SIC 6153
SHORT-TERM BUSINESS CREDIT INSTITUTIONS, EXCEPT AGRICULTURAL



This industry includes establishments primarily engaged in extending credit to business enterprises for relatively short periods. Private establishments primarily engaged in extending agricultural credit are classified in SIC 6159: Miscellaneous Business Credit Institutions.

NAICS Code(s)

522220 (Sales Financing)

522320 (Financial Transactions Processing, Reserve, and Clearing House Activities)

522298 (All Other Non-Depository Credit Intermediation)

Industry Snapshot

Credit generally refers to a purchase, or the power to make a purchase, of goods for use in the present—with payment deferred to a future date. Granting credit typically depends upon three factors: character of the borrower, capacity to repay, and capital used as collateral. Each of these factors introduces some risk into the transaction. The risk of lending on character is called "moral risk," the risk of lending on capacity is called "business risk," and the risk of lending on capital is called "property risk." An ideal borrower will combine a minimum of each of these three risks.

Lenders are often not in a position to evaluate a business against these criteria as easily as they could with an individual. Consequently, they may contact either general or special mercantile agencies to find needed information. General agencies, such as Dun & Bradstreet, collect information on a wide range of business enterprises nationwide. Special agencies limit their coverage to one or few business areas and may operate nationally or locally.

General agencies furnish general and special reports. General reports are leased by subscribers on a quarterly basis and contain information on capital (based on financial statements), and credit, denoting the grade of credit ratings. Special reports are limited to specific businesses or companies and are obtained under contract. These reports are more extensive than the general reports, and contain background as well as general information. Credit reporting agencies collect their information from several sources, including direct investigation, trade creditor and banking connections, insurance records, and public records. The lenders usually pay an annual fee to these agencies in exchange for an unlimited amount of information.

A large portion of modern business is conducted on a credit basis. The need for credit arose from a complex system of manufacturers, suppliers, distributors, and retailers in the modern market economy. Credit allows the smooth operation of such a system. A cash-only business is virtually impossible in the 1990s.

Organization and Structure

Business transactions, including credit transactions, are regulated by the Uniform Commercial Code (UCC). The UCC is a standardized commercial law effective in most U.S. jurisdictions whose goal is to simplify interactions between businesses. The numerous entities that constitute this category have varying organizations and structures.

Purchasers of Accounts Receivable and Commercial Paper. Accounts receivables are promises from customers to pay for goods or services that have already been rendered. Commercial paper is any form of short-term negotiable instrument that arises out of a commercial transaction, to be distinguished from speculative, investment, real estate, personal, or public transactions. Many companies receive financing by using their accounts receivable as collateral, or selling the accounts outright at a discount.

Factors of Commercial Paper. Factors provide financing on accounts receivable by discounting accounts receivable on a non-recourse basis. Upon buying the accounts, the factor assumes the position of the seller—including the risk of default and credit losses—and may not hold the original seller liable in the event of loss. The factor then pays the entity that sold the account, paying upwards of 85 percent of the face value of the account receivable. The remaining amount is considered a discount fee, which is the factor's payment. In short, factors buy the accounts on an "as is" basis. Customers then pay factors. Factors often are also engaged in inventory financing, secured loans against fixed assets and other resources, as well as unsecured loans. They may also offer financial advisory services.

Sellers benefit from using factors because they are able to avoid tying up working capital in accounts receivable for the full credit period, which may be several months. Another advantage enjoyed by sellers using factors is that they may eliminate their in-house credit and collection departments.

Financing of Dealers by Motor Vehicle Manufacturers' Organizations. Automobile manufacturers offer "floor plan" financing to support dealers' sales and leasing programs. "Floor plan" financing, or trust receipt financing, is a form of inventory financing under which the bank holds title to the automobile inventory. The dealer is loaned money to buy the inventory from the original equipment manufacturer and holds the inventory in trust for the manufacturer. As the borrower sells inventory to consumers, he pays these proceeds to the manufacturer. The dealer keeps the mark-up of the retail price over the payments due the manufacturer. When the sale is made on a credit basis, the dealer often sells the obligation to the manufacturer. This practice is used in other industries as well as the automobile industry.

