrial companies can create a significant additional source of revenue and profitability for their parent companies. They can also help to harmonise financial processes and commercial practices across the entire group. In addition, they can provide a good opportunity to learn more about the needs of a particular customer segment or market.
Nonetheless, it is important to understand the interrelationship between the rating of a captive and its industrial parent. The success of a captive depends on the extent to which it is fully integrated into the group’s business model and if it is able to establish critical volume in the market. A separate, discrete structure is possible, but the risk of the captive experiencing difficulties if its parent does not support it is higher.