4.

Sources and Uses

of Short-term
and Long-term
Funds
Learning Objectives -------------------------------------------- .
. .
. This chapter aims to achieve the following:
.
. Offer a good discussion on the specific fund .
. requirements of a business, and to identify the .
. available sources of funds; .
. .
. Explain the importance of matching fund
.
. requirements with specific sources of funds;
.
. Present the concept of working capital; and .
. .
Introduce personal finance specifically the sources
. .
of personal funds
. .
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Mr. Christopher B. Cauan

Business Finance
4.1 Sources of
Funds for
Business
Operations
Mr. Christopher B. Cauan
Business Finance
Short-term Funds

Banks are usually your good source of short-term funds.

Short-term funds are used for business operations’ working capital.

This means that when you need to finance accounts
receivables or inventory, you usually turns to the banks for
short-term financing.

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 yet been received or paid.

Mr. Christopher B. Cauan

Business Finance
Funding Working Capital
Savings account and current account are sources of
working capital.

Working Capital. Are current assets of your business that

are used in the operations (Eugene F
Brigham and Joel F. Houston, Essentials
of Financial Management)
These are usually in the form of cash, cash equivalents or
marketable securities, accounts receivables, and
inventory.

Mr. Christopher B. Cauan

Business Finance
For example, a thirty day bank loan, can finance a
business’ inventory. A short-term debt is usually one
year or less.

This means that a business can borrow to purchase

his inventory while he is waiting for cash or
available funds to arrive.

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Business Finance
Use of funds The Balance Sheets

Total Assets Total Liabilities and

Equity

Current Long-term Current Long-term Stockholder’s

Assets Assets Liabilities Debt Equity

Cash

Cash Equivalents/Marketable Aside from bank loans,

Securities other sources of short-term
Accounts Receivable
funds include credit from
suppliers (increasing
Inventory accounts payables) and
accrued liabilities.
Mr. Christopher B. Cauan
Business Finance
Uses of Working Capital
Net Working Capital or working capital is defined as
current assets less current liabilities.
Working capital helps carry out normal
operations of business.
Working capital is used to generate sales and
profits for a business.
Cash is churned to either invest in inventory or
to pay off short-term obligations so that the cost
of doing business is reduced.

Mr. Christopher B. Cauan

Business Finance
Marketable securities are used to generate
investment income through capital appreciation in
stock investments or trading through bond
investments.
Accounts receivables increase sales by making
buying more attractive to the customer with the
availability of credit.
Inventory is your product roster. The more
interesting your inventory, the greater potential sales
for your business.

Mr. Christopher B. Cauan

Business Finance
What are Long-term Funds and Why Do
Companies Need Long-term Funds?

Long-term funds are usually used for start-up

business requirements, or capital expenditures or
business expansion for existing businesses.
This means that when a business owner sees the
need or the opportunity for his business to grow
some more, he may invest in a building or
equipment that will sustain the growth of his
operations.

Mr. Christopher B. Cauan

Business Finance
The funds he will use for the building or the
equipment may usually be financed by long-term
funding from the banks. These may include a five-
year or a twenty-year loan.
However, in a corporate setup, long-term funds may
come from two major sources – debt and equity
from the investing public.
Corporations may acquire debt by issuing bonds, or
may raise capital by issuing preferred stock and
common stock.

Mr. Christopher B. Cauan

Business Finance
Banks
A bank is a financial intermediary that brings together
depositors and borrowers. Banks are a major source of
funding for our working capital requirements.
Commercial Banks
Its main business is lending.
Commercial bank clients are mostly retail customers.
They are the moms and dads in the neighborhood who
are either employed, self employed or who have small
businesses to operate.
Transactions are many and usually not very large in size.
They put up many branches in different locations to
reach more clientele.
Mr. Christopher B. Cauan
Business Finance
Other services of commercial banks include:
 Loans for vehicle or home improvement.
 Requiring collateral, security, and credit history of
loan.
 Personal installment loans or credit history for loans.
 Offering passbook, loans, and second mortgages.
Universal Banks
Licensed to do more sophisticated banking services
than commercial banks.
Clientele comprises of the top corporations of the
country and global businesses.
Their transactions are usually bigger in size,
multicurrency, and global in nature.
Mr. Christopher B. Cauan
Business Finance
Investment Banks
Similar to universal banks in terms of sophisticated
banking services.
They do not have branches all 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.

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Business Finance
Nonbanks
Nonbanks are financial intermediaries but are
supervised and regulated by another government body,
the Security and Exchange Commission.
Investment Companies
They pool your money together with the money of
other investors and invest these in financial
instruments – stocks, bonds, currencies, commodities,
financial derivative.

