Lesson 1 Flashcards
Philippine is a long-term source of funds, while the issuance of commercial paper is a form of short-term debt financing.
Equity financing
can be in the form of borrowing banks or other lending institutions or the issueance of debt securities like commercial papers and bonds
Debt financing
the process by which a private company becomes publicly listed through a stock exchange by offering shares of stocks to the public.
Initial public offering
the process of offering new shares where existing shareholders can subscribe to the new issues based on their proportionae share the company prior the issuance of new shares.
Stock rights offering
creates a contractual obligation for the borrower to pay interest and the principal
Debt financing
tax-deductible, provides a tax shield
Interest expense
allows a company to grow without diluting the interest of the controlling shareholders or the proprietor, in the case of a single proprietorship.
advantageous to existing shareholders or owners because it allows a company to grow without fresh equity infusion.
This mode of financing does not dilute the existing ownership stake of existing shareholders or proprietors.
Debt financing
generally do not intervene in the decisions of management.
impose certain conditions specified in the loan covenant, such as maintaining certain liquidity and stability ratios
do not intervene in managing their borrowers’ companies.
Creditors
which means that for somebody to take more risk, he/ she has to be compensated by an expected higher return
“high risk, high return,”
refers to the issuance of new shares of stock and retained earnings plowed back into company operations
safest source of financing for a company
Equity financing
also called an internally generated fund
Latter
corporate finance was developed based on repeated observations of how companies fund their financing requirements. According to this hypothesis, this is how companies fund their requirements:
Pecking Order Hypothesis
These are the funds that come from operating cash flows and plowed back earnings of a company
Internally generated funds
When internally generated funds have been exhausted, then is the next alternative.
debt financing
The last in the priority list of financing
equity financing
normally used to finance the day-to-day operations of a company.
It is used for working capital requirements, such as accounts receivable and inventories. It is also used to pay the salaries of employees, utility expenses, business and income taxes, and security services.
It can also be used for bridge financing where a company has some maturing obligations and does not have enough cash to pay such maturing obligations
Short-Term Funds
Example of Sources of Short-Term Funds:
Suppliers’ credit
Advances from owners/ shareholders
Advances from customers
Loans from banks
Loans from cooperatives
Loans from lending companies
Commercial papers
Example of Uses of Short-Term Funds:
Working capital
requirements, e.g..
inventories and accounts receivable
Operations, e.g..
salaries of employees,
rent, and utilities
Bridge financing
Suppliers of raw materials and merchandise are the best sources of short-term working capital. This is the reason why a good relationship with suppliers has to be nurtured.
Suppliers’ credit
f an owner or a controlling shareholder has enough personal assets, advancing funds to his/her company when there are financial requirements is an easy way for a company to raise funds
Advances from owners or shareholders
There are occasions when a customer advances the payment for his/her purchase orders. The advances may be a percentage of the entire value of the order.
Advances from customers
can lend as much as five times equity contributions.
Credit cooperatives.
can provide both short-term and long-term loans.
Banks
banks that offer short-term credit facilities to small and medium enterprises (SMEs)
Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP)
short-term debt securities issued to the public, normally with tenors of one year. This is a credit facility normally available to big corporations.
Commercial papers
can finance working capital requirements. Some of them may require documents such as a purchase order to support a loan application. This purchase order may become the basis of a loan release
lending companies
sources such as “5-6.” This is a very expensive source of financing and should be avoided. It is called as such because for every 15 that one borrows, he/she has to return 6. This 20% interest is just for a month
Informal lending
are used for long-term investments, or sometimes called capital investments.
These include replacement of old equipment, expansion of production capacity, and buying a piece of land that will be the site of future expansion.
can also be used to finance permanent working capital requirements
Long-term funds
Example of long term funds:
Equity infusion
Internally generated funds
Loans from banks
Loans from lending companies
Bonds
Example of Uses of Long-Term Funds
Long-term investments, e.g..
expansion of production capacity
Permanent working capital
requirements
have to be financed by long-term sources of funds to minimize default risk. The returns on long-term investments may not be realized immediately and, therefore, require more patient sources of financing.
Long-term investments
can be in the form of fresh equity infusion from the owner in a single proprietorship or issuance of new ordinary shares or perpetual preference shares for a corporation. This is the most patient source of capital.
Equity financing
contains information that will guide potential investors in making an investment decision. This is prepared through the services of investment bankers.
prospectus
Instead of declaring cash dividends or distributing the profits to the proprietor,
for expansion or finance other types of capital investments
Internally generated funds
sources of different types of financing, from short-term to long-term. They provide lower interest rates as compared to other financial institutions. Still, they have many requirements, and a borrower goes through a process, normally a month to three months before a loan gets approved (refer to the next section for the list of requirements, general procedures, and flowchart on a loan application).
Banks
This market is gaining more popularity among our big publicly listed companies for their fund-raising activities.
Bond Market
credit rating agencies is important because
it will dictate the interest rate that an issuer can charge to the buyers of the bonds.
means that a bond issuer has low credit risk
high credit rating
General Steps on Loan Application
- The loan applicant approaches an account officer to apply for a loan.
- The account officer evaluates if the loan applicant qualifies for any of the bank’s loan products.
- If qualified, the account officer gives the loan applicant the list of requirements (refer to Appendix 1 for a possible list of requirements).
- The loan applicant completes the requirements and submits them to the account officer.
- The account officer checks the completeness of the requirements and forwards them to the credit evaluation department if the requirements are complete.
- The credit evaluation department assigns the account to a credit analyst who will evaluate the creditworthiness of the loan applicant.
- The credit analyst prepares a recommendation and will present the recommendation
before a loan committee that approves the loan application. The loan committee is
generally composed of top executives from the bank.
- If the loan is approved, the post-approval requirements will be sent to the loan applicant for compliance.
reasons for the inability of SMEs to take advantage of available financing:
- Limited track record
- Limited acceptable collateral
- Inadequate financial statements
- Lack of business plans
The potential creditors of these SMEs cited the following reasons for rejecting the loan applications:
- Poor credit history
- Insufficient collateral
- Insufficient sales, income, and cash flows.
- Unstable business type
- Poor business plans
One way of establishing credibility is ________
paying obligations on time
These conditions are supposed to benefit the borrower so that his/her company will not be overexposed to borrowing, or he/she will monitor the liquidity position on a more regular basis.
Comply with the provisions of loan covenant, such as maintaining certain liquidity and stability or leverage ratios.
if a company is acquiring another company or if a company is now the subject of acquisition.
Notify the creditors
