SENIOR HIGH SCHOOL

Business Finance
Quarter 3- Module 3
Sources of Funds
Business Finance – Senior High School
Alternative Delivery Mode
Quarter 3- Module 3: Sources of Funds
First Edition, 2021

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Published by Department of Education

Division of Lapu-Lapu City

Development Team of the Module

Writer’s Name :Aisa V. Soroño, MBA
Editors’& Reviewrs’ Name :Rebecca P. Toring, PSDS District 5
:Rowena G. Sagarino, Principal II
Illustrator’s Name :Aisa V. Soroño, MBA
Layout :Maria Teresa D. Amion, Librarian II
Plagiarism Detector Software :PlagiarismDetector.com
Grammarly Software :CitationMachine.com
Management Team
Schools Division Superintendent Wilfreda D. Bongalos, Ph.D., CESO V
Assistant Schools Division Superintendent Cartesa M. Perico, Ed. D.
Curriculum Implementation Chief Oliver M. Tuburan, Ed. D.
EPSVR-Mathematics: Cecilia O. Arcenal
EPSVR-LRMDS: Teresita A. Bandolon
ADM Coordinator: Jennifer S. Mirasol

Printed in the Philippines by:

Department of Education – Region VII Central Visayas
Division of Lapu-Lapu City
Office Address: BM Dimataga Road, Poblacion, Lapu-Lapu City
Contact No. (032) 410-4525
Email Address: oliver.tuburan@deped.gov.ph

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 Introduction
This module was designed and written with you in mind. It is here to help you master the
sources of Funds. The scope of this module permits it to be used in many different learning
situations. The language used recognizes the diverse vocabulary level of students. The
lessons are arranged to follow the standard sequence of the course. This module, although
self-paced, can even be more effective with the use of other modalities like collaborative type
with other students to apply management theories and concepts in solving business cases.
This can be done in the entire semester with the guidance of the teacher/facilitator.
The Most Essential Learning Competencies:
● compare the loan requirements of the different banks and nonbank institutions
and cite these institutions in the locality.

The module provides two lessons, namely:

● Lesson 1: Debt and Equity Financing
● Lesson 2: Duties of Borrowers to Creditors

After going through this module, student/s will:

1. Demonstrate an understanding of the sources and uses of short- term and long-term
funds, and the requirements, procedure, obligation to creditor, and reportorial
necessities.

2. Be able to:
2.1. distinguish debt and equity financing.
2.2. identify the bank and nonbank institutions in the vicinity that are possible sources
of funds, and enumerate their requirements and process for loan application

Pre-Test Take the test to determine whether you have a solid

background of the topic. If you get perfect, you may skip this part and
proceed to Lesson 2. If not, go through with the meaningful learning
journey of the lesson. Check your answer with the answer key at the
back portion of this module. Identify the answer to the following question.
____________________1. borrowing money from lenders and not giving up ownership.
____________________2. the method of raising capital by selling company stock to investors
(stockholders) in exchange of ownership interests in the company.
____________________3. provided lending services to its members. Members usually pay
contributions to the cooperative.
____________________4. provides several loan products catering to different types of needs.
____________________5. just take note of the high interest rates on this source of funds.
The 5 C’s of Credit
1.
2.
3.
4.
5.
 Lesson 1
Debt and Equity Financing

The previous lesson discussed Financial Planning Process. Planning is

an important aspect of the firm’s operations because it provides road
maps for guiding, coordinating, and controlling the firm’s actions to
achieve its objectives (Gitman & Zutter, 2012). Management planning is
about setting the goals of the organization and identifying ways on how
to achieve them (Borja& Cayanan, 2015).

Read the article below and answer the questions that follow.

Filinvest Land raises P8 billion from debt sale

By Philippines News Agency
August 21, 2015 11:15 PM

MANILA - Property developer Filinvest Land, Inc. (FLI) has raised P8 billion from a
bond issue to partially fund new projects that can triple its retail and office space
portfolio in the next five years. FLI president Josephine Gotianun-Yap said the
company had budgeted P24 billion in capital expenditures this year. FLI listed
successfully its seven- and 10-year peso fixed-rate bonds in the Philippine Dealing
and Exchange Corp. on Thursday. The bonds attained the highest PRS Aaa rating
from the Philippine Rating Services Corp. (PhilRatings). The Gotianun-owned property
arm's fixed-rate bonds due 2022 and 2025 had an oversubscription of almost thrice
the base amount of P5 billion, enabling the company to exercise the P3 billion
oversubscription option approved by the Securities and Exchange Commission. “With
this bond issuance, FLI is now in full-gear for office and retail space expansion. We
are tripling our office and retail rental portfolio to hit close to one million square meters
of gross leasable area in the next five years. We tap the long-term bond market to
match our funding sources with our project horizons,” said Gotianun-Yap. FLI
launched P6 billion worth of projects in the first half of 2015 while it targets a total of
P16 billion for the entire 2015. It has developed over 2,400 hectares of land and more
than 600,000 square meters of prime office, residential and retail spaces. “With the
country’s real estate sector experiencing a continued robust growth, in line with the
Philippine economy, FLI is in the best position and time to address the needs of a
flourishing economy,” Gotianun-Yap said.

