How do finance companies' advantages affect competitive strategies in short‐ and intermediate‐term loan markets? A theoretical analysis

Abstract The emergence of finance companies has affected the competitive strategies of financial service industry and has also altered the financing patterns of various borrowers. This study's theoretical model illustrates that finance companies are able to offer larger loans and reach risky niche‐market borrowers more easily than banks can because of certain advantages of the finance company's business model, including unique funding sources, cross‐subsidization, relatively low collateralization costs, and extensive financial intermediation. The resulting loan terms are typically more attractive than those that banks can offer, including higher loan‐granting ratios. These advantages can expand borrowers' financing sources and thereby reduce their financing difficulties. This is especially the case for risky borrowers or entrepreneurs who operate small‐ and medium‐size enterprises. Such borrowers, who typically face liquidity constraints and are thus willing to pay higher interest rates, are more inclined to obtain operating funds from finance companies than from banks.