Overview
Thomas Money Service Inc. started out as a consumer finance company in 1940, granting small loans for household needs. During 1946, a decision was made to branch out and do equipment financing under a subsidiary called Future Growth Inc. (FGI). Because of the downturn in the economy, profits have declined by 30% and FGI has had to lay off one-third of their workforce.
To increase revenues, we are proposing that we shift our focus back onto consumer financing or making “deferred deposit loans” for our customer base under the Thomas Money Service Inc. entity. A “deferred deposit loan” is a small dollar, short-term, unsecured loan to a high-risk borrower. Thomas Money Service will increase revenues by fees charged for their services.
Services
Thomas Money Service’s typical client will write a check payable to Thomas Money Service with amounts ranging from $50 to $500 with the check being made out to include the principal amount plus origination fees. The client is then given cash for the principal amount of the loan for a term of 5 to 31 days. The check will then be deposited by Thomas Money Service on the maturity date of the loan. The client may elect to extend the loan for up to 2 more weeks for additional fees. Thomas Money Service will regulate the need for more revenue by monitoring based on risk and term.
Elasticity of Demand and Market Structure
The demand for a “deferred deposit loan” will run in cycles around the 3rd-13th and 17th and 28th when loan payments are due and in between paydays. The supply and repayment of the loans are going to be on paydays, usually the 1st and 15th of each month.
Industry
Typical customers are people in need of short-term cash who have limited access to other sources of credit, such as banks, credit unions, or family members.
The US consumer finance industry consists of about 3,500 companies with combined annual revenue of about $35 billion. Major competitors include Ace Cash Express, Advance America, Check 'n Go, Check Into Cash, and Dollar Financial.
Consumer finance companies typically operate in the "subprime" portion of the market. Subprime borrowers may have a history of delinquent loan payments or no credit history, and often have low income and a higher debt-to-income ratio.
Consumer finance revenue comes mainly from the difference between the "yield" on loans (the finance charge) and the cost to fund the loans. Various fees may also be charged to originate, insure, or collect loans. Consumer finance companies generally charge higher interest rates than prime lenders, expect to take larger loan losses, and service their loans more intensively to avoid losses. To minimize loan losses, companies may use special collections teams that contact delinquent borrowers as soon as one day after a loan payment is past due to work out a payment plan, and that maintain frequent contact through phone, mail, and personal visits. Delinquent loans are usually "cured" quickly or determined a loss ("First Research", 2011).
Entry into the market
Entry into the market can seem to be somewhat difficult. The company needs to be liquid enough to have the funds to provide loans to customers, they also must have the system and software available to track all of clients and outstanding loans and means to collect past due loans. Any potential business needs to be willing to assume the high risk of loss and have capital to cover the losses and maintain a high enough volume of fees.
A company needs to find the equilibrium on fees they can charge per the demand before a customer will switch to a competitor with lower fees. If a company does not charge high enough fees, they will not make enough in revenues and be able to stay in business for long. We are also willing to provide return customers that special rates and terms if they were not delinquent on previous loans. This would keep our customers from going to a competitor.
Another barrier that could suppress
