SOURCES AND USES OF SHORT-

TERM AND LONG-TERM FUNDS

BUSINESS FINANCE
WEEK 5 – LESSONS 1–5
CITE BANK AND NONBANK
INSTITUTIONS IN THE
LOCALITY THAT WOULD
SERVE AS POSSIBLE
SOURCES OF FUNDS FOR
BUSINESS OPERATIONS
BUSINESS FINANCE
WEEK 5 – LESSON 1
 GENERAL CLASSIFICATION OF
FUNDS SOURCES
1. Internal Sources – fund generated by the company itself
(e.g., sale of goods and services, investment income, sale
of assets, etc.)

2. External Sources – funds obtained from outside sources

(e.g., investors, lenders, financial institutions)
 INTERNAL SOURCES OF FUNDS
1. Sale of goods and services above production cost
known as Profit is and important and inexpensive source
of finance where a company buys a product and/or
service at cost and sells them above that

§ Example:
selling a pen for P15, which had been bought at P10. The
excess of P5 is the profit.
Observe how the company was able to source an additional P5 grow its P10 to P15
 INTERNAL SOURCES OF FUNDS
2. Investment income is obtained when a company invests
in other companies' stock and/or bonds, or when it earns
interest from depositing its funds in the bank

§ Example:
putting idle cash of P1M in a savings account provided
the company an interest of P5,000.
Observe how the P1M sourced an additional P5,000
 INTERNAL SOURCES OF FUNDS
3. Proceeds from sale of assets happens when a company
sells its properties to obtain additional funds. It is different
from item 1 because item 1 refers to inventory (item bought
with the intent of selling them) while item 3 refers to Property,
Plant and Equipment (PPE) (items bought with intent of using
to support operations)

§ Example:
A company sells 2 of its used company cars to have additional
funds to buy 2 new cars.
Observe how funds is obtained when the old cars are sold
 TWO TYPES OF EXTERNAL SOURCES OF
FUNDS
1. Long–term financing is a form of financing that is
provided for a period of more than a year. This source is
usually used by companies for capital expenditures (e.g.,
purchase of new building, opening of new warehouse /
plant)
2. Short–term financing is a form of financing that is
normally used to provide money that has to be paid back
within a year. The period may be shorter than one year as
well.
 COMMON EXAMPLES OF LONG–TERM
FINANCING
1. Share Capital – is often referred to as permanent capital
as it is not repaid, but the shareholder can have a share in
the profit, called dividend (e.g., common shares and
preferred shares)

2. Debt Capital – is a money borrowed for a long period of

time by a business. Usually charges interest on principal
and may be paid by installments (e.g., bonds, long-term
bank loan, mortgages)
 SOURCES OF FUNDS
1. Bank – a financial institution licensed to receive deposits
and make loans (e.g., BDO, Citibank, PNB, etc.)
2. Savings and Loans Association – an institution that
accepts savings at interest and lends money to savers
chiefly for home mortgage loans and may offer checking
accounts and other services

3. Credit Union – an institutions that pools their money in

the bank in order to be able to loan money to each other
and achieve these financial benefits.
 COMPARE AND CONTRAST THE LOAN
REQUIREMENTS OF THE DIFFERENT BANK
AND NONBANK INSTITUTION
BUSINESS FINANCE
WEEK 5 – LESSON 2
 WHAT IS A LOAN?
• A loan is a debt provided by an entity (organization or
individual) to another entity at an interest rate, and
evidenced by a promissory note, which specifies among
other things, the principal amount of money borrowed, the
interest rate the lender is charging, and date of repayment.
• A loan entails the reallocation of the subject asset(s) for a
period of time, between the lender and the borrower.
 TWO GENERAL TYPES OF LOANS
1. Retail / Consumer Loans – are amounts of money lent to an
individual (usually on an unsecured basis) for personal, family, or
household purposes. Also called consumer credit or consumer
lending. Examples of consumer loans are Home Loan, Car Loan,
and Personal Loan

