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7 Sources and Uses of Short Term and Long Term Funds
7 Sources and Uses of Short Term and Long Term Funds
CHAPTER 4
Sources and Uses of
Short-term and Long-term
Funds
Sources and Uses of
Short-term and Long-term
Funds
Learning Objective
• To identify the different sources of short-term
financing and long-term financing
Sources and Uses of Short-Term Funds
What are the USES of SHORT-TERM FUNDS?
1. Suppliers’ credit
Suppliers of raw materials and merchandise are the
best sources of short-term working capital, which is
why a good relationship has to be nurtured with
suppliers.
Sources and Uses of Short-Term Funds
3. Credit cooperatives
Credit cooperatives can lend as much as five times of
your equity or contributions. However, you have to be
a member to be able to borrow. Chances are, your
company isn’t. If you own a company which is in need
of funds and you are at the same time a member of a
credit cooperative, then you can borrow in your
personal capacity from the cooperative and advance
the proceeds from the loan to your company.
Sources and Uses of Short-Term Funds
4. Bank loans
Banks, both private and government-owned (or
government-controlled), can provide both short-
term and long-term loans.
Some banks also provide credit facilities, not just
to big corporations, but even to small and medium
enterprises as well.
Sources and Uses of Short-Term Funds
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 interests.
These lending companies can finance working
capital requirements.
Sources and Uses of Short-Term Funds
1. Equity investors
This is the most patient source of capital. And as far as the
company is concerned, this is the safest source of financing.
Equity investors can be issued common stocks through
different approaches. For big companies, they can use
organized stock exchanges like the Philippine stock market.
For small and medium enterprises (SMEs), there are what we
call venture capital companies who are willing to provide
equity financing. Some of these even finance a start-up
company.
For SMEs, friends or relatives can also be considered to
invest in your company in the form of equity financing.
Sources and Uses of Long-Term Funds
What are the SOURCES of
LONG-TERM FUNDS?
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.
Sources and Uses of Long-Term Funds
What are the SOURCES of
LONG-TERM FUNDS?
3. Banks
Banks are sources of different types of financing from
short-term to long-term.
Banks provide lower interest rates as compared to
other financial institutions but they have a lot of
requirements and a borrower goes through a
process, normally taking a month to three months
before a loan gets approved.
Sources and Uses of Long-Term Funds
What are the SOURCES of
LONG-TERM FUNDS?
4. Bond market
This market is gaining more popularity among big
publicly listed companies for their fund raising
activities. Philippine bonds are now traded through
the electronic platform provided by the Philippine
Dealing System Holdings Corporation (PDS Group).
To issue bonds, the services of an investment bank
are also needed to underwrite the issue. The bonds
that will be issued have to be registered with the
Securities and Exchange Commission and they have
to be credit rated.
Sources and Uses of Long-Term Funds
What are the SOURCES of
LONG-TERM FUNDS?
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.
Self-Test Questions
1. What are the different sources of short-term funds
and long-term funds?
2. When are short-term funds used in business?
Discuss.
3. When are long-term funds used in business?
Discuss.