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Business Finance
 They managed this pool of funds which are called
mutual funds.
Mutual funds are sold based on a net asset value per
unit.
Insurance Companies
Sell coverage or protection from events such as (1) a
death of a loved one, (2) fire, or (3) accident.
Insurance premiums are paid by the owner/buyer over
a time such as from 5-10 years, in exchange for the
coverage.

Mr. Christopher B. Cauan

Business Finance
In return, the insurance companies manage the
premiums by investing the same in financial
instruments that offer good returns – stocks, bonds,
currencies, commodities, financial derivatives or real
estate.
Other service that an insurance company offers
include:
 Lend on cash value of the insurance policy.

 Offer single payment or partial payment

loans.

Mr. Christopher B. Cauan

Business Finance
Private Equity Funds

Funds of private investors used to finance lucrative

projects that are projected to give good returns.

They are big in Europe because the market has grown

and investors have become more sophisticated, more
knowledgeable, and are trying to move away from
regulated investments and funds.

Mr. Christopher B. Cauan

Business Finance
4.2 Requirements
of Applying
for a Personal
Loan
Mr. Christopher B. Cauan
Business Finance
The borrower promises to return the property or money after an agreed
period of time.
The payment for the use of property or money is called interest.
The agreement is usually documented through a Promissory Note, connoting a
promise to pay back the owner for the use of the property or cash.
Debt is the obligation to pay back property or cash borrowed in accordance to
an agreement, and this may be in the form of notes, bonds, or mortgage
Credit is a loan or money extended to a person or business in exchange for a
return.
Once issued, it becomes a debt of the borrower.
When the money is extended, there is a pre-agreed covenant, such as
how long the credit payment is extended, how much, and how much
will be returned, how frequent, at what interest rate.

Mr. Christopher B. Cauan

Business Finance
Credit Analyst holds the important role of analyzing the financial track record of
the person or the business that borrows, as well as its financial transactions.
He determines the credit rating of the borrower by looking at trends and
forecasting potential payback on the loan.
What affects credit ratings?
 Ability to repay the loan.
 Character of the borrower.
 Capacity to pay the loan.
 Capital and personal assets.
 Collateral and size of business assets.
Credit Bureau is the agency that gathers information about the credit history of the
borrower and sells this information for a fee.
Banks keep credit information private and confidential (Philippines)
Credit Bureaus has been recognized and existed (U.S)
Mr. Christopher B. Cauan
Business Finance
Insolvency is the is the inability to pay debts on time when they are due.
It is not the same as bankruptcy.
Insolvency is insufficiency of cash flow and is temporary.
Insolvency or illiquidity is already an indication of trouble.
The acknowledgement of insolvency is a step toward managing your credit
better.
Bankruptcy is the last remedy to declare, if you suffer from debt problems.
Is a legal process wherein assets of a debtor are distributed to creditors to be able
to pay his debts.
Bankruptcy also includes a plan to repay creditors on an installment basis.
Declaring bankruptcy severely damages one’s credit rating.
Net worth is the value of your assets, cash, savings, real state, cars, stock, bonds,
jewelry collection, insurance, and art collection.
The net worth value is deducted from your debt including credit card debts,
monthly bills, auto loans, home loans, and medical bills.

Mr. Christopher B. Cauan

Business Finance
A personal budget helps you track your financial assets and financial activities

A successful and effective budget will have the following.

 Information based on past spending and expectations.

 No single expense, rent, and utilities should not consist of 50%
of your gross income.
 Must be flexible for modification if important considerations
change, i.e, income, marital status, new spending habits, new
medical expenses.
 Easy access any time – file folders, a notebook, a computer file
may be used to store the budget for any need and update.

Mr. Christopher B. Cauan

Business Finance
Factors affecting your personal buying decision
 Personal values
 Available time for research
 Take home pay
 Access to the product/service
 Benefits of a brand

When buying a car, for example, what are the major considerations?
 Mechanisms to improve performance such as larger engine
anti-lock brakes, cruise control.
 Convenience like stereo and tinted windows.
 Visual options like style.

Mr. Christopher B. Cauan

Business Finance
Loan Amortization and the Loan Application Process
Lending is the commercial bank’s bread and butter.
This is where banking earns and pays his employees, whose salaries, in turn are
reserved for several purposes.
Personal Loan, he will be assessed on the basis of his personal financial capacity
 What is his age?
 What is his occupation?
 Where does he live?
 How many cars does he have?
 How many children does he have?
 What is his business?

Mr. Christopher B. Cauan

Business Finance
Business Loan, the application will ask for information to be able to determine the
capacity of the business to repay the loan.

 What is the nature of the business?

 How long has the business been in operation?
 How much revenues accrued in the last three years?
 How much were profits for the last three years?
 What is the size and value of the business?
 What is the size and value of the properties of the business?