Filinvest Land raises P8 billion from debt sale. (2015). InterAksyon.com. Retrieved 5 April
2016, from http://www.interaksyon.com/business/116404/filinvest-land-raises-php8-b-frombond-issue-to-boost-
recurring-business

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• What is the subject company? What are their main activities?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________

• What do they need financing for?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________

• How much did they raise through financing? In what manner did they manage to raise
funds?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________

• What are the companies’ plans after achieving their proposed funding?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________

Let’s Discuss
• Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire
amount using a one-year short-term loan. The company’s average annual
operating cash flows for the last three years is PHP 1.5 million. What do you
think happened to the company?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________

• Given the average annual operating cash flows of the company of only PHP1.5
million, there is a very high probability that Fabrics Inc. will not be able to pay
the loan within one year.
• Given the amount of the loan in relation to operating cash flows, management
may be become very stressed thinking about how to settle this loan. This will
adversely affect the executive time they spend in managing the core business
of the Company.

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 Mini Lesson

Definition of Terms

• Debt Financing - borrowing money from lenders and not giving up ownership.
• Equity Financing - the method of raising capital by selling company stock to
investors (stockholders) in exchange of ownership interests in the company.

Sources and Uses of Short-term funds

• Suppliers Credit – refers to the extension of payment due date by suppliers.

• For example, the terms 2/10 (2% discount if paid within 10 days) with the due
date of 60 days will result in annual interest of (2/98)*(360/50 days), or 14.69%.
Therefore, by
not availing of the discount, the one who ordered the supplies from the supplier
in effect borrowed at 14.69%. It may also be viewed as the opportunity cost
forgone.

• Advances from stockholders or other owners – personal funds advanced by a

stockholder to a company that usually requires interest. These usually require little to
no interest on advances, especially if the owner is advancing funds to assist the
company in sudden liquidity crisis. This source, however, is depended on the
availability of funds of an individual.

• Credit cooperatives – provided lending services to its members. Members usually

pay contributions to the cooperative.

• Banks – provides several loan products catering to different types of needs.

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• Credit Cards – just take note of the high interest rates on this source of funds.

• Lending Companies – companies that are dedicated to lending. They usually

charge higher interest than banks, but their credit requirements are more lenient
compared to banks.

• Pawnshops – provides funds in exchange for collateral, usually jewellery, or other

items of value.

• Informal lending sources (5/6)

• Interest is usually paid per month, and monthly interest is (6-5)/5 or 20%.
Annual interest is actually 20%*12 or 240%.

Factors considered in selecting the source of short-term financing.

• Cost (Interest)
• Informal lending sources like 5/6 may be the most expensive.
• Availability of short-term funds
• Informal lending sources like 5/6 is most available because there are no
formal requirements to avail of the facility.
• Risk
• Whatever the source of fund is, if the company defaults, the lenders may
foreclose some of the company’s properties or even the entire business
itself to settle the loan.
• Flexibility
• This pertains to the ability of the company to access funds.
• for example, a bank loan may be cheaper, but the bank may reject the
loan application of the borrower because he/she did not pass the credit
evaluation process of the bank.
• This financial flexibility can be influenced by:
• Nature of the Company’s business
• Leverage ratio
• Stability of operating cash flows
• Restrictions (Debt covenants)
• Some lenders like banks may require a minimum deposit balance with
their branch for as long as the loans remain outstanding.
• The bank’s approval may also be secured before cash dividends can be
declared.

Sources and uses of long-term funds.

• Equity investors – these are the individuals/corporations which are

issued common stock. They share in the ownership of the company.
There are also equity investors who do not have voting rights in the
company but have a share in dividends, usually a fixed percentage.
These investors are issued preferred stock. Holders of preferred shares
are first to receive dividends than common stockholders.

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 • Internally generated funds – not all profits are distributed to stockholders.
Most of the profits are re-invested and used by companies to finance
their needs.
• Banks – they provide long-term loans, depending on the nature of the
need. For example, a 5-year to 10-year loan may be granted if the
purpose of the loan is construction of an office building.
• Bonds – these are debt investments where an investor loans money to
an entity which borrows the funds.
• Lending companies – they can also provide long-term loans.

The company’s capital structure is a major consideration for deciding which long-term
sources of funds to utilize. The target would be to balance debt and equity and come
up with the minimum cost of capital.

Independent Assessment
Identify if the following scenarios need a long-term or short-term financing.

