Lesson

Sources and Uses of Short-Term

What I Know

ACTIVITY 31. PRE-TEST. Directions. Choose the letter of the best answer. Write the
chosen letter on a separate sheet of paper.
1. Daniel will apply for a loan in Palawan Bank. What general document will he accomplish
first?
a. Daniel’s Signature b. Valid IDs c. Signature of spouse d. Loan application form
2. Among the following, who is tasked to analyze the financial track record of the borrower?
a. Manager b. Credit analyst c. Loan officer d. Credit bureau
3. When the borrower is married, which of the following signature/s should NOT be missed
when filling-out the general loan application documents?
a. Borrower and spouse’s signature b. Borrower’s signature only
c. Borrower and co-maker’s signature d. Co-maker’s signature only
4. These pertain to loan requirements that reflect the employment/business of the
borrower. a. Income Documents b. Collateral Documents
c. General Loan Application Documents d. Generic Loan Documents
5. Which loan requirements are submitted to support the loans secured from the banks?
a. Income Documents b. Collateral Documents
c. General Loan Application Documents d. Generic Loan Documents
6. All are needed loan requirements for business owners or self-employed individuals
EXCEPT a. Business/ Mayor’s Permit b. Bank Statement
c. Audited Financial Statements d. Certificate of Employment
7. Which of the following is NOT an example of general loan application documents in
nonbank financial institution?
a. Water bill b. Electric bill c. Certificate of no pending case d. Certificate of
Registration
8. Which of the following is the collateral document/s for owned vehicles required by
nonbank financial institutions?
a. Copy of ownership b. Transfer Certificate of Title
c. Official Receipt & Certificate of Registration d. Tax declaration & Tax clearance
9. To accomplish one of the income documents, a borrower may present copy of payslip
reflecting how many month/s? a. 6 months c. 3 months b. 1 month d. 4 months
10. Which of the following is mandated by the Banko Sentral ng Pilipinas to be clearly
stated in the loan application and contract?
a. Loan amount b. Purpose of the loan c. Kind of business d. Kind of employment
11. All are examples of income documents EXCEPT for: a. Employment Certificate
b. Business/ Mayor’s Permit c. Copy of Visa d. Copy of Income Tax Return
12. In nonbank financial institutions’ general loan application documents, which of the
following can be presented by an OFW borrower? a. Copy of Passport b. Business Permit
c. Signature of co-maker d. Certificate of Employment
13. Which of the following is NOT a reason for financial institutions to demand for loan
requirements?
a. To assess the financial capability of the borrower b. To evaluate borrower’s credit ratings
c. To verify the identity of the borrower d. To gain linkages with suppliers and
customers
14. Jessica, a self-employed individual applied for a loan in a bank. One of the documents
she submitted is a copy of her Income Tax Return for one year. The bank declined her
application. Why do you think so?
a. She must submit two copies of her ITR b. Her ITR must be for the last 2 years
c. Her ITR must be for the last 6 years d. She must not submit the ITR
15. Which of the following is reflected in the credit rating of the borrower?

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a. Credit balance b. Loanable amount
c. Credit history d. Both A and B
What’s New
Financing means to provide funding for a particular need. Short term financing is debt
scheduled to be paid within a year while long-term financing is debt to be paid in more than
a year. Liquidity risk typically refers to the inability of an investor to buy or sell an asset to
avoid financial loss. It can also refer to the inability to meet obligations since assets are tied
up with investments or inventory. Interest is the cost of holding money. It is the amount
charged by the lenders to the borrowers/users of money and is usually paid at regular
intervals.

The Sources and Uses of Short-Term Funds

A. Suppliers Credit – refers to the extension of payment due date by suppliers. See the
example below the effects of stretching payables and the computation for interest effects of
not taking discounts.
For example, the terms 2/10 (2% discount if paid within 10 days) with the due date
of 60 days will result in annual interest of (2/98)*(360/50 days), or 14.69%. Therefore, by
not availing of the discount, the one who ordered the supplies from the supplier in effect
borrowed at 14.69%. It may also be viewed as the opportunity cost forgone.
B. Advances from stockholders or other owners – personal funds advanced by a
stockholder to a company that usually requires interest. These usually require little to no
interest on advances, especially if the owner is advancing funds to assist the company in
sudden liquidity crisis. This source, however, is depended on the availability of funds of an
individual.
C. Credit cooperatives – provided lending services to its members. Members usually pay
contributions to the cooperative.
D. Banks – provides several loan products catering to different types of needs.
E. Credit Cards – just take note of the high interest rates on this source of funds.
F. Lending Companies – companies that are dedicated to lending. They usually charge
higher interest than banks but their credit requirements are more lenient compared to
banks.
G. Pawnshops – provides funds in exchange for collateral, usually jewellery, or other items
of value.
H. Informal lending sources (5/6)
I. Single proprietors and rich members of family and friends can be taped. Should you
decide to do this in the future, everything has to be documented to avoid a fall out or a
family feud.