Available pertinent information Loan Officer Manager

Credit Committee Credit Officer

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Business Finance
Credit Committee
This group of officers represents the financial institutions, creditors and/or
investors that have claims on a company that is in financial difficulty or
bankruptcy.
Their role begins in approving the credit line and credit terms for a business,
monitoring the payments schedule as agreed on, and filing for bankruptcy or
initiating the claims procedures if the business operations fail.

Credit Ratings
Credit ratings are a way to formally evaluate the credit history of a person or
company and that includes a forecast of its capability to repay obligations.
Normally begin with the company’s 3-5 year financial statements, a review of
its business operations, a review of the economic conditions the company
operates in, the stability and credibility of the business owners and
management, and a forecast on revenues and the bottomline.

Mr. Christopher B. Cauan

Business Finance
What is Credit Analyst?
The credit analyst evaluates the borrower’s financial standing by reviewing
his financial statements. The borrower here is usually a company or
corporation.
The credit analyst evaluates statistics and analyzes corporate records
including (1) payment plans (2) savings data (3) payment history
(4) purchase activity
Based on these records, the credit analyst makes a recommendation to his
lending officer whether to extend credit to the borrower or not, after
determining his credit worthiness and/or credit limit.

Mr. Christopher B. Cauan

Business Finance
 The credit analyst’s job involves a lot of critical thinking, judgment, and
decision-making.
TheVery Important Cs of Credit
Character
 How long has credit been used before?
 How long has the borrower lived in the present address?
 How long has he held the same job?

Capacity
 Who is the current employer and how much is the current
salary?
 What are other sources of income?
 What are the current debts?

Mr. Christopher B. Cauan

Business Finance
Capital
 What are his/her assets?
 What are his/her liabilities?
 Are the assets enough to pay for the debts?

Collateral
 What assets do you have to secure the loan (a vehicle, your
home, furniture)?
 What investments or savings you have?
Conditions
General economic conditions such as unemployment and
recession can affect the ability to pay a loan. Focuses on the
security of your job and the company that employ you.

Mr. Christopher B. Cauan

Business Finance
ImprovingYour Credit Score
 Pay your bills on time.
 Lower your balances.
 Set a monthly date wherein you can pay a certain amount
regularly if you are not able to pay the entire balance.
 Target paying the entire balance all the time.
 Delay or forgo unimportant purchase like luxury items.
 Use credit wisely.

ProtectingYour Credit fromTheft or Loss

Credit can be stolen from you. If you never charged those goods and
services, someone else may have had used your name, and used your
personal information to commit fraud.

Mr. Christopher B. Cauan

Business Finance
What should you do?
 Report the crime to the credit bureau immediately.
 Report the crime to the creditor immediately.
 File a police report immediately.
How do you prevent this?
 Shred papers that contain personal information, especially
financial.
 Be sure your credit card is returned after a purchase.
 Keep a record of credit card numbers.
 Keep records separate from your cards.

Mr. Christopher B. Cauan

Business Finance
Signs of debts problems
 Only minimum monthly payments are paid.
 There is a struggle to make monthly payments on credit card
bills.
 The total balance on the credit card bills increases every month.
 Loan payments are missed or are very late.
 Savings are used to pay food and utilities.
 Notices are sent by creditors.
 You borrow money to pay off old debts.
 You exceed credit limits.
 You have been denied credit because of bad credit report.

Mr. Christopher B. Cauan

Business Finance
What is Personal Bankruptcy?
When an individual suffers from extreme case of debt
problems, he can declare bankruptcy.
Bankruptcy is the legal process where he sells some or all of his
assets, or his assets are distributed to his creditors because he is
unable to pay his debts.
It may also include a plan to repay creditors on an installment
basis.This severely damages ones credit rating.
The Cost of Credit
You should first figure out how much the loan will cost you, if
you are taking out a loan or borrowing or applying for a credit
card .

Mr. Christopher B. Cauan

Business Finance
There are two costs that a credit card holder should know.
1. The Finance Charge.
This is the total amount you pay to used credit.
In most cases, this is the amount paid to the credit card company for any
unpaid balance.
The finance charge is calculated using the annual percentage rate.
2. The Annual Percentage Rate
The annual percentage rate(APR) is the cost of credit on a yearly basis
expressed in percentage points.
An APR of 18% means that you pay ₱ 18.00 for every ₱ 100.00 you
charged the credit card company or for every ₱ 100.00 you owe.
The credit card company must inform you in writing before you sign any
agreement, in relative to the finance charge and the APR.

