Business Finance (Final Term)
Sources of Funds for Business Operations rural areas and clients are usually retail
 Short-Term Funds
- Used as working capital for daily business
operations
- Used to finance accounts receivables or
inventory
- While sales are bought on credit or inventory
needs to be paid, business may turn to the
banks for short-term financing while cash has
not been received or paid.
- I year or less
 Sources of Short-Term Funds
- Bank loans, credit from suppliers (increasing
accounts payable) and accrued liabilities
 Funding Working Capital
- Savings account and current account—sources
of working capital
- Savings account- deposit taking and earns
interest
- Current Account- used for ordinary course of
business
 Working Capital—current assets of your
business that are used in operations (Eugene F.
Brigham & Joel F. Houston, in Essentials of
Financial Management)
- Also known as Net Working Capital
- Current assets less current liabilities
- Used to generate sales and profits for a
business
- These are usually cash, cash equivalents, or
marketable securities:
1. Cash- invest in inventory or pay off short term
debt
2. Marketable Securities- generate investment
income through capital appreciation in stock
investment or trading
3. Accounts Receivable- increase sales by buying
more attractive to the customer with the
availability of credit
4. Inventory- used to generate sales by attracting
potential customers
- The more interesting your inventory, the
greater potential sales for your business
 Long-Term Funds
- Used for start-up business requirements, capital
expenditures, or business expansion
- Sees the need or opportunity, the business
owner may invest in building or equipment that
will sustain growth of operation
- 5-20 year loan
 Sources of Long-Term Funds
- Debt and equity
- May acquire debt by using bonds or may raise
capital by issuing preferred stock and common
stock
1. Banks- financial intermediary between
depositors and borrowers
: regulated By Bangko Sentral ng Pilipinas
(BSP)
: major source for working capital requirements
- Commercial Banks- deposit taking, credit
taking and service rendering bank located at
customers and transactions are usually small;
SMES
- Universal Banks- same in nature with
commercial banks but this one deals with
companies with local and global presence
- Investment Banks-perform market making
activities—trading, fund management, and
portfolio management
2. Nonbanks- financial intermediaries but not
supervised and regulated by Securities and
Exchange Commission (SEC)
- Investment Companies- pool money together
with money of other investors and invest in
financial instruments—stocks, bonds,
currencies, commodities, financial derivatives
(Mutual Funds)
- Insurance Companies- sell coverage or
protection from death, fire, and accident.
: premiums are paid by owner/buyer over a
period of time in exchange for the coverage
- Private Equity Funds- funds of private
investors used to finance lucrative projects that
are projected to give good returns
Requirements of Applying for a Personal Loan
- ID
- Age
- Occupation
- Proof of Address
- Personal property
- Children
- Business of any
- Credit score/ history
- Income document
- Income tax return and Certificate of
Employment with compensation
Requirements for Applying for Business Loan
- Business nature
- How long in operations
- Revenues/ profits for the last 3 years
- Size and value of business
- Size and value of properties of business
1. Purpose of Loan
Reasons why banks approve loans
- Improve cash flow
- Purchase of equipment
- Pay for expansion projects
- Purchase inventory
- Use as payroll
2. Business experience
3. Business plan
4. Credit history
5. Personal information
6. Financial statements
7. Collateral
8. Cash flow
9. Information on outstanding loans and other
debts
10. A personal guarantee
 Lending happens when owner of property or
money allows another party to use the property
or money. The borrower then promise to return
Business Finance (Final Term)

the property or money after an agreed period of 3. Capital- assets and liabilities
time—in short, consent is required - Assets, liabilities, assets enough to pay debts
 Interest- payment for the use of property or - SALN, Audited FS
money 4. Collateral- securement of the loan
 Promissory note- document that includes the - What assets have to secure loan (vehicle,
agreement connoting promise to pay back the home, furniture)
owner for the use of property or money - Investments or savings (stocks or bonds)
 Debt- obligation to pay back property or - Certificate of True Copy
money borrowed in accordance to an 5. Conditions- unemployment, security of job and
agreement company that employs you
 Credit- loan or money extended to a person or - Latest news articles related to company;
