LAS BF Q3 Week 5 IGL

Interest on bank loans are
Business Finance calculated in five ways:

Quarter 3 – Module 5 1. Simple interest
Week 5 2. Discount Interest
3. Add-on Interest
4. Simple Interest with
After going through this module, you are expected to: Compensating Balances
1. Compare and contrast the loan requirements 5. Discount Interest with
of the different banks and nonbank Compensating Balances
institutions and cite these institutions in the d. Cost of Commercial Paper
locality (ABM_BF12-IIIe-f-14)
Sources of Short-Term Funds
Short-Term Financing refers to debt originally Short term funds can be obtained through either
scheduled for repayment within one year. Short term unsecured credit or secured loans. They are either
financing is used to finance all or part of the firm’s spontaneous or negotiated.
working capital requirements and sometimes to meet
permanent financing needs. UNSECURED CREDIT VS. SECURED LOANS
Two basic problems encountered in managing the Unsecured Credit includes all those sources that
firm’s use of short-term financing. (1) determining have as their security only the lender’s faith in the
the level of short-term financing the firm should use ability of the borrower to repay the funds when due.
and (2) selecting the source of short-term financing. Unsecured short-term financing is an obligation
without specific assets pledged as collateral.
Factors in Selecting a Source of Short-Term Collateral is the asset that the borrower pledges to a
Funds lender until a loan is repaid.
1. the effective cost of credit.
2. the availability of credit in the amount Secured Loans involve pledge of specific assets as
needed and for the period when financing is collateral to the event the borrower defaults in
required. payment of principal or interest. Account receivable
3. the influence of the use of a particular credit and inventory are most common source of collateral
source on the cost and availability of other for short-term financing. The lender expects the loan
sources of financing, and to be repaid from the cash-generating ability of the
4. any additional covenants of the loans that borrower at maturity. If the borrower defaults, the
are unique to the sources mentioned lender has the legal right to seize the collateral and
previously. sell it to pay off the loan.
Estimating Cost of Short-term Credit

1. Accruals are current liabilities for services What do banks look for when evaluating your
received but for which complete payments loan applications?
have not been made as of the reporting date.  Earnings
2. Cost of Trade Credit. Credit received  Net Income
during the discount period is sometimes  Cash Flow Available for Debt
called free trade credit. Service
Cost associated with trade credit:  Financial Condition
a. Implicit/Hidden costs.  Balance Sheet Analysis to support
Suppliers of trade credit incur the Financial Health of the
the costs of operating a credit Company
department and financing  Management Experience
account receivables. They pass  Resume of each owner and key
these costs on to buyers in the management members and their
price of the product or service. industry knowledge.
However, this is determinable  Credit History
if cash price is known.  Reports from outside agencies,
b. Opportunity costs/missed cash references, other bank customers
discount. Trade credit does not  Evaluation of your personal credit
have explicit cost if there is no and business credit history
discount offered or if the buyer  Years Financial Statement
pays the invoice during the  Years of Personal and
discount period. However, if Business Tax Returns
the terms of the sale include a  Personal Financial
discount and the discount is Statement
not taken, an opportunity cost  Accounts Payable and
is incurred because the buyer Receivables
forgoes an opportunity to pay  Collateral
less for the purchases.  List real property and other assets
c. Cost of Bank Loans. to be held as collateral.
pg. 1
Most loans will have at least two identifiable 1. How do you understand the need for short
sources of repayment: term financing? Discuss and give example.
1. Cash flow generated from profitable 2. What are the factors in selecting the sources
operations. of short-term funds? Enumerate and discuss
2. Collateral pledged to secure the loan. each.
3. Personal Guaranty. 3. Identify and discuss the different sources of
short-term funds then give example.
Trend Analysis
o Review of historical results to identify
trends or patterns in performance. 2nd Semester, 3rd Quarter, Week 5
Activity 2
Early Warning Signs
o May affect your relationship with your bank 4. For (50points)
and loan officer. 5. Search from the internet or look from your
Examples of Early Warning Signs community or area for the different source
 Failure to provide information of funds, banks, cooperative or lending
requested by the bank institutions. Compare the feature of the loan
 Borrower becomes hesitant to allow products, procedures, and process on how to
lender to visit their operations avail the funds.
6. If you were the one to secure such loan,
 Frequent changes in high level which of the two will you prefer and
management elaborate your answer based on the data you
 Frequent changes in accountants have acquired.
 Borrower who expects an immediate
decision.
 Payment Delinquency
 Repeat Overdrafts
 Increase in Loan Requests
 Tax Liens
 Unusual Capital Withdrawals by
Owners
 Communications with Lender Ceases
Communication with your Lender is KEY.

Be honest and trust your lender. Your Lender is your
partner.
Example of Bank Loan Features and Procedure

https://www.bdo.com.ph/mobile/personal/loans/
small-business-loan/?wmode=text
LEARNING ACTIVITY SHEET IN BUSINESS

FINANCE GRADE 12
2nd Semester, 3rd Quarter, Week 5
Activity 1
Answer the following questions. (10 points each)
pg. 2

LAS BF Q3 Week 5 IGL

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LAS BF Q3 Week 5 IGL

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Interest on bank loans are

Business Finance calculated in five ways:

Estimating Cost of Short-term Credit

Communication with your Lender is KEY.

Example of Bank Loan Features and Procedure

LEARNING ACTIVITY SHEET IN BUSINESS

Answer the following questions. (10 points each)

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