Retail Finance
Retail finance typically means financing for retail purchases. This can include credit cards, but more often this sector of finance deals with same-store finance programs. Popular examples of retail finance includes financing by Home Depot for purchases at Home Depot and Buy Here Pay Here auto finance programs.
More often than not, retail finance programs have interest rates that are higher than the national average of credit card interest rates. Many programs are sold on the promise of 0% interest for one year. However, if the customer fails to repay the debt within the grace period the customer is charged back interest for the entire year on the 366th day. The rate the customer is charged is often in excess of 20% per annum.
If you are ever in a position where you are considering a retail finance program, carefully review the terms and conditions of the offer. If the offer contains a back interest penalty, you should only accept the offer if you are certain you can repay the debt before the end of the introductory term. In the long run, you are always better off declining a bad credit offer versus accepting it, no matter how much you may want the product.
Retail finance can also mean lending to retail businesses. This is an extension of commercial finance, where a lender channels its lending strictly to retail firms and corporations.
When a firm is looking to expand its working capital through the use of financial leverage, a firm will look to borrow capital through corporate finance. Without additional capital, many firms are unable to grow their business.
Financial leverage is the process by which a firm borrows capital and reinvests it. The intent is to receive a return on the investment that is greater than the interest rate of the monies borrowed. Financial leverage thereby increases both risk and reward. Financial leverage magnifies financial gains and magnifies financial losses.
During the high periods of the normal cyclical business cycle, increased economic optimism can lead a firm to overleverage. The subprime crisis of 2008-2009 was a form of overleverage. Mortgage lenders financed homes with little or no down payment. Lenders and home buyers believed that the asset being financed (a home) would rise in value quickly and offset the lack of down payment. In this case the losses involved with this type of investment were magnified. Property values dipped below mortgage values and borrowers defaulted (went into foreclosure) in great numbers.