Department of Education

SCHOOLS DIVISION OF CITY OF MEYCAUAYAN

Pag-asa St., Malhacan, City of Meycauayan, Bulacan

Senior High School

Activity Sheet 12
in
Business Finance
Quarter 1 – Week 5:
Compare and Contrast the Loan
Requirement of the Different
Banks and Non-banks Institutions
(ABM_BF12-IIIe-f-14)
 COMPARE AND CONTRAST THE LOAN REQUIREMENT OF
THE DIFFERENT BANKS AND NON-BANKS INSTITUTIONS

LET US KNOW

Financing a long-term investment through a short-term loan.

Let us say you are a restaurant owner and you are planning to open another branch
which will cost you ₱8 million. The returns on this investment will be realized over several
years. Therefore, financing it through a short-term loan, say one year, will give you too
much pressure to pay the loan because the new branch may not have generated enough
cash flow within the year to cover the ₱8 million.

Question: How do you plan to finance the PHP 8 million?

Answer: Since this is a long-term investment where the expected benefits are going to be
realized over a couple of years, this investment should be financed by long-term sources.
Assuming that both long-term debt and equities are accessible, part of the requirements
must be financed by long-term debt. The question is how do you obtain long-term debt?

LET US REVIEW

I. Multiple Choice. Choose the letter of the correct answer. Write the letter and its
corresponding word/words on a separate sheet of paper.

1. The _________ inventory consists of items that have been produced but not yet sold.
a. raw materials c. finished goods
b. work-in-process d. capital goods
2. The _________ inventory consists of all items currently in the production process.
a. raw materials c. finished goods
b. work-in-process d. capital goods
3. The _________ inventory contains the basic components of the production process.
a. raw materials c. finished goods
b. work-in-process d. capital goods
4. The credit applicant’s _________ is the amount of assets the applicant has available
for use in securing the credit.
a. character c. capital
b. capacity d. collateral
5. The three basic types of inventory are the following EXCEPT ________.
a. raw materials. c. finished goods.
b. work-in-process. d. capital goods.

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 LET US STUDY

How can management minimize the potential loss from uncollected accounts
receivable? Minimizing loss from exposure to accounts receivable starts with its
organization. This means the customers who is given credit terms must be credit worthy. In
large companies, there is credit committee composed of representatives from sales and
marketing and finance departments who decide which customers should be given credit
terms. This does not mean that if a company is small, customers will no longer be screened.
The same principles of credit evaluation applies to big and small companies. The approach
may probably just vary as it is more formalized in big companies.in any case, the following
5C’s of Credit can be used in the credit evaluation.

1. Character
This refers to the integrity and reputation of the customer.
2. Capacity
This refers to the customer’s capacity to pay.
3. Collateral
This can be guarantees or collateral provided by the customer to support his
exposure to the company.
4. Capital
This refers to the amount of capital invested by the owner or in this case, the
customer, into his company.
5. Condition
This one describes the environment where the company operates which may
affect the ability of a customer to pay.

General Steps on Loan Application are as follows:

1. Loan applicant inquires with the loan officer to apply for a loan.
2. The loan officer provides the loan applicant a loan application form and interviews
the client.
3. The loan officer then decides what type of loan product the borrower qualifies in,
and then provides them a list of requirements.
4. The applicant then submits the requirements along with the loan application form.
5. If collateral is required, the corresponding mortgage documents are made ready.
6. The loan officer then forwards the documents to the credit evaluation department.
7. The credit evaluation department checks whether the applicant provided the
complete documents.
8. Credit investigation is done, and the credit worthiness of the loan applicant is
evaluated.
9. The credit analyst prepares a recommendation and will present the recommendation
before a loan committee who approves the loan application. The loan committee is
generally composed of top executives from the bank.
10. If the loan is approved, then the post-approval requirements will be sent to the loan
applicant for compliance.

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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
• 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

Duties of the Borrower to Creditors

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

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 LET US PRACTICE

Visit a bank/cooperative/lending company near or around your community (You may

search online). Inquire on the different loan requirements and steps in loan application, and
compare the different rates for the different loan products. Prepare for a report on what you
have researched.
• Different Loan requirements for small business loan, loans to corporation, personal
consumption loans, and other desired loan products.
• Steps in Loan Application for secured and unsecured loans.

Note: You may design a flowchart for this.

LET US REMEMBER

Answer the following. Write your answer on a separate sheet of paper.

1. What is the credit evaluation a company used?
2. What are the Steps on Loan Application?
3. What are the bank requirements for loan application for a corporation?
4. What are the duties of the borrower to creditors?
5. Discuss the problems encountered by Small Market Enterprise in getting financing
from the banks.

LET US APPRECIATE

Mr. Lincoln Sta. Maria applied for a ₱1.5 million loan in behalf of his business,
“Cole’s Restaurant”, for additional capital in 2019. He is the Chairman of the Board of
Cole’s Restaurant. In their meeting, the Board decided to open an additional branch for the
restaurant. Cole’s Restaurant currently has 3 branches in Metro Manila and would like to
open a small branch in Caloocan City. Cole’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 is located is pledged as collateral to the bank. This
property is valued at ₱2 million.

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 Shown below is an excerpt from Cole’s Restaurant’s 2018 consolidated audited
financial statements. Identify the information to be used in analyzing the 5C’s of Credit.

As of 31 December, 2018 As of December, 2017

Current Assets 1,200,000 900,000
Long Term Assets 4,400,000 4,200,000
Short Term Liability 500,000 460,000
Long Term Liability 2,300,000 3,500,000
Equity 2,800,000 1,140,000
Net Income 900,000 950,000
Cash Flow from operation 500,000 450,000

LET US PRACTICE MORE

Answer the following. Write your answer on a separate sheet of paper.

1. What are the 5C’s of credit? Explain each.
2. What do you think is the most important consideration of banks in approving a
loan?
3. Why is it important for banks to collect all the loan requirements? Which
requirements are meant to be used to evaluate each of the 5C’s of credit?

EVALUATION

The following excerpt was taken from an article published in Inquirer.net on February 10,
2015:
“Infrastructure holding firm Metro Pacific Investments Corp. has raised 200 million
in fresh funds from expansion through an overnight equity private placement deal.”
According to the management, proceeds from his fundraising activity will be used to
retire the more expensive debt of its affiliate, Beacon Electric Asset holdings, Inc.
Metro Pacific Investments Corp. (MPIC) is the holding company behind MERALCO,
NLEX, Maynilad, and hospitals like Makati Medical Center.
Discuss how this fundraising activity will affect the statement of financial position of
MPIC. How will this affect the financial position and profitability of its affiliate, Beacon
Electric Asset Holdings, Inc?

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 All Right Reserved
2020

ACKNOWLEDGEMENT

CAROLINA S. VIOLETA, EdD

Schools Division Superintendent

JERRY D. CRUZ, PhD, CESE

Asst. Schools Division Superintendent

DOMINADOR M. CABRERA, PhD

Chief, Curriculum Implementation Division

EDWARD C. JIMENEZ, PhD

Education Program Supervisor- LR Manager

JOCELYN A. MANALAYSAY, PHD

Education Program Supervisor- MATH

REALYN B. TANABE
Developer/Writer