SOURCES AND USES OF

SHORT-TERM AND LONG-

TERM FUNDS
Learning Objectives

At the end of this module, the learner should be able to:

• Differentiate debt financing from equity financing
• Identify the different sources of short-term and long-term
financing
• Explain the advantages and disadvantages of the
different sources of financing
• Know the general steps on loan application and the
corresponding loan requirements
• Explain the problems faced by SMEs in financing
DEBT AND EQUITY FINANCING
PECKING ORDER HYPOTHESIS
• The pecking order hypothesis in corporate finance was developed based on repeated
observations of how companies fund their financial requirements.
• In the pecking order theory, firms have a definite preference in the order in which the finance
their projects.
Sources and Uses of Short-term Funds

.
Supplier’s credit. Bank Loan

Short-term funds are normally used to

finance the day to day operations of the
Advances from company. It is used for working capital Lending company
Stockholder. requirements such as accounts receivable
and inventories. It can also be used for
bridge financing where the company has
some maturing obligations and does not
have enough cash to pay such maturing
obligations. There are occasions when the
Informal Lending
management of a company decides to
sources
Credit Cooperatives. borrow short-term loan to address this
problem.
Sources and Uses of Long-term Funds

. .
Equity Investors. Bond Market
Long-term funds are used for long-term
investment 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
Internally Generated Funds permanent working capital requirements.

. Long-term investments have to be .

Banks. financed by long-term sources of funds to Lending Companies
minimize default risk or the risk that you may
not be able to pay maturing obligations. The
returns on long-term investments may not be
realized immediately, and therefore require
more patient sources of financing.
List of Bank Requirements for Loan Application

Pre-approval requirements
• Duly accomplished application form
• SEC Registration
• Articles of incorporation and By-laws
• List of Elected Officers
• Board resolution or corporate secretary’s certificate regarding loan application
• Company profile or business background
• List of major suppliers and customers with contact information
• Audited financial statements
• Bank statements
• Collateral documents such as (1) Copy of Transfer Certificate of Title, (2) Copy of Tax Declaration, and (3) Appraisal fee
with Official Receipt
• For construction loan : (1) Building plan, (2) Bill of materials and labor cost, (3)Building specifications certified by the
architect/civil engineer, and (4) development permit
• Copy of lease contracts (if applicable)
Post-Approval Requirements
• Original owner’s duplicate copy of TCT/CCT
• Original certified true copy of latest tax declaration on land and improvement
• Master deed of declaration (for condominium)
• Electronic-certified true copy of TCT/CCT with original official receipt
• Original certified true copy of tax clearance
• Original real estate tax receipts
• Mortgage redemption insurance
• Fire insurance
GENERAL STEPS ON LOAN APPLICATION
1. Loan applicant approaches an account officer to apply for
loan
2. An account officer evaluates if a loan applicant qualifies for
any of the loan products the bank offers
3. If qualified, account officer gives the loan applicant the list
of requirements
4. Loan applicant completes the requirements and submits
them to the account officer
5. A c c o u n t o f f i c e r c h e c k s t h e c o m p l e t e n e s s o f t h e
requirements and forwards them to credit evaluation
department
6. Credit evaluation department assigns the account to a credit analyst who will
evaluate the credit worthiness of the loan applicant
7. Credit analyst prepares recommendation and presents recommendation
before a loan committee who approved the loan application. The loan
committee is generally composed of top executives of the bank.
8. If the loan is approved, then the post-approval requirements will be sent to
the loan applicant for compliance
PROBLEMS FACED BY SMEs in
FINANCING
The following are reasons for the inability of SMEs to take
advantage of available financing:

1. Limited track record

2. Limited acceptable capital
3. Inadequate financial statements
4. Lack of business plans
The potential creditors of these SME’s cited the following
reasons for rejecting the loan applications:

1. Poor credit history

2. Insufficient collateral
3. Insufficient sales, income, and cash flows
4. Unstable business type
5. Poor business plans
Duties of Borrowers to Creditors
1. Pay the creditors based to 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.