Debt Financing - borrowing money from lenders and not giving up ownership.

Equity Financing - the method of raising capital by selling company stock to investors
(stockholders) in exchange of ownership interests in the company.

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Note that if debt is cheaper, why doesn’t the company avail of 100% debt financing?
Possible answer: No bank/creditor will provide 100% debt financing. Creditors evaluate the
paying capacity of borrowers which means the amount of loans they will tend depends on
the ability of the company to serve the debt. Normally, this is based on the projected cash
flows of the borrower.

Note that it is risky because:

• Stockholders are not guaranteed of returns unlike creditors which have guaranteed
interest and principal payment.
• Under the corporation code, creditors have to be paid first in case of liquidation before
anything is paid to the stockholders
• If the company is losing, it is the stockholders who bear the loss.

Factors Considered in Selecting the Source Of Short-Term Financing

A. Cost (Interest). Informal lending sources like 5/6 may be the most expensive.

B. Availability of short-term funds. Informal lending sources like 5/6 is most available
because there are no formal requirements to avail of the facility.

C. Risk. Whatever the source of fund is, if the company defaults, the lenders may foreclose
some of the company’s properties or even the entire business itself to settle the loan.

D. Flexibility. This pertains to the ability of the company to access funds. Example, a bank
loan may be cheaper, but the bank may reject the loan application of the borrower because
he/she did not pass the credit evaluation process of the bank. This financial flexibility can
be influenced by: Nature of the Company’s business; Leverage ratio; Stability of operating
cash flows

E. Restrictions (Debt covenants). Some lenders like banks may require a minimum
deposit balance with their branch for as long as the loans remain outstanding. The bank’s
approval may also be secured before cash dividends can be declared.

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The Sources and Uses of Long-Term Funds

A. Equity investors – these are the individuals/corporations which are issued common
stock. They share in the ownership of the company. There are also equity investors who do
not have voting rights in the company but have a share in dividends, usually a fixed
percentage. These investors are issued preferred stock. Holders of preferred shares are first
to receive dividends than common stockholders.
B. Internally generated funds – not all profits are distributed to stockholders. Most of the
profits are re-invested and used by companies to finance their needs.
C. Banks – they provide long-term loans, depending on the nature of the need. For example,
a 5-year to 10-year loan may be granted if the purpose of the loan is construction of an
office building.
D. Bonds – these are debt investments where an investor loans money to an entity which
borrows the funds.
E. Lending companies – they can also provide long-term loans.
The company’s capital structure is a major consideration for deciding which long-term
sources of funds to utilize. The target would be to balance debt and equity and come up
with the minimum cost of capital.

The 5C’s of Credit - the institution’s primary consideration in approving loan applications.
• Character –the willingness of the borrower to repay the loan
• Capacity – a customer’s ability to generate cash flows
• Collateral – security pledged for payment of the loan
• Capital – a customer’s financial resources
• Condition – current economic or business conditions
Illustration:

Mr. Joe Salazar applied for a PHP1.5 million loan on behalf of his business, “Joe’s
Restaurant”, for additional capital in 2015. He is the Chairman of the Board of Joe’s
Restaurant. In their meeting, the Board decided to open an additional branch for the
restaurant. Joe’s Restaurant currently has 3 branches in Metro Manila and would like to
open up a small branch in Quezon City. Joe’s Restaurant has been in the business for 12
fruitful years and has been a previous borrower of the bank. The company had previous late
payments before, but the reasons are usually justifiable, and the balance of the loan, along
with any penalties, if any, is paid. The three branches earn a net income of PHP900,000/
year. The lot where the main restaurant is located is pledged as collateral to the bank. This
property is valued at PHP2 million. Shown below is an excerpt from Joe’s Restaurant’s 2014
consolidated audited financial statements.

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ACTIVITY 31 Analyze the 5C’s of Credit using the problem/illustration above.

