Debt Financing

 Debt financing can be in the form of borrowing from banks or other lending
institution or issuance of debt securities like commercial papers and bonds. For
companies, it can also be in the form of advances from stockholders to expedite the
process of raising funds.
 Debt financing creates a contractual obligation for the borrower to pay the interest
and the principal. Payments have to be made on time because unpaid interest and
principal lead to penalties and more interest.

Equity Financing

 Equity financing refers to issuance of new shares of stocks and retained earnings
plowed back into the operations of the company. The latter is also called internally
generated funds. Equity financing is the safest source of financing for a company
because it does not require any mandatory payment of dividends. If you own enough
shares of a company, you can end up controlling its operating and financing
decisions. Controlling stockholders defines the direction of the company because they
can choose who will manage the company.

SOURCES AND USES OF SHORT-TERM FUNDS

Short-term funds are normally used to finance the day-to-day operations of the company.
It is used for working capital requirements such as accounts receivable and inventories.
It can be also be used for a bridge financing where a company has some maturing
obligations and does not have enough cash to pay such maturing obligations. There are
occasions when the management of a company decides to borrow short-term loan to
address this problem.

The following can be sources of short-term funds:

1. Suppliers credit - suppliers of raw material and merchandise are best sources of
short-term working capital.
2. Advances from stockholders - if you have enough personal assets and you
control the company, advancing funds to the company when there are financial
requirements is an easy way for the company to raise funds.
3. Credit cooperatives – credit cooperatives can lend as much as five times of your
equity or contributions.
 4. Bank loans - banks can provide both short-term and long-term loans. Some banks
also provide credit facilities, not just too big corporations, but also to small and
medium enterprises.
5. Lending companies – these are small lending companies which cater normally to
small and medium enterprises. The lending process is much faster as compared to
banks but they charge higher interest, higher than the banks but lower compared
to a more informal lending, popularly known as “5-6”.
6. Informal lending sources such as “5-6” - this is very expensive source of
financing and should be avoided. It is called such because for every 5 php that
you borrow, you have to return 6 php. This 20% interest is just for a month.

SOURCES AND USES OF LONG-TERM FUNDS

Long-term funds are used for a long-term investments or sometimes called capital
investments. This includes expansion, buying new equipment, or buying a piece of land
which will be the site of future expansion. Long-term funds can also be used to finance
permanent working capital requirements.

The following are different sources of long-term funds:

1. Equity investors – equity investors can be issued common stocks. This is the
most patient source of capital.
2. Internally generated funds - instead of declaring cash dividends, the company
can use internally generated funds for expansion or to finance other types of
capital investments.
3. Banks – banks are sources of different types of financing from short-term to long-
term.
4. Bond market - this market is gaining more popularity among our big publicly
listed companies for their fundraising activities.
5. Lending companies - these are the same lending companies previously
discussed. Some of them also provide long-term loans ranging from two to five
years. These lending companies can process loans faster but they charge higher
interest rates.
BANK AND NON-BANK INSTITUTION
1. Bank – are the traditional institution for handling deposits and extending credit,
but they aren’t the only place that performs this functions.
2. Non-bank Institution - a non-bank financial institution (NBFI) is an institution
that offer loans and financial products but does not have a full banking license.
These type of institution are privately owned which gives them more leverage and
flexibility with the rates and fees they can offer customers.

Examples of Non-bank and Bank Institution ( sjdm )

Philippine National Bank

Basic Criteria:
 25-65 years old (not to exceed 65 years of age upon loan maturity)
 Employed / Self-employed for at least 2 years
 Filipino Citizen of Foreigner based in the Philippines

Income Documents:
Employed (Local
 Latest ITR
 Certificate of Employment with compensation.

Self-employed / Business Owner:

 Latest ITR with Audited Financial Statement
 Latest three (3) month’s Bank Statement
 Business Paper

Partnership / Corporation

 SEC Certificate of Registration

 Articles of Incorporation By-Laws
 Secretary’s Certificate / Partnership Resolution (using PNB prescribed format)
 Latest ITR and Audited Financial Statement
 Latest three (3) month’s Bank Statement
BANK INSTITUTION

Cebuana Lhuillier
Requirements for Loan Application:

 Government-issued photo-bearing ID (Passport, Driver’s Licence, SSS, PRC, etc.

)
 Original pay slip and/or Latest Income Tax Return with BIR or Bank stamp ( BIR
Form 2316 )
 Birth Certificate
 Utility Bills
 Credit Card

Compare / Differences

 Bank Institution request for more requirements such as Income Documents, Self-
employed / Business owner and Partnership / Control.
 Bank Institution has detailed and elaborated requirements than Non-Bank
Institution.

FLOWCHART ON THE STEPS OF LOAN APPLICATION

STEP 1: STEP 2:

Decide how much money you need Find the right type of loan

STEP 3: STEP 4:

Decide on the right type of lender Check your credit score

\ STEP 5: STEP 6:

Check the Lender’s Requirements Compare providers and read the fine
print

STEP 7: STEP 8:

Gather your documents and Apply for preapproval

information
DUTIES OF THE BORROWER TO CREDITORS
1. Pay the creditors based on the payment schedule agreed upon.
2. Provide the collaterals as agreed upon in the loan negotiation with proper
documentation, if necessary and if applicable.
3. Comply with the provisions of the loan covenant such as maintaining certain
liquidity and leverage ratios.
4. Notify the creditor if the company is acquiring another company or the company
is now the subject of acquisition.
5. Do not default on the loans as much as possible.

USES OF FUNDS
 The money needed for various purposes for business start up, including beginning
quantities of supplies, equipment, and furniture needed the purchase of building
and land or cost of deposits for rent, and other startup cost.
 Where the money for all funding is going to come from. You will probably have a
mix of different parts of your plan. For example, you may be contributing office
furniture yourself, getting loan for purchasing major equipment, and getting a line
of credit for working capital.

EXAMPLES OF USES OF FUNDS

 Facilities costs
 Equipment and Vehicles
 Supplies and Advertising
 Other Startup costs
 SOURCES AND USES OF
SHORT-TERM
AND
LONG-TERM FUNDS

PREPARED BY:

LARISSA MAE IBONA

CYRILLE MAGLOYUAN
JAKE ANTONIO
QUEENIE CAROLINO
JULIANT LIM
JOSHUA TUNDAYAG