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Lesson
THE SOURCES AND USES OF SHORT-
3 TERM & LONG-TERM FUNDS
What I Need to Know
Objectives
After going through this module, you are going to:
1. Distinguish debt & Equity Financing
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.
What I Know
Activity 1
Let us determine how much you already know about the sources and uses of short-
term & Long-term funds
Direction: TRUE OR FALSE. Write T if the statement is correct and F if it is
wrong. Write your answers in your notebook.
_____1. Cooperative banks and credit cooperative are just the same.
_____2. All cooperative in the Philippines regulated and supervised by the
Cooperative Development Authority.
_____3. By resorting to debt financing, business ownership has kept and
maintained.
_____4.One of the aims of cooperatives is to provide goods and services to its
members to enable them to attain increase, savings, investments,
productivity, and purchasing powered income, and promote among
themselves equitable distribution of net surplus through maximum
utilization of economies of scale, cost sharing and risk sharing.
_____5. Capacity refers to the applicant’s net worth, which can be arrived at by
deducting total liabilities from total assets.
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What’s In
The role of the VP for Finance/Financial Manager is to determine the
appropriate capital structure of the company. Capital structure refers to how
much of your total assets has financed by debt and how much has financed by
equity.
- To be able to acquire assets, our funds must have come somewhere. If it
has bought using cash from our pockets, it has financed by equity.
- On the other hand, if we used money from our borrowings, the asset
bought has financed by debt.
What’s New
Activity 2
Direction: Write your answer in the box provided below.
Question: What comes to your mind when you hear the words debt financing and
equity financing based on your knowledge and understanding in the previous
lesson? Copy the rectangular box and write your answers in your notebook.
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What is it?
Debt Financing Versus Equity Financing?
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Debt financing is being done through borrowing, whether short-term or long-
term, and it usually comes with interest. This, together with other charges, is
referred to as the cost of borrowing or cost of debt. Common debt financing
arrangements include bank loans, issuance of debt instruments like bonds,
financing from nonbank institutions like lending companies and cooperatives,
assignment of accounts receivable, and selling of notes receivables. In here, there
exists a borrower-lender relationship. In the case of banks and other nonbank
institutions, borrowing entails compliance of certain requirements.
Equity Financing, on the other hand, refers to the sale of ownership interest,
most often represented by shares, to raise fund for business purposes. To
compensate for the use of funds from equity financing, dividends or profits shares
has declared, set aside, and paid by the business. Common Equity financing
arrangements include funds raise by the entrepreneur or business owner from
friends and family, capital infusion through direct sale of shares or through initial
public offerings, and financing by private companies. In here, there exists an
investee-investor relationship.
Short-term financing is debt scheduled to pay within a year while long-term
financing is debt paid in more than a year.
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What’s more?
Activity 3
Direction: List the sources of funds that are found in your community and
describe. Copy the table below and write your answer in your notebook.
Sources of fund Describe
Example: Bank of the Philippine Island A bank is a financial institution
(BPI) involved in borrowing and lending
money. Banks take customers’
deposits in return for paying
customers an annual interest
payment.
1.
2.
3.
4.
5.
What are the sources of funds?
The most common sources of funds include banks, cooperatives, and
commercial Finance companies. Cooperatives and commercial finance companies
are example of nonbank institutions.
Bank- Supervised and regulated by the Bangko Sentral ng Pilipinas (BSP), an
establishment for the deposit, custody, and issue of money for making loans
and discounts, and for making easier the exchange of funds. In the Philippines,
banks include universal and commercial banks, thrift banks, and rural and
cooperative banks.
Credit Cooperatives- With the primary objective of helping improve the quality of
life of its members. One of its aims is to provide goods and services to its
members to enable them to attain increased income, savings, investments,
productivity and purchasing power, and promote among themselves equitable
distribution of net surplus through maximum utilization of economies of scale,
cost-sharing and risk-sharing. In particular, credit cooperatives promote and
undertake savings and lending services among its members. It generates a
common pool of funds in order to provide financial assistance to its members
for productive and provident purposes. All cooperatives regulated and
supervised by the Cooperative Development Authority (CDA). The BSP, in
coordination with the CDA, shall prescribe the appropriate prudential rules and
regulations applicable to the financial service cooperatives.
Commercial finance companies- they are organizations without a bank charter
that advances funds to businesses by discounting notes receivable, making
loans secured by mortgage, or financing deferred-payment sales of commercial
and industrial equipment.
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What are the usual loan requirements and application? See table below.
Loan Applications Requirements Loan Application process
Demographics –includes the name or Receipt of application form and
business name, birthdate, address, SSS required documents;
no., TIN no., phone no., and other
identifying information such as valid
government-issued identification cards
Income or revenue refers to current Verification of information in the
personal income and employer, application form and required
employment and salary history, and documents may include interview;
business revenue, if there is already an
existing business.
Assets and Liabilities-applicants may Checking credit history
ask to disclose their checking savings
and investment accounts and their Writing credit report with
outstanding loans and credit cards, if appropriate recommendations
there are any.
Contact or references-require Documenting final decision
identification and contact information of
existing employers, previous employers, If approved, final documents sign-
or even nearest relative not living with off (interest rate and other terms)
the identified contact and loan release
Attest and authorization require If rejected, rejection letter sent to
affixing applicant’s signature on the applicant
credit application stating that
everything on the application is true and
correct and authorizing the lender to
verify the information provided with the
identified contacts and references.
The credit department evaluates on the
basis of Character, Capacity, collateral,
capital and conditions or 5C’s of credit
Note: Loan application requirements and process vary among banks, credit
cooperatives and commercial finance companies.
Activity 4
Direction: Copy the process questions below in your notebook and answer directly.
1. In loan application, when is a co-maker required?
2. What is the importance of affixing applicant’s signature on the loan
application?
3. Enumerate the five C’s of credit and describe each.
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What I Have Learned
Activity 5
Direction: Complete the sentence stem below. Write your answers on a separate
sheet of paper.
1. Sources of funds is important because:
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
What I Can Do
Activity 6
Direction: Choose one bank, one credit cooperative and one commercial finance
company. Research on the following: compare the loan application requirements
and loan application process.
Assessment
Activity 7
Directions: Identify the following activity if either Long-term or short-term
financing.
Activity/Need Answer
1.Acquisition of equipment
2.Franchise of a fast-food outlet
3.Purchase of inventory for a clothing shop
4.Loan for agricultural needs
(ex. Palay production)
5.Loan for purchase of a commercial space
6.Auto-loan
7.Housing loan
8.Emergency loans
9.Development of a subdivision
