BUSINESS FINANCE - REVIEWER

- helps carry out the normal operations of

business.
Sources and Uses of Short-term and Long-term
1. Cash
Funds
2. Cash equivalents/marketable securities
Debt Financing Vs Equity Financing 3. Accounts receivables
4. Inventory
Debt Financing
Current assets less current liabilities
➢ Achieved by borrowing, whether short-
Long-term Funds
term or long-term, which typically comes
with interest. ➢ Used for long-term investments or capital
➢ Interest is the cost of borrowing or the investments.
cost of debt. ➢ Used for start-up business requirements,
➢ Creates a contractual obligation for the or capital expenditures or business
borrower to pay the interest and the expansion for existing businesses.
principal.
Common sources of Long-term funds
➢ Borrower-Lender Relationship
1. Equity Investors
Equity Financing
2. Preference shares
➢ Raising capital through selling of equity 3. Debentures
interest, most commonly expressed by 4. Retained earnings
shares. 5. Banks and nonbanks
➢ Equity financing comes from many
Uses of funds
sources: for example, an entrepreneur's
friends and family, investors, or an initial ➢ For working capital
public offering (IPO). ➢ For Capital Expenditures, To Reinvest in
➢ Investee-investor relationship the Business, For Business Expansion
➢ For Debt Servicing
Why do we need additional financing?
What affects credit ratings?
➢ Industry or Business Factor
➢ Seasonal Variation 1. Ability to repay the loan
➢ Revenue Trend 2. Character of borrower
3. Capacity to pay the loan
Funds
4. Capital and personal assets
Short-term funds 5. Collateral and size of the business