Mercantile Financing. Mercantile financing is typically done through the sale of mercantile paper. Mercantile paper is a note, acceptance, or bill of exchange made or endorsed by concerns engaged in jobbing, wholesaling, or retailing of commodities.

Working Capital Financing. Working capital refers to an entity's net current (or liquid) assets, or current assets minus the current liabilities (those expected to mature within one year). This excess, called free working capital, is the cash available to meet a company's liabilities as they mature over this one-year period. This liquidity is achieved by a number of means including trade credit, bank loans, factoring, and sales of accounts receivable.

Background and Development

As the U.S. economy became more complex and competitive in the 1980s and 1990s, businesses needed increasingly flexible short-term financing to remain competitive. This flexibility is provided by a business credit market that offers a variety of financing options.

Co-branding led business credit institutions to get involved in other services. General Motors (GM), for example, has always been involved in financing the sale of its cars to consumers and floor plan financing. In the early 1990s, GM got involved in credit card financing in a cobranding arrangement with MasterCard, thus providing automobile and credit card financing to its customers. By 1994, GM had earned $9.4 billion from financing. Ford Motor Credit has also been involved in this type of co-branding financing, earning $21.3 billion in 1994.

Current Conditions

Throughout the 1990s, most business credit institutions broadened the range of services offered. In the late 1990s, the major credit card companies began to offer purchasing or procurement cards in addition to typical business credit cards. These cards were designed to make the purchase of small items cheaper and more efficient. The average company conducts 90,000 transactions—typically individual purchases of $10,000 or less—annually. The cost of each of these transactions is about $80, but can be minimized through the use of procurement cards.

All three major credit card providers—MasterCard International Incorporated, American Express, and Visa USA—adapted their services in the late 1990s to facilitate electronic commerce conducted business-to-business. In late 1999, MasterCard and American Express expanded their alliances with e-commerce businesses: MasterCard allied itself with Commerce One, which tailored its BuySite and MarketSite to accept online payment with the MasterCard Corporate Purchasing Card; American Express increased the number of affiliations with e-commerce companies in its portfolio to 10, adding Clarus, Extensity, Sun-Netscape Alliance, and Trilogy to its affiliations with Ariba, Commerce One, Concur Technologies, Intelisys, Remedy, and tradex Technologies.

At the same time, Visa USA focused its efforts on tailoring its procurement cards toward the newly-defined global commodity code standards merging the United Nations' Common Coding System (UNCCS) and Dun and Bradstreet's Standard Products and Services Codes (SPSC) to create UN/SPSC Codes specifically for electronic commerce. SAP ag, Visa's ally in e-commerce, adopted this coding system to streamline its purchasing systems, paving the way for other affiliates such as Ariba.

All of the major international credit card companies —American Express, MasterCard International and its affiliates Europay and Mondex, Visa International, and JCB of Japan — joined forces in the Smart Card Security Users Group (SCSUG) to create a standardized system, called Common Criteria, for evaluating the security of smart cards. The astronomical increase in online credit card use brought with it the inherent fraud enabled by transactions conducted in such a public forum. Credit card security thus became a key issue, not only in terms of real protection, but also in terms of consumer perceptions of security.

Workforce

The short-term business credit industry includes many diverse companies, employing anywhere from 2 to 50,000 employees. These occupations include bankers, tellers, loan officers, secretaries, and security personnel.

Further Reading

Brunelli, Mark A. "Card Companies Create Alliances and New Services." Purchasing, 4 November 1999.

Kutler, Jeffrey. "Global Heavyweights Form Group to Set Smart Card Security Standards." American Banker, 10 November 1999.

Small Business Exchange, 20 March 2000. Available from http://www.americanexpress.com .



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