Lesson 6: Short-Term and Long-Term Funds Flashcards
debt financing is being done through
borrowing, whether short term or long term
debt financing usually comes with
interest
Referred to as the cost of borrowing or cost of debt
debt financing
bank loans
debt financing
issuance of debt instruments
debt financing
examples of debt instruments
bonds
financing from nonbank institutions
debt financing
examples of nonbank institutions
lending companies and cooperatives
assignment of accounts receivable
debt financing
selling of notes receivables
debt financing
common debt financing arrangements
bank loans, issuance of debt instruments, financing from nonbank institutions, assignment of accounts receivable, selling of notes receivable
In the case of banks and other nonbank institutions, borrowing entails
compliance of certain requiremnets
refers to the sale of ownership interest, often represented by shares, to raise fund for business purposes
equity financing
equity financing is often represented by
shares
To compensate for fund usage from equity financing,
dividends or profit shares are declared, set aside, and paid by the business
funds raised by the entrepreneur or business owner from friends and family
equity financing
capital infusion
equity financing
how is capital fusion done
through direct sale of shares or through initial public offerings
initial public offerings
equity financing
financing by private companies
equity financing
common equity financing arrangements include
funds raised by the entrepreneur/business owner from friends and family, capital infusion through direct sales of shares or through initial public offerings, financing by private companies
sources of funds
bank, credit cooperatives, commercial finance companies, supplier’s credit, bank loans, lending companies, informal lending sources
banks are supervised and regulated by the
Bangko Sentral ng Pilipinas
BSP stands for
Bangko Sentral ng Pilipinas
An establishment for the deposit, custody, and issuance of money used to facilitate the exchange of money and to make loans and discounts.
bank
in the philippines, banks include
universal and commercial; thrift; rural and cooperative BANKS
Aims to give members access to goods and services that will enhance their income, savings, investments, productivity, and purchasing power.
credit cooperatives
all cooperatives are regulated and supervised by the
Cooperative Development Authority
CDA stands for
Cooperative Development Authority
in coordination with the cda, who prescribe the appropriate prudential rules and regulations applicable to financial service cooperatives.
BSP
Promote and undertake savings and lending services among its members.
credit cooperatives
Organizations without a bank charter that advances funds to businesses by discounting notes receivable, making loans secured by mortgage, or financing deferred-payment sales of commercial and industrial equipment.
commercial finance companies
A good relationship has to be
nurtured with suppliers
Suppliers of raw materials and merchandise are the
best short-term working capital
Some suppliers charge a small interest rate on their deliveries to their customers
if not paid on a specific date
suppliers can also ask their customers to
sign promissory notes
the chances of the suppliers agreeing to the request increase when
your company has been a good customer
who distribute BANK LOANS and offer short-term credit facilities to SMEs
government banks, the development bank of the philippines, land bank of the philippines
DBP stands for
development bank of the philippines
LBP stands or
land bank of the philippines
Securing loans from these institutions may take some time as they
have to do credit investigation and evaluate loanable values of the collateral that may be mortgaged to support a loan
the transaction costs involved in bank lending may be
high
examples of mortgage properties
house and lot
for bank loans, mortgaged properties may have to
be insured as well
these companies can finance working capital requirements.
lending companies
lending companies are faster than
bank but they charge higher interests
the interests charged by lending companies are higher than
banks but lower than informal lending companies or “5-6”
informal companies are also known as
“5-6”
some lending companies require some
documents such as purchase order to support a loan application
may become the basis of a loan release in lending companies
purchase order
A very expensive source of financing and should be avoided.
informal lending sources
in informal lending sources, for every 5 PHP you borrow
you have to return 6 PHP
how much is the interest rate for just a month in informal lending soruces
20% interest
loan application requirements
demographics; income or revenue; assets and liabilities; contact or references; applicant’s signature; 5C’s of credit
includes the name or business name, birthdate, address, SSS no, TIN no, phone no, valid government-issued ID
demographics
refers to current personal income and employer, employment and salary history, and business revenue, and if there are already an existing business
income or revenue
applicants may ask to disclose their checking savings and investment accounts and their outstanding loans and credit cards, if there are any.
assets and liabilities
require identification and contact information of existing employers, previous employers, or even nearest relative not living with the identified contact
contact or references
stating that everything on the application is true and correct and authorizing the lender to verify the information provided with the identified contacts and references
attest and authorization require affixing applicant’s signature on the credit’s application
the credit department evaluates on the basis of
5C’s of credit
5C’s of cerdit
character, capacity, capital, collateral, condition
loan application process
receipt of application form and required documents; verification of information in the application form and required documents (may include interview); checking credit history and writing credit report with appropriate recommendations; documenting final decision
if the loan is approved,
final documents signoff (interest rate and other terms) and loan release
if the loan is rejected
rejection letter is sent to applicant
Problems faced by SMEs in Financing
limited track record; limited acceptable collateral; inadequate financial plans; lack of business plan
Creditors of these SMEs cited the following reasons for rejecting the loan applications
poor business plans; poor credit history; insufficient sales, income, and cash flows; insufficient collateral; unstable business type
Duties of the Borrower to Creditors
paying obligations on time; provide collaterals as agreed upon and ensure they are in the physical condition perceived by the creditors; secure permission before declaring cash dividends; notify the credit if the company is acquiring another company or if the company is not the subject of acquisition; do not default on the loans as much as possible; comply with the provisions of the loan covenant such as maintaining certain liquidity and leverage ratios
one way of establishing credibility is __________. Coming up with different reasons for not paying on time creates a bad impression.
paying obligations on time
in the loan negotiation with proper documentation. Ensure that these collaterals are in the physical condition perceived by the creditors during determining the loanable value of the loans
provide collaterals as agreed upon
Comply with the provisions of the loan covenant such as
maintaining certain liquidity and leverage ratios
Another provision in the loan covenant involves getting __________________. If the company plans to declare cash dividends, secure permission before declaring so. This is included in most loan covenants because some companies in the past declared cash dividends to the stockholders at the expense of debt services to creditors.
permission to declare cash dividends
The interest of creditors may be jeopardized if new owners take over the company of if the company is going to acquire another company.
notify the creditor if the company is acquiring another company or if the company is not the subject of acquisition
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.
do not default on the loans as much as possible
a person who jointly signs a check, draft or any other negotiable instrument alongside a primary borrower of a loan.
co-makers
This means that if the primary borrower cannot pay back the loan, they are responsible for paying it back instead. It’s like having a backup person to help pay the loan if needed.
co-maker
what are the demographics in the loan application
name or business name, birthdate, address, SSS no, TIN no, phone no, valid government-issued ID
what are the demographics in the loan application
name or business name, birthdate, address, SSS no, TIN no, phone no, valid government-issued ID
