Lesson 4: sources and uses of short-term and
long-term funds
1. BPI is the oldest bank in the
Philippines still in operation
2. BDO in terms of total assets, it is the
largest bank in the Philippines
3. In 1990, METROBANK alongside
chinabank, Citibank, RCBC and
Security Bank. It became a founding
member of BancNet
4. BANKO SENTRAL NG PILIPINAS
has the power to supervise operation
of banks and exercises the New
Central Bank Act 1993
Short-term funds
 Used for business operation’s
working capital
 Sources
 Banks loans for short-term
financing
 Credit from suppliers
 Accrued liabilities
Long-term funds
 Used to start-up business
requirements
 Used for capital expenditures
 Used for business expansion for
existing business
 Sources
 Equity financing – the process of
raising capital through the sales of
shares in an enterprise. It
essentially refers to the sales of an
ownership interest to raise funds
for business purposes.
 Debt financing – when a firm
raises money for working capital
or capital expenditures by selling
bonds, bills or notes to individual
and/or institutional investors. In
return for lending the money, the
individuals or institutions become
creditors and receive a promise to
pay principal and interest on the
debt.
Banks
 Financial intermediary that brings
together depositors and borrowers
 Major sources of funding for
working capital requirement
Different types of banks
Commercial banks
 Its main business is lending
 Other services include
 Loans for vehicles or home
improvement
 Requiring collateral, security and
credit history for loans
 Personal installment loans and
credit cards loans
 Offering passbook, loans and
second mortgages
 Clients are mostly retail customers
and their transactions are many and
usually not very large in size
 Commercial banks buts up many
branches in different locations
Universal Banks
 They are commercial banks but are
licensed to do more sophisticated
banking services.
 Their transaction are usually bigger
size than commercial banks,
multicurrency and global in nature.
 Clients compromises of top
corporation of the country and global
in nature
 They have business dealing with top
business corporation locally and
globally and lend to these top
business conglomerates, manage
their corporate funds, invest their
portfolio and advise these companies
in financial market movements and
directions
Investments banks
 Unlike commercial banks, they do
not have branches around the country
 They are more specialized and deal
with top corporations, global
businesses, and governments.
  They perform market making
activities such as trading, fund
management and portfolio
management.
Nonbanks
 Financial intermediaries as well but
are supervised and regulated by
another government body, the
securities and exchange commission
(SEC).
Different types of nonbanks
Investment companies
 They pool money together with the
money of other investors and invest
these in financial instruments –
stocks, bonds, currencies,
commodities, financial derivatives
which are called mutual funds.
Insurance companies
 Sell coverage or protection from
events such as death of loved one,
fire, or accident.
 Insurance premiums are paid by the
owner/buyer over a time period such
as five to ten years, in exchange for
coverage for the events mentioned
Private Equity Funds
 Funds of private investors used to
finance lucrative projects that
projected to give good returns.
Use of funds
For working capital
For capital expenditures, to reinvest in the
business and for business expansion
Obligations of entrepreneurs to creditors
 The entrepreneur keeps his promise
to pay back his creditor banks by
ensuring that he is financially
capable and that his business is
sustainable
 The entrepreneur must fulfill the
following tasks:
 Continuous submission of
financial reports to assure regulars
and prompt payments of his
obligations
 Yearly walk through of business
operations to review, assess and
improve the business
 Annual corporate planning to
determine that needs to be done to
increase sales
 Annual strategic planning to
identify growth areas in the
business and to assess where
innovation can help business
efficiency
 Regular discussions on cost and
operating controls
 The entrepreneur must fulfill the
following tasks:
 Financial management is
identifying where to source funds
how to raise cheap funds, how to
keep costs down, paying debts on
time.
 Managing debts, avoiding delayed
payments, avoiding bankruptcy
and during bankruptcy, the
orderly liquidation of assets and
payment to creditors
 Used for the business day-to-day
activities
 Used for long-term opportunities,
purchase of new equipment or
technology, or opening a new
branch.
For debt servicing
 Used to pay debts.

Lesson 5: Basic Long Term Financial

Concept
Time Value of Money and Opportunity Cost
 The concept of time value of money
states that a peso today, all things
being equal, has a greater value than
a peso in the future because of the
opportunity cost to invest that peso
and earn interest.
Time Value of money
 is the idea that money available at
the present time is worth more than
the same amount in the future due to
its potential earning capacity.
Opportunity cost
 refers to a benefit that a person could
have received, but gave up, to take
another course of action.

Analogy about the previous Illustration

 Because money is a limited resource,
you cannot spend and save that
money at the same time. If you
decide to save, then the opportunity
for you to spend has just been given
up As what stated earlier, the money
that you save can earn interest.
 You deposited P10,000 in savings
account.
 The bank pays an interest 3%
annually
 How much interest will this account
in one year?