Question

In time-sales finance, what do dealers do when they cannot themselves finance installments or conditional sales contracts on a purchased equipment?

- They can stall the purchase until they find means for financing.

- They sell it off in the market for a lower price.

- They take loans to cover their financial purposes.

- They sell and assign the installment contract to a bank.

Answer 1

Many dealers or producers who cannot themselves finance installments or conditional sales contract to purchase the equipment in that case they sell and assign the bank or any finance company for installments contract.

In time sale finance the dealers or small manufacturer gets the short term financing for their long term.

The reason why dealers assign this contract to bank is that the bank purchases installments contract at the discounted rate and in addition takes as security the assignment from the dealer.

Basically, the bank being the third-party purchases installments sales contract from the dealer at the discounted rate. Hence this is the type of indirect lending where bank recourse to the seller in case of default.

The obligation of bank is

• payment for the equipment purchased
• recourse to manufacture in case of default
• holding the portion of payment as dealer reserve

Therefore, the correct answer is the last option i.e. assigning the contract to the bank which is also called indirect lending.

The rest of the options are not correct because

• They can stall the purchase until they find means for financing.: Banks generally offer these types of services and moreover many other financing companies also are in the pipeline and once the equipment is purchase one cannot stall for financing as the seller needs the payments. Therefore, this is wrong option because option of financing is already available.
• They sell it off in the market for a lower price: they do not sell it in the market instead banks purchase them at discounted prices from the dealers. Therefore, is option is also wrong and is not cover under the definition of time sale finance.
• They take loans to cover their financial purposes: The term finance is basically used for borrowing the money or third party is paying in your behalf whereas in loan you take the loan and you only pay it. As per definition of time sale finance the bank finance the equipment and dealer are not taking loan from bank to payback hence this option is also not correct.