1. Character
2. Capacity
3. Collateral
4. Capital
5. Condition

Duties of the Borrower to Creditors

• Pay the creditors based on the payment schedule agreed upon. If you cannot pay on time,
notify the creditors ahead of time. But as much as possible, pay on time.
• Provide the collaterals as agreed upon in the loan negotiation with proper documentation,
if necessary and if applicable (e.g. annotation of the TCT or CCT). Ensure that these
collaterals are in the physical condition perceived by the creditors in determining the
loanable value of the loans.
• Comply with the provisions of loan covenant such as maintaining certain liquidity and
leverage ratios. These conditions are supposed to benefit the borrower so that his company
will not be over-exposed to borrowing or he will monitor the liquidity position on a more
regular basis.
• Notify the creditor if the company is acquiring another company or the company is now
the subject of acquisition. The interest of creditors may be jeopardized if new owners take
over the company or if the company is going to acquire another company.
• Do not default on the loans as much as possible. Aside from the creditors, there may be
other parties such as the guarantors of the loan who will be put at a disadvantage if the
borrower defaults.
A Banking Financial Institution (BFI) is a financial intermediary licensed to receive
deposits and make loans and may also provide financial services such as wealth
management, currency exchange, and safe deposit boxes. Examples: BDO Unibank Inc.,
Metrobank, China Banking Corporation and Union Bank of the Philippines

A Non-bank Financial Institution (NBFI) is a financial institution that does not have
a full banking license or is not supervised by a national or international banking regulatory
agency. It also provides banking services but is not allowed to take deposits from the public.
Examples: Pawnshops, Insurance Firms, Venture Capitalists, Microloan Organizations and
Currency Exchanges

A Loan is the lending of money to another party in exchange for repayment while
Loan Requirements are the documents that provide the essential financial and other
information about the borrower on which the lender bases the decision to lend.

List of Bank Requirements for Loan Application for a Corporation (Arthur S. Cayanan)
Pre-approval Requirements:
• Duly accomplished application form
• Securities and Exchange Commission (SEC) registration
• Articles of incorporation and by-laws
• List of elected officers
• Board resolution or corporate secretary’s certificate regarding loan application
• Company profile or business background
• List of major suppliers and customers with contact information
• Audited financial statements (2 to 5 years depending on the bank)
• Bank statements (most banks require bank statements for the past 6 months)
• Collateral documents such as the following:
• Copy of transfer certificate of title (TCT) or condominium certificate of title (CCT)
• Copy of tax declaration
• Appraisal Fee with official receipt

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 • For construction loan
• Building plan or floor plan
• Bill of materials and labor cost
• Building specifications certified by architect/civil engineer
• Development permit
• Copy of lease contracts (if applicable)
Post-approval Requirements:
• Original owner’s duplicate copy of TCT/CCT
• Original certified true copy of latest tax declaration on land and improvement
• Master deed of declaration (for condominium)
• Electronic-certified true copy of TCT/CCT with original official receipt
• Original certified true copy of tax clearance
• Original real estate tax receipts
• Mortgage redemption insurance
• Fire insurance

Sample 1. The table below shows a comparison on the different requirements needed for
employee’s salary personal loan application to a certain banking and nonbanking
institution.

Sample 2. The table below shows a comparison on the different requirements needed for
business loan application to a certain banking and nonbanking institution.

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ACTIVITY 32

Directions: Classify as BANK or NONBANK the following financial intermediaries. Write your answer
on the space opposite each financial institution.

ACTIVITY 33
Directions: Read and analyze well the case presented below and identify the needed
information to be used in analyzing the 5C’s of Credit for the loan application of Mr. Bawhal
Luhmavas.
Mr. Bawhal Luhmavaz applied for a ₱1.5 million loan on behalf of his
business, “Kim’s Restaurant,” for additional capital in 2019. He is the Chairman of
the Board of Kim’s Restaurant. In their meeting, the Board decided to open an
additional branch for the restaurant. Kim’s Restaurant currently has 3 branches in
Metro Manila and would like to open a small branch in Quezon City. Kim’s
Restaurant has been in the business for 12 fruitful years and has been a previous
borrower of the bank. The company had previous late payments before, but the
reasons are usually justifiable, and the balance of the loan, along with any
penalties, if any, is paid. The three branches earn a net income of ₱900,000/ year.
The lot where the main restaurant located is pledged as collateral to the bank. This
property is valued at ₱2 million. Shown below is an excerpt from Kim’s Restaurant’s
2018 consolidated audited financial statements.

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ACTIVITY 34

Reference:

Business Finance, TG

file:///D:/ Senior%2012%20Business%20Finance_Q1_M5%20for%20printing.pdf CLAUDINE A.

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