2. Corporate Loan – is a loan specifically intended for business

purposes. As with all loans, it involves the creation of debt, which
will be repaid with added interest. Examples of corporate loans
are Term Loan, Working Capital Loan, Supply Chain Financing,
etc.
GENERAL APPLICATION DOCUMENTS OF LOAN
REQUIREMENTS
1. Loan application form
2. 2 valid IDs
3. Signatures of borrower, spouse, and co-borrower (last two
is required only if it applies)
 INCOME DOCUMENTS
§ Income documents will depend whether the borrower is
employed or self-employed.
§ Other categories will depend per bank/ lending institutions,
these other categories include if the borrower is an expat, a
public practitioner (doctor, lawyer, CPA, etc.) and other
categories, which the bank deems fit.
 INCOME DOCUMENTS
• For employed:
• Certificate of employment
• Copy of income tax return
• For self-employed:
• Articles of incorporation and by-laws with SEC registration certificate
• Audited Financial Statements for the last 2 years
• DTI Registration
• Income Tax Return with Statements or Assets and Liabilities (SAL) for
the last 2 years
• List of Trade References (at least 3 names with telephone nos. of
major suppliers / customers)
• Bank Statements for the past 6 months
 COLLATERAL DOCUMENTS
• Collateral documents (for secured loans) – the collateral and
its corresponding document would depend on the type of loan
• Housing Loan
• Clear copy of owner’s duplicate copy of TCT/CCT
• Lot plan with location/ vicinity map certified by licensed geodetic engineer
• Photocopy of tax declaration/ tax receipts/ tax clearance
• Endorsement letter / computation sheet / contract to sell from developer stating
the contract price (for accredited developer / project)
• Auto Loan
• To be provided by car dealer to the bank thus will not need any intervention
from the borrower
STEPS IN LOAN
APPLICATION

BUSINESS FINANCE
WEEK 5 – LESSON 3
PARTIES INVOLVED IN LOAN PROCESSING
• Borrower – the entity (individual or establishment)
applying for the loan
• Loan Processor – can also be known as Account Officer
(AO) or relationship manager (RM) – the client facing
personnel in the bank that helps the borrower in choosing
what loan best suits their need and is the person that
collects and processes all of the borrower’s document
before forwarding it to the underwriter.
• Underwriter – the person responsible for determining if the
loan package is acceptable and that the borrower’s risk
has been established
 STEPS IN LOAN APPLICATION PROCESS
1. Loan application completion and submission
§ This step is to be completed by the borrower. After deciding on what
loan to take, the borrower then prepares all needed loan
requirements, then submits them to the loan processor

2. Loan application package review and verification

§ This step is then performed by the loan processor. The loan
processor ensures the completeness of the loan application package
and then perform the initial credit check. The check is done based on
credit reports obtained from different credit bureaus, which are
included in the application package to be forwarded to the
underwriting team
 STEPS IN LOAN APPLICATION PROCESS
3. Detailed Credit Check
§ This is done y the underwriting team after receiving the complete
application package from the loan processor. During this step the
underwriter checks the borrower’s capacity to pay and other
factors before given their approval

4. Approval
§ This happens after all checks are done and everything is in
order. The approval is then given by the underwriter to the
borrower.
OBLIGATIONS OF
ENTREPRENEURS TO
CREDITORS

