Business SENIOR

HIGH
Finance SCHOOL

Distinguish Debt and Equity Self-Learning

Module

Financing 11
Quarter 3
Business Finance
Quarter 3 – Module 11: Distinguish Debt and Equity Financing
First Edition, 2020

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Pasig City
Business SENIOR
HIGH

Finance SCHOOL

Self-Learning
Module

11
Quarter 3

Distinguish Debt and

Equity Financing
Introductory Message

For the Facilitator:

Welcome to the Distinguishing Debt and Equity Financing!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
 For the Learner:

Welcome to the Business Finance Self-Learning Module on Distinguishing

Debt and Equity Financing!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS

At the end of this module, you are expected to:

1. define the financing, debt financing, equity financing, long-term finance, and
short- term finance; and
2. know the advantages and disadvantages of using debt and equity financing.

PRETEST

Directions. Write DF if the statement refers to Debt Financing and EF if it is Equity

Financing. Place your answer on the space provided.

__________ 1. Borrowing money to be paid with interest at a future date.

__________ 2. Raised capital from lending company.

__________ 3. Looking for a partner in the business to have a combined working
capital and shared ownership for the business.
___________4. Raising capital by selling company stock to investors in exchange
of ownership interests.
___________5. Cash loan in the bank for additional working capital.

RECAP
You learned from previous lessons that proper management of working capital
is important to a company’s financial health and success of the business operation.
What are the two important tools or metric should use by the firm’s to maintain or
grow it’s business?
 LESSON

The major challenge when starting the business is the seed money or capital to start-
up a business. To respond to this issue financing is the answer.

Financing is the process of providing funds for business activities, making

purchases, or investing. Financial institutions, such as banks, are in the business
of providing capital to businesses, consumers, and investors to help them achieve
their goals.
There are two types of financing
1. Debt Financing involves borrowing funds from creditors either short-term or
long-term with interest at a specified future of time.
Examples are:
• Bank loans are the first tool to consider in the context of corporate debt. Bank
loans usually require some type of collateral, an asset that the bank can confiscate
and sell if the borrower fails to make the payments.
• Bonds are financial instruments that promise a specific periodic payment to the
owner of the bond. Interest rates on bonds are generally lower than bank loans.
• Lending companies and Cooperatives are financing from non-bank institutions.

2. Equity Financing is a method of raising capital by selling company stock to

investors (stockholders) in exchange for ownership interests in the company. With
equity financing, you do not have to make repayments or pay interest. Instead, you
share your profits with the investor. Examples are:
• Shares when a company sells shares to other investors, it gives up a piece of itself
as a way to raise money finance growth.
• Venture capital is a form of private equity and a type of financing that investors
provide to start-up companies and small businesses that are believed to have long-
term growth potential.

• Taking on a partner is one oldest forms of equity financing. Looking for

partnerships to chip in, they will have equity in the business and became a part’
owner.

The advantages and disadvantages of debt financing and equity financing

Debt Financing
 Advantages Disadvantages

• The bank can’t tell how to run the

• You have to pay back the loan
business. The owner maintains the
within a designated period.
full ownership.

• After paying the loan off, you have • Debt financing could cause small
no obligations to the bank. business cash flow problems.

• Interest on the loan is tax’ • You will probably need to offer

deductible. business collateral.

• You can get a short-term or long-

term loan.

• You know what the principal and

interest cost, so you can create a
business budget.

Equity Financing

Advantages Disadvantages

• The returns you pay an investor

• You have less risk than you
would with a loan. could be more than bank loan
repayments.

• The investor requires some

• You don’t pay the funds back.
ownership of your business.

• Your investor’s network could • You need to consult the investor

help your business gain credibility. before making business decisions.

• Investors don’t expect to see an

immediate return on investment
(ROI).

• You have more cash on hand

without repayments.

Long-term finance any financial instrument with a maturity exceeding one year
(such as bank loans, bonds, leasing, and other forms of debt finance), and public
and private equity instruments.
Short-term finance refers to financing needs for a small period normally less than
a year. This type of financing is normally needed because of the uneven flow of cash
in the business, the seasonal pattern of business, etc. In most cases, it is used
to finance all types of inventory, accounts receivables, etc.
.

ACTIVITIES

Directions. Decide whether the following scenarios are Long-term or Short-term

financing is needed. Write your answer to the space provided before the number.

__________________ 1. Auto-loan
__________________ 2. Housing Loan
__________________ 3. Purchase of inventory for a clothing shop
__________________ 4. Acquisition of equipment
__________________ 5. Development of a subdivision
__________________ 6. Loan for agricultural needs like rice and corn production
__________________ 7. Loan for purchase of a commercial space
__________________ 8. Loan for sari-sari store supplies
__________________ 9. Franchise of a fast-food outlet
__________________10. Emergency loans

WRAP-UP

In this lesson, you learned:

1. What financing?
2. What debt and equity financing?
3. What is long-term and short financing?
4. What are the advantages and disadvantages of debt and equity financing?

VALUING

1. Do you agree that securing capital is a challenge in starting-up a business?

2. Do you think it is important to choose the right financing that fits the capacity
of the business?

POSTTEST

Directions. Read the questions and encircle the letter of your answer.

1. Borrowing of money with interest refers to

A. Debt financing
B. Equity financing
C. Long-term finance
D. Short-term finance

2. A common ways of businesses to raise capital by selling the shares.

A. Debt financing
B. Equity financing
C. Long-term finance
D. Short-term finance

3. All of the following terms are attributed to debt financing except

A. Issuance of bonds
B. Bank loans
C. Lending
D. Sale of shares

4. Equity financing includes the following except

A. Profit shares
B. Venture capital
C. Interest rates
D. Stockholder

5. This refers to the process of providing funds for the business.

A. Equity financing
B. Debt financing
C. Financing
D. Long-term and short-term financing

KEY TO CORRECTION
 1. D
5. DF
5. C
4. EF 4. D
3. EF 3. D
2. DF 2. B
1. DF 1. A
Pre-Test Post-Test

10. Short-term
9. Long-term
8. Short-term
7. Long-term
6. Short-term
5. Long-term
4. Long-term
3. Short-term
2. Long-term
1. Long-term
Activity

References

Business Finance Teachers Guide

Florenz C. Tugas, Aeson Luiz C. Dela Cruz, Alloysius Jushua S. Paril, and Alger C.
Tang. Business Finance. Vibal Publishing
https://corporatefinanceinstitute.com
https://efinancemanagement.com/sources-of-finance/short-term-
https://dictoinary.cambridge,org>
https://www.bsp.gov.ph>banking>bspup
https://www.cda.gov.ph>issuances
https://www.investorwords.com>comm…
https://www.investopedia.com>ask
https://www.patriotsoftware.com/blog/accounting/what-is-debt-financing-vs-…
https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/long-