➢ Used for business operations’ working Credit bureau

capital or to finance the day-to-day
➢ an agency that gathers information about
operations of the company.
the credit history of the borrower and
➢ To finance accounts receivables and
sells this information for a fee.
inventories
➢ It can also be used for bridge financing Insolvency
where a company has some maturing
➢ unable to pay debt on time.
obligations and does not have enough
cash to pay such maturing obligations. Bankruptcy
Common sources of short-term funds ➢ Suffering form debt problems.
1. Suppliers’ credit Sample personal balance sheet
2. Advances from stockholders
3. Credit cooperatives
4. Bank loans
5. Lending companies
6. Informal lending sources
Net Working Capital
BUSINESS FINANCE - REVIEWER
✓ Payment History
✓ Purchase Activity
Personal Budget
5C’s of Credit
➢ Information bases on past spending and
expectations ➢ Character – refers to the customer’s track
➢ No single expense, rent, or utilities should record of settling its obligations on time.
consist of 50% of your gross income. ➢ Capacity - refers to the capacity of the
➢ Must be flexible for modification. customer to repay you.
➢ Easy access anytime. ➢ Capital – refers to the customer’s level of
capital in relation to its debt level.
Loan Amortization and the Loan Application
➢ Collateral – refers to the value of the
Process
assets that the customer has and plans to
How to assess Personal Loan? us secure credit.
➢ Conditions – refers to the general global
1. What is your age?
and home country macroeconomic
2. What is your occupation?
conditions and industry-specific
3. Where do you live?
conditions.
4. How many card do you have?
5. How many children do you have? Improving Credit Scores
6. What is your business?
➢ Pay bills on time
How to assess Business Loan ➢ Lower balances
➢ Set monthly date to pay certain amount
1. What is the nature of the business?
regularly
2. How long has the business been in
➢ Target paying the entire balance all the
operation?
time
3. How much revenues accrued in the last
➢ Delay or forego unimportant purchases
three years?
➢ Use credit wisely
4. How much were profits for the last three
years? Protecting you credit from theft or loss
5. What is the size and value of the business?
What should you do?
6. What is the size and value of the
properties of the business? ➢ Report the crime to the credit bureau
immediately.
Credit Committee
➢ Report the crime to the creditor
➢ The group of officers represents the immediately.
financial institutions, creditors and/or ➢ File a police report immediately.
investors.
How do you prevent this?
➢ The role is to approve the credit line and
credit terms for a business, monitor the ➢ Shred papers that contain personal
payments schedule as agreed on, and information, especially financial.
filing for bankruptcy or initiating the ➢ Be sure your credit card is returned after a
claims procedures if the business purchase.
operations fail. ➢ Keep a record of credit card numbers.
➢ Keep records separate from your cards.
Credit Ratings
Signs of Debt Problems
➢ a way to formally evaluate the credit
history of a person or company and ➢ Only minimum monthly payments.
includes forecast of the capability to repay ➢ There is struggle to make monthly
obligations. payments on credit card bills.
➢ The total balance on the credit card bills
Credit Analyst
increases every month.
➢ evaluates statistics and analyzes corporate ➢ Loan payments are missed or are very
records including: late.
✓ Payment Plans ➢ Savings are used to pay for food and
✓ Saving data utilities.
BUSINESS FINANCE - REVIEWER
➢ Notices are sent by creditors. ➢ Insufficient collateral
➢ You borrow money to pay off old debts. ➢ Insufficient sales, income, and cash flows
➢ You exceed credit limits. ➢ Unstable business type
➢ You have been denied credit because of ➢ Poor business plans
credit report.
Obligations of Entrepreneurs to creditors
Personal Bankruptcy
➢ Pay the creditors based on the payment
➢ When an individual suffers from extreme schedule agreed upon.
case of debt problems, as a last resort, he ➢ Provide the collaterals as agreed upon in
can declare bankruptcy. the loan negotiation with proper
➢ A legal process where he sell some or all documentation.
of his assets, or his assets are distributed to ➢ Comply with the provisions of loan
his creditors because he is unable to pay covenant.
his debts. ➢ Notify the creditors if a company is
acquiring another company or if a
General Steps on Loan Application
company is now the subject for
➢ The loan applicant approaches an acquisition.
account officer to apply for a loan. ➢ Do not default on the loans as much as
➢ The account officer evaluates if the loan possible.
applicant qualifies for any of the bank’s
Simple and Compound Interest
loan products.
➢ If qualified, the account officer gives the Interest
loan applicant the list of requirements.
➢ Interest is the cost of holding money.
➢ The loan applicant completes the
➢ It is the amount charged by the lenders to
requirements and submits them to the
the borrowers/users of money, and is
account officer.
usually paid at regular intervals.
➢ The account officer checks the
➢ Interest is the charge for the privilege of
completeness of the requirements and
borrowing money, typically expressed as
forwards them to the credit evaluation
annual percentage rate (APR).
department if the requirements are
complete. Simple Interest
Business Loan Application ➢ If the interest earned or incurred is always
based on the original principal, then
➢ Copy of valid identification
simple interest is assumed.
➢ Bureau of Internal Revenue Registration
➢ Interest is computed on an agreed rate of
(BIR)Certificate
interest and the formula used is:
➢ Department of Trade and Industry (DTI)
Interest = P x r x T
Certificate
Interest = PrT
➢ Business Permit or Mayor’s Permit
P - Principal-the amount of money
➢ Settlement Procedures and details
invested or borrowed/loaned.
Problems Faced by MSMEs in Financing r - Rate - is in the annual interest
converted to a decimal.
➢ Limited track record ◦ Limited acceptable
T - Time - is the number of years, months
collateral
or days for which the money will be used.
➢ Inadequate financial statements
(always express in years)
➢ Lack of business plans
To Find the Final Amount:
MSME – Micro, Small, and Medium Enterprises F=P+I
F – Final Amount
➢ Any enterprise in the Philippines that are
P – Principal
engaged in industry, agriculture, and
I – Interest
service.
Compound Interest
Reasons for rejecting the loan applications
➢ Compound interest is simply earning
➢ Poor credit history
interest on interest.
BUSINESS FINANCE - REVIEWER
➢ The interest in the first compounding
period is added on the principal, which
will then be the basis for the interest to be
computed for the next period.
Interest = P x (1+ r/m)(T x m)-P
P - Principal
r - Rate
T - Time
m – Compounding Frequency
Time Value of Money
Future Value
➢ Is the amount your original funds will be
worth in the future, based on earning an
interest rate over a time period.
FV = PV (1 + I ) n
Present Value
➢ Is today’s worth of future money. It is the
amount you have to invest today if you
want to have a certain amount of cash
flow in the future.
PV = FV / (1 + I ) n
Loan Amortization
➢ A type of loan that requires the borrower
to make scheduled, periodic payments
that are applied to both the principal and
interest.
➢ An amortized loan payment first pays off
the interest expense for the period; any
remaining amount is put towards
reducing the principal amount.
➢ As the interest portion of the payments
for an amortization loan decreases, the
principal portion increases.