BUSINESS FINANCE
WEEK 5 – LESSON 4
 WHAT IS AN OBLIGATION?
• An obligation is a liability or duty to do something or
refrain from doing something or refrain from doing
something under the terms of a contract, such as the
obligation of a borrower (the obligator) to pay back the
lender (the oblige) under the terms of the loan agreement
 WHAT IS A LOAN AGREEMENT?
• Loan agreement is an agreement between two parties
whereby one party (usually referred to as the lender)
agrees to provide a loan to the other party (usually referred
to as the borrower)
 KEY OBLIGATIONS OF A BORROWER IN A
LOAN AGREEMENT
• Purpose
• the loan may state that the borrower has to use the money for a
particular purpose. A lender often assess the risk profile of the loan
based on what the money is being used for.
• E.g., Amount received from a housing loan should be used to
purchase a house
• Repayment of the principal loan amount
• The borrower is obliged to repay the principal loan amount back to the
lender. Exactly when and how the amount must be repaid will depend
on the terms of the loan agreement.
• Generally, either the full amount is due and payable on one particular
date, or the amount is payable in installments over a period of time
 KEY OBLIGATIONS OF A BORROWER IN A
LOAN AGREEMENT
• Payment of interest
• The borrower may be obliged to pay interest on the principal
loan amount. If so, the loan agreement will set out the interest
rate, the dates on which interest is payable and how interest is
calculated
• Payment of fees
• The borrower may have to pay fees to the lender in
consideration for advancing the loan. If so, the amount of the
fees and the dates on which they are payable will be set out in
the loan agreement
 KEY OBLIGATIONS OF A BORROWER IN A
LOAN AGREEMENT
• Payment of cost and expenses
• The borrower may be expected to pay or reimburse the lender for any
costs and expenses in relation to the loan agreement and any
security documents (such as lawyer’s fees, registration fees, and
stamping costs). If this is expected, it will be set out clearly in the loan
agreement

• Provision of a guarantee or security

• The borrower may have asked to provide a third-party guarantee or
some form of security in relation to the loan, particularly if the
borrower has a low credit rating or if the loan amount is significant.
• This will be referred to in the loan agreement and the loan agreement
may even contain the provisions of the guarantee
 KEY OBLIGATIONS OF A BORROWER IN A
LOAN AGREEMENT
• Provisions of financial information
• The borrower is likely to be asked to provide on going financial information.
Example, an annual statement of its financial affairs, if it is an individual, or
its annual financial statements, if it is a company)
• This is do that the lender can monitor the borrower’s financial position and
ensure they remain able to repay all amounts due under the loan
agreement
• Other covenants
• The loan agreement may contain other covenants. These are basically
promises by the borrower to do/not to do certain things (such as disposing
the valuable assets for less than market value, entering into other loan
agreements, mortgaging its property)
• They are aimed at minimizing the risk of the borrower being unable to repay
the loan
IDENTIFY USES OF FUNDS

BUSINESS FINANCE
WEEK 5 – LESSON 5
 DIFFERENT USES OF FUNDS
1. To use to cover business start-up costs
2. To raise money to expand the business
3. To meet short/ medium/ long term obligations
4. Making regular payment of funds will improve credit
worthiness
5. To address any temporary gap in the company’s cash flow
 WHAT IS LONG – TERM FINANCING?
• Long–term financing means capital requirements for a
period of more than 5 years to 10, 15, 20 years or maybe
more depending on other factors.
• Capital expenditures in fixed assets like plant and
machinery, land, and building of a business are funded
using long–term sources of finance
 WHAT ARE THE USES OF LONG-TERM
FINANCING?
• Uses of long-term financing include for acquisition of new
equipment, R&D, cash flow enhancement and company
expansion.
• Major methods for long–term financing are as follows:
• Equity financing
• Corporate bond
• Capital notes
 WHAT IS SHORT-TERM FINANCING?
• Short–term financing is business financing that you obtain
usually for a term of one year or less
 WHAT IS MEDIUM TERM FINANCING
• Medium term financing are sources of finance available for
the mid-term of between 3 - 5 years typically used to
finance expansion of a business or to purchase large fixed
assets
 WHAT IS EQUITY FINANCING?
• Equity financing is the method of raising capital by selling
company stock to investors
• In return for the investment, the shareholders receive
ownership interests in the company
END OF PRESENTATION

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