1st Option: Borrow funds from Money Market

Money Market

Financial Market

Those who Banks Specialty Paper

invest/deposit their Corporation
excess funds in a Financial Intermediaries
Borrower
money market or in
banks

Lender
Commercial Paper

Financial Instruments

As an alternative to bank borrowing, the company may communicate to a money

market since short term securities are normally traded in this kind of financial market. To
resolve their liquidity crisis, borrowing from a money market will be a big help because it
caters short-term funds from fund providers and since their suppliers are asking for an
advance payment or cash on delivery, money market caters immediate cash
requirements of the company. With this they can meet what the supplier wants.
A money market account, or money market deposit account, is a government-
insured bank account that pays relatively high interest rates and provides cash withdrawal
privileges. This type of account offers both savings and checking tools at higher yields
than regular savings and checking accounts. Money market accounts are offered by
banks and credit unions and have several significant advantages and disadvantages.
How it works
Unlike money market mutual funds, a money market deposit account works just
like a checking or savings account. You'll sign up for this type of account at your bank
and likely won't notice any difference from a regular bank account you'd set up. When
you deposit your funds into a money market, however, you will notice a few benefits that
you don't find with a traditional checking or savings account. Banks steer members toward
money market accounts, especially if they maintain a high balance. Although it doesn't
pay out as a CD might, you'll have access to your funds when you need them, rather than
being restricted to leaving the money alone for months at a time.
Advantages of money market
Money market accounts pay higher interest rates than other types of bank
accounts, including passbook savings accounts and regular savings accounts, provided
they maintain the minimum balance. The interest rate is tiered, compounded and credited
monthly so that a money market account accrues more profit as the account balance
increases.
Account holders can easily access their money market accounts through ATMs,
transfers and checks. If you bank online, you'll see your money market account displayed
just as you would any other checking and savings account.
As long as you haven't exceeded your account limits, you'll be able to move money
between accounts as you would with standard checking and savings.

Disadvantages of Money Market Accounts

Financial institutions require account holders to maintain a minimum balance in
their money market accounts. Bank of America, for example, requires a minimum balance
of $2,500 for its Rewards Money Market Savings account.
Most money market accounts allow only a limited number of monthly withdrawals
and transfers as per federal banking regulations. For example, the National Bank permits
no more than six withdrawals per statement cycle. Commerce Bank’s Premium Money
Market Account allows up to six transfers or withdrawals per month.
This poses an inconvenience to a customer who needs to make an emergency
withdrawal that will exceed the number of withdrawals permitted.

Commercial Paper
Commercial paper refers to unsecured short-term promissory notes issued by
financial and nonfinancial corporations. Commercial paper has maturities of up to 270
days (the maximum allowed without SEC registration requirement). Dollar volume for
commercial paper exceeds the amount of any money market instrument other than T-
bills. It is typically issued by large, credit-worthy corporations with unused lines of bank
credit and therefore carries low default risk.
Standard and Poor's and Moody's provide ratings of commercial paper. The
highest ratings are A1 and P1, respectively. A2 and P2 paper is considered high quality,
but usually indicates that the issuing corporation is smaller or more debt burdened than
A1 and P1 companies. Issuers earning the lowest ratings find few willing investors.
Unlike some other types of money-market instruments, in which banks act as
intermediaries between buyers and sellers, commercial paper is issued directly by well-
established companies, as well as by financial institutions. Banks may act as agents in
the transaction, but they assume no principal position and are in no way obligated with
respect to repayment of the commercial paper. Companies may also sell commercial
paper through dealers who charge a fee and arrange for the transfer of the funds from
the lender to the borrower.

2nd option: Assignment of Receivable

Secondary Market

Financial Market

Private Firms or Public Banks Specialty Paper

Corporation Corporation
Financial Intermediaries
Lender Borrower

Receivables of Specialty Paper

Corporation

Financial Instruments

The financial accounting term assignment of accounts receivable refers to the process whereby a
company borrows cash from a lender, and uses the receivable as collateral on the loan. When accounts
receivable is assigned, the terms of the agreement should be noted in the company's financial
statements.
In the normal course of business, customers are constantly making purchases on credit and remitting
payments. Transferring receivables to another party allows companies to reduce the sales to cash
revenue cycle time. Also known as pledging, assignment of accounts receivable is one of two ways
companies dispose of receivables, the other being factoring.
The assignment process involves an agreement with a lending institution, and the creation of a
promissory note that pledges a portion of the company's accounts receivable as collateral on the
loan. If the company does not fulfill its obligation under the agreement, the lender has a right to collect
the receivables.