Mr. Christopher B. Cauan

Business Finance
4.3 Flowchart of
a Loan
Application

Mr. Christopher B. Cauan

Business Finance
 Filling out the Loan
Application Form  Amount of loan needed
 Purpose of Loan
 Name of borrower
Credit History  Address of borrower
 Present salary /Information  Social Security System
 Number of dependents of the Number
 Other sources of income Borrower  Present employer
 Past credit/history
 Bank accounts
 Marital Status
Credit Find out the reason why
Processing and appeal to the
creditor or apply with
by Committee
another creditor.
Requirements may be
different with another
Credit is Credit is company
approved denied

-Own illustrations, Source: Kapoor, Dlabay, Hughes, Personal Finance

Sole Proprietorship and the Business Documentation
Requirements

Business Loan Requirements

Copy of Valid Identification

Bureau of Internal Revenue Registration Certificate

Department of Trade and Industry Certificate

Business Permit or Mayor’s Permit

Settlements Procedure and details

Mr. Christopher B. Cauan

Business Finance
Requirements
Identification
The following may be accepted:
 Passport ID
 Any government-issued ID
 School ID
 Voter’s ID
 Picture in the ID must be clear
 The ID must have a recent signature
Bureau of Internal Revenue (BIR) Registration Certificate,
Department of Trade and Industry (DTI) Certificate
Both ensure that the business had gone through the proper procedures and
compliance with the BIR and DTI.
Certificates must be updated and not expired.

Mr. Christopher B. Cauan

Business Finance
Business Permit
The business permit must be current and updated.
If the business is undergoing renewal, a clear copy of the business permit
application for renewal must also be submitted as part of the requirements
for a business loan.
Official receipt of proof of payment must be submitted - for ongoing
process of renewal

Settlement Bank Account

Facilitates the more efficient payment of interest on the loan.
Through electronic/mobile/internet funds transfer to the bank account
Through bank checks
Passbooks with complete name and account number as proof of regular
loan payments

Mr. Christopher B. Cauan

Business Finance
What is bad credit? How does bad credit happen?
Bad credit happens when companies are unlikely to pay their debts. They are
illiquid, their debts are not paid on time, or could go bankrupt, which
means that their assets even if sold, would not be enough to pay for their
debts.
Bad credit happens when company sales do not grow over time and when
company expenses increase faster than sales.

This is why growing companies are always on the lookout for new products
and new business opportunities.

Mr. Christopher B. Cauan

Business Finance
4.4 Obligations of
Entrepreneurs
to Creditors

Mr. Christopher B. Cauan

Business Finance
 A key partner of the entrepreneur is his creditor bank.
His bank extends him a line for his daily business requirements as well as
his requirements for longer term capital expansion.
In return, the entrepreneur keeps his promise to pay back his creditor
banks by ensuring that he is financially capable and that his business is
sustainable.
How can he ensure that this happens?
Business activities such as annual corporate planning, strategic planning, a
review of his business from the top level help, including a forecast of where
the economy is going.
A forecast is an analysis of a company’s strengths, weaknesses, opportunity,
and threats.
It enhance its competitiveness, profitability and sustainability.
Scan of the macroeconomic background his business operates will help him
the future of the business.
Mr. Christopher B. Cauan
Business Finance
The Business Owner and Creditor as Partners in Growing a
Business
The Business Entrepreneur Complies with Regulation
Financial Institution provides the funds and offers financial services and
financial advise.
To assist the financial institution facilitate the service, the entrepreneur
does the following:
 Continuous submission of financial reports to assure regular and
prompt payments of his obligations.
 Yearly walk through the business operations to review, assess,
and improve the business.
 Annual corporate planning to determine what needs to be done
to increase sales.

Mr. Christopher B. Cauan

Business Finance
 Annual strategic planning to identify growth areas in the
business and to assess where innovation can help business
efficiency.
 Regular discussion on cost and operating controls.
 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.

Mr. Christopher B. Cauan

Business Finance
4.5 Uses of Funds

Mr. Christopher B. Cauan

Business Finance
ForWorking Capital
Business working capital is used for the business’ day-to-day activities,
and this refers to the current assets and the current liabilities of the
company.

What are your current assets?

Cash, marketable securities, accounts receivables, and inventory are
resources a business can work with to be able to generate sales and
revenues.
Too much inventory carried can be costly. On the other hand, too little
inventory may limit sales for the company.

Mr. Christopher B. Cauan

Business Finance
For Capital Expenditures, To Reinvest in the
Business, For Business Expansion
Funds used for long-term investments as opposed to your day-to-day
operations are usually:
1. Revenue enhancing as a result of research and development;
2. Cost reducing new equipment or technology; and
3. Required investments due to a government regulation health or
pollution.

For Debts Servicing

Funds are also used to pay for debts. As a general rule, debts should be
self-liquidating.
The cash needed to pay short-term loan should be generated from the
sale and immediately pay the debt.

Mr. Christopher B. Cauan

Business Finance
 End of
Chapter 4

Mr. Christopher B. Cauan

Business Finance