FINANCE COMPANIES: TRY A ROLE REVERSAL

As we see the fallout happening from yet another finance company collapse it is interesting to review why such companies do go broke.

There are three main reasons;

• Bad lending, producing bad debts (or theft)
• An inability to raise cash form investors, banks or loan repayments
• Negative results cause by mispricing risk.

For most of us the signs of these are not always easy to see. But for those who may wish to invest money in a finance company try a role

reversal; approach them through a colleague or associate with few assets and see how easy the finance company is to borrow from. The easier it is the higher the risk. If for example (and we have seen this) the broker encourages the value of the asset to be misstated higher than the real cost then you shouldn’t be dealing with that company.

Remember that you want a return OF your investment as well as a return ON your investment. Some of the finance companies that have collapsed were not paying interest rates much higher than first tier institutions such as the banks. In many instances the return indicated did not reflect the risk being taken by the investor.

There may well be more finance companies in difficulty at present but equally there are others that are well run with prudent lending policies.

Standard & Poors have just launched a web page to help investors & advisors better understand the risks of investing in non-bank deposit taking institutions – www.yourinvestments.standardandpoors.co.nz

Grace Team Contact here