There are two ways this can be accomplished:

  General Assignment: a portion of, or all, receivables owned by the company are pledged as
collateral. The only transaction recorded by the company is a credit to cash and a debit to notes
payable. If material, the terms of the agreement should also appear in the notes to the
company's financial statements.
 Specific Assignment: the lender and borrower enter into an agreement that identifies specific
accounts to be used as collateral. The two parties will also outline who will attempt to collect
the receivable, and whether or not the debtor will be notified.

In the case of specific assignment, if the company and lender agree the lending institution will collect
the receivables, the debtor will be instructed to remit payment directly to the lender.

3rd option: Bank borrowing

Secondary Market

Financial Market

Those who Commercial Banks Specialty Paper

invest/deposit their Corporation
excess funds in Financial Intermediaries
Borrower
commercial banks

Lender

Short-term funds or non-collateral

funds

Financial Instruments

Steps in Bank borrowing

1. Finding prospective loan customers
Most loans to individuals arise from a direct request from a customer who approaches a
member of the lender’s staff and asks to fill out a loan application. On the other hand,
Business loan request, often arise from contacts the loan officers and sales
representatives make as they solicit new accounts form firms operating in the lender’s
market area.
2. Evaluating a prospective customer’s character and sincerity of purpose
Once a customer decides to request a loan, an interview with a loan officer usually
follows, giving the customer the opportunity to explain his/her credit needs. That
interview is particularly important because it provides an opportunity for the loan officer
to assess the customer’s character and sincerity of purpose. If the customer appears to
lack sincerity in acknowledging the need to adhere to the terms of a loan, this must be
recorded as a strong factor weighing against approval to the loan request.
3. Making site visits and evaluating a prospective customer’s credit record
Business or mortgage loan is applied for, a loan officer often makes a site visit to
assess the customer’s location and the condition of the property and to ask clarifying
questions. The loan officer” may contact other creditors who have previously loaned
money to this customer to see what their experience has been. A previous payment
record often reveals much about the customer’s character, the sincerity of purpose, and
sense of responsibility in making use of credit extended by a lending institution.
4. Evaluating a prospective customer’s financial condition
If all is favorable to this point, the customer is asked to submit several crucial
documents the lender needs in order to fully evaluate the loan request, including
complete financial statements and, in the case of a corporation, board of directors’
resolutions authorizing the negotiation of a loan with the lender. Once all documents are
on file, the lender’s credit analysis division conducts a thorough financial analysis of the
applicant, aimed at determining whether the customer has sufficient cash flow and
backup assets to repay the loan.
The credit analysis division then prepares a brief summary and recommendation, which
goes to the appropriate loan committee for approval. On large loans, members of the
credit analysis division may give an oral presentation and discussion will ensue between
staff analysts and the loan committee over the strong and weak points of a loan request.
5. Assessing possible loan collateral and signing the loan agreement
If the loan committee approves the customer’s request, the loan officer or the credit
committee will usually check on the property or other assets to be pledged as collateral
in order to ensure that the lending institution has immediate access to the collateral or
can acquire title to the property involved if the loan agreement has defaulted.
Once the loan officer and the loan committee are satisfied that both the loan and the
proposed collateral are sound, the note and other documents that make up a loan
agreement are prepared and signed by all parties to the agreement.
6. Monitoring compliance with the loan agreement and other customer service
needs
The new agreement must be monitored continuously to ensure that the terms of the
loan are being followed and that all required payments of principal and interest being
made as promised, for larger commercial credits, the loan officer will visit the customer’s
business periodically to check on the firm’s progress and see what other services the
customer may need.
Usually, a loan officer or other staff members enter information about a new loan
customer in a computer file known as customer profile. This file shows what services
the customer is currently using and contains other information required by management
to monitor a customer’s progress and financial service needs.