business in exchange for a return business background
: when the money is extended, there is pre-agreed
covenant—how long the credit payment is extended,  Insolvency- or illiquidity; inability to pay debts
how much, how much will be returned, how on time when they are due; insufficiency in
frequent the payments, and what interest rate cash flow and is temporary
 What affects credit ratings  Bankruptcy- legal process wherein assets of
1. Ability to repay the loan- security of the debtor are distributed to creditors to be able to
person’s job pay his debts; plan to repay creditors in
- Takes a look the condition of the borrower installment basis; permanent
2. Character of the borrower- trustworthiness  Net worth- value of assets, cash, savings, real
- History of trouble with law estate, cars, stocks, bonds, jewelry collection,
- How long have you lived in your present insurance, art collection less debts like credit
address card debts, monthly bills, auto loans, home
3. Capacity to pay the loan- stable job; other loans, and medical bills
sources of income; current debts  Flowchart of Loan Application
4. Capital and personal assets- value of cash, 1. Filling out Loan Application Form
property, and other investments 2. Credit History/Information of the Borrower:
5. Collateral and size of business assets- security - Amount
of the loan - Purpose
- Name of borrower
 Credit bureau- agency that gathers information - Address of borrower
about the credit history of the borrower and - SSS number
sells this information for a fee - Present employer
 Credit Analyst- analyze financial track record - Present salary
of the person or business that borrows and its - Number of dependents
financial transactions; determine credit rating - Other income sources
of borrower by looking at trends and - Past credit history
forecasting potential payback on the loan; - Bank accounts
evaluates borrower’s financial standing by - Marital status
reviewing his financial statements 3. Credit Processing by committee
 Credit Committee- represents financial 4. Credit is approved
institutions, creditors, or investors that have - Credit is denied- find out reason why
claims on a company that is in a financial
difficulty or bankruptcy
- Approves credit line and credit terms
 Credit Ratings- way to formally evaluate the
credit history of a person or company and
includes a forecast of capability to repay
obligations
 5 C’s of Credit
1. Character- attitude and discipline
- How long credit used before
- How long lived in present address
- How long held same job
- Fill out info; NBI/Police clearance
2. Capacity- up to what extent
- Current employer & current salary
- Other sources of income
- Current debts
- Certificate of employment; audited FS; income
tax returns
Business Finance (Final Term)

 Basic Long-Term Financial Concepts - Effective annual rate- also known as effective
Time Value of Money and Opportunity Cost interest rate—interest is compounding
- Its concept states that a peso today, all things  Why do we need to compute for present value?
being equal, has greater value than a peso in - Because it will greatly help an investor in
the future because of the opportunity to invest deciding
that peso today and earn interest Which investment to choose from
- Choosing one option means letting go of the  Loan Amortization—gives exact amount in
other equal payment we need to settle at specific
- Opportunity Cost- anything given up after amount of money, at specific interest rate, and
choosing an option; in finance it’s the possible specific time
income from one option or investment - Purpose- to be aware of the outstanding
opportunity given up balance of loan and payment schedule
- Good Money Management- decision to invest - P=P ¿ ¿
your money—money market, fixed income
securities, stocks, bonds, real estate, or in a
small business venture
- Annual Interest- additional money earned from
money in an account
 Future Value and Present Value
- Future Value- amount of original funds will be
worth in the future, based on earning interest
rate over a period of time
- FV =P ( 1+ rt )—simple
t
- FV =P ( 1+ r ) —compound
- Where:
- FV= future value
- P= present value
- r= interest rare
- t= time
- Present Value- today’s worth of future money
FV
- P= —simple
1+rt
FV
- P= t —compound annually
( 1+ r)
FV
P=
- r mt —compound the rest
( 1+ )
m
- Simple Interest- principal amount does not
change as time goes by
- I =Prt
- Compound interest- principal amount is
changing
- FV =P(1+i)t—annually
r mt —the rest
- FV =P(1+ )
m
- Annually- 1
- Semi-annually- 2
- Quartic- 3
- Quarterly- 4
- Quintic- 5
- Monthly- 12
- Weekly- 48
- Daily- 365
- Nominal interest rate- sometimes called annual
percentage rate or quoted rate—interest not
compounding