1. Acquisition of equipment
2. Franchise of a fast-food outlet
3. Purchase of inventory for a clothing shop
4. Loan for agricultural needs (i.e., palay production, mango, etc.)
5. Loan for purchase of a commercial space Long-term
6. Development of a subdivision Long-term
7. Auto-loan Long-term
8. Loan for sari-sari store supplies Short-term.
9. Housing Loan Long-term
10. Emergency loans (advances) Short-term

Making Generalization
1. What are the advantages and disadvantages of long-term debt financing?
Give at least 3. Explain.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________
2. What are the advantages and disadvantages of equity financing? Give at
least 3. Explain.

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________

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 3. Identify the different sources of short-term funds and long-term funds. Give at
least 3 and define.

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________

4. Discuss when to use short-term funds in business.

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________

5. Discuss when to use long-term funds in business.

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________

Lesson 2
Duties of Borrowers to Creditors

Let us say you are a restaurant owner, and you are planning to open
another branch which will cost you PHP8 million. The returns on this investment will
be realised over a number of years. Therefore, financing it through a short-term loan,
say one year, will give you too much pressure to pay the loan because the new branch
may not have generated enough cash flow within the year to cover the PHP8 million.

How do you plan to finance the PHP 8 million?

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________

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 Let’s Discuss
What are the usual loan products from banks do you usually encounter?
Describe it briefly.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________

Mini Lesson
The 5 C’s of Credit

● Character –the willingness of the borrower to repay the loan

● Capacity – a customer’s ability to generate cash flows
● Collateral – security pledged for payment of the loan
● Capital – a customer’s financial resources
● Condition – current economic or business conditions
Duties of the Borrowers to Creditors

• Pay the creditors based on the payment schedule agreed upon. If you cannot pay on
time, notify the creditors ahead of time. But as much as possible, pay on time.

• Provide the collaterals as agreed upon in the loan negotiation with proper
documentation, if necessary and if applicable (e.g. annotation of the TCT or CCT).
Ensure that these collaterals are in the physical condition perceived by the creditors
in determining the loanable value of the loans.
• Comply with the provisions of loan covenant such as maintaining certain liquidity and
leverage ratios. These conditions are supposed to benefit the borrower so that his
company will not be over-exposed to borrowing or he will monitor the liquidity position
on a more regular basis.
• Notify the creditor if the company is acquiring another company or the company is
now the subject of acquisition. The interest of creditors may be jeopardized if new
owners take over the company or if the company is going to acquire another company.
• Do not default on the loans as much as possible. Aside from the creditors, there may
be other parties such as the guarantors of the loan who will be put at a disadvantage
if the borrower defaults.

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 Independent Assessment

Listed below are the importance of the banking industry. Try to expound each in at least
three sentences.
1. Provision of Credit and Liquidity
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________
2. Risk Management Services
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________
3. Money Remittance
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________

4. Economic Development
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________
5. Channel for Saving and Investment
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________
6. Promotion for Entrepreneurship
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________

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 Making Generalization

1. Enumerate the 5C’s of credit and briefly explain.

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
__________________
2. What do you think is the most important consideration of banks in approving a
loan?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
____________
3. Why is it important for banks to collect all the loan requirements? Which
requirements are meant to be used to evaluate each of the 5C’s of credit?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_______________

Application.

Mr. Joe Salazar applied for a PHP1.5 million loan on behalf of his business, “Joe’s
Restaurant”, for additional capital in 2015. He is the Chairman of the Board of Joe’s
Restaurant. In their meeting, the Board decided to open an additional branch for the
restaurant. Joe’s Restaurant currently has 3 branches in Metro Manila and would like
to open up a small branch in Quezon City. Joe’s Restaurant has been in the business
for 12 fruitful years and has been a previous borrower of the bank. The company had
previous late payments before, but the reasons are usually justifiable, and the balance
of the loan, along with any penalties, if any, is paid. The three branches earn a net
income of PHP900,000/ year. The lot where the main restaurant is located is pledged
as collateral to the bank. This property is valued at PHP2 million. Shown below is an
excerpt from Joe’s Restaurant’s 2014 consolidated audited financial statements.

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Identify the information to be used in analyzing the 5 C’s of Credit.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
_____________________
Additional Activity
You are applying for a loan as a corporation. What are your loan
requirements? List them down below.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
______________________________

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Answer Key:
Business Finance

Pre-test:
1. Debt Financing
2. Equity Financing
3. Credit cooperatives
4. Banks
5. Credit Cards

● Character
● Capacity
● Collateral
● Capital
● Condition

Independent Assessment
1.L 2.L 3.S 4.S 5.L 6.L 7.L 8.S 9.L 10.S

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References:
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA: Prentice-Hall
https://en.wikipedia.org/wiki/Wikipedia:Philippines_copyright_law
https://attorney.org.ph/legal-news/216-copyright-law-in-the-philippines
https://sei.dost.gov.ph/images/downloads/SiyensyaBilidad2e.pdf

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For inquiries or feedback, please write or contact:

Division of Lapu-Lapu City

Department of Education
B. M. Dimataga St., Poblacion, Lapu-Lapu City

Contact No. (032) 410-4525

Email Address: oliver.tuburan@deped.gov.ph

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