Creditworthiness of a company in the Philippines

A company’s credit score is a three-digit number that represents their creditworthiness
or ability to pay off a loan based on the information in their credit report. Credit scores
range from 300 to 850, with 850 being the highest rating. The higher credit score, the
better. Banks, insurance companies, and other financial institutions use the credit score,
among other things, to assess a borrower’s credit risk.
Factors That Affect Credit Score
Credit bureaus calculate credit scores based on five criteria:
Credit payment history: How regular you pay your debts, how much you repay, and
whether you’ve paid on time or not.
The amount owed or credit utilization ratio: How much of your credit limit you spend.
If you’re maxing out your credit card, you’re likely to miss your loan repayments in the
future and get a lower credit score.
Length of credit history: The average age of your credit card and loan accounts, and
the length of time since those were used
Types of credit used: Whether you’ve availed of a variety of credit types such as auto
loans, mortgages, and credit cards. This information gives lenders an idea if you can
manage different credit types responsibly.
New credit: How often you’ve opened new accounts. Applying for multiple credit cards
or loans at once can hurt your credit score.
Difference Between a Credit Score, Credit Report, and Credit History
Credit score, credit report, and credit history are interrelated yet different from each
other.
A credit report is a comprehensive summary of all financial transactions, including loans
and utility subscriptions. It contains credit information such as balances and missed
payments, as well as personal data such as name, TIN and SSS/GSIS number, home
address, and employer. It’s used as the basis for computing a person’s credit score.
Meanwhile, a credit history is a record of one’s ability to repay debts over the years. It
describes how you use credit and how responsible you are as a borrower.

Credit Reporting and Scoring System in the Philippines: How Does It Work?
Created through Republic Act 9510 or the Credit Information System Act, the Credit
Information Corporation (CIC) is the only centralized registry of credit data in the
Philippines. The CIC is authorized to collect, consolidate, and share credit information
with all financial institutions in the country.
Banks, cooperatives, insurance firms, and telecom companies submit their clients’ credit
history to the CIC, which then collates the information into detailed credit reports.
Authorized lenders can access credit reports from the CIC.
The CIC has four accredited credit bureaus or special accessing entities that compute
credit scores: CIBI Information, Inc., Compuscan Philippines, CRIF Philippines,
TransUnion Philippines.

Importance of Credit Score

Having a good credit score is important, so much so that it’s considered a big deal when
it comes to romantic relationships. Various studies found that higher credit scores
increase the likelihood of finding a lifetime partner, with financial responsibility topping
the list of qualities of an ideal mate.
The same dynamics can also be said about lenders and borrowers. To gain the bank’s
trust, you have to prove your commitment and responsibility to pay back what you owe
on time. Your credit report and credit score will be your proof.

5 Reasons to Improve Credit Score

1. Easy to get a loan or credit card - With a high credit score, you can enjoy easy
credit access because lenders will see you as a reliable, trustworthy borrower. Your
loan or credit card applications will get approved faster than those with poor credit
scores.
2. Higher loan amounts and lower interest rates - Credit reports enable lenders to
make fair and objective decisions when processing loan and credit card applications. If
you’re found to be creditworthy based on your credit report, you’ll qualify for higher loan
amounts and credit card limits with lower interest rates.
3. Lower insurance costs - Your credit score also affects how much premium you’re
going to pay for your car insurance or life insurance. You can get a discount on
insurance rates with a good credit score, while a bad credit score can cost you higher
premiums.
4. Better deals on property leases - The importance of a credit score goes beyond
credit cards and loans. It also matters when negotiating for better deals, such as when
you’re renting a property. If you know you have a high credit score, you can use that to
haggle with a prospective landlord for just a one-month advance payment rather than
the usual two month-deposit.
5. Higher chances of getting hired - Your potential employers may conduct
background checks and even avail of the employment history check service from credit
bureaus in the Philippines. They may also look specifically at your credit score or credit
report to determine how responsible you are as a potential employee.