Dumaguete City National High School

Dumaguete City Division

BUSINESS FINANCE
Prepared by: Miss Clareen June E. Dagoy

SECOND SEMESTER
Quarter 1 – Week 5
Content Standard:

The learners demonstrate an understanding of the sources and uses of short-term and long-term funds, and the requirements,
procedure, obligation to creditor, and reportorial necessities

Performance Standard:

The learners are able to:

a. distinguish debt and equity financing
b. identify the bank and nonbank institutions in the vicinity that are possible sources of funds, and enumerate their requirements
and process for loan application

Most Essential Learning Competencies (MELCs):

The learner compares and contrasts the loan requirements of the different banks and nonbank institutions and cite these institutions in
the locality.

This module is composed of one lesson, namely:

• Lesson 1 – Compare and Contrast the Loan Requirements

of the Different Banks and Nonbank Institutions and Cite
these Institutions in the Locality

After going through this module, you are expected to:

1. Identify bank and nonbank institutions in the locality;

2. Compare and contrast the loan requirements of bank and
nonbank institutions;
3. Explain why bank and nonbank financial institutions
demand for loan requirements; and
4. Perform decision-making on bank and nonbank loan
application

What’s In !

You have already learned in your previous lesson how to distinguish financial institutions and explain the tools in managing cash,
receivables and inventory. Now, before you proceed, this next activity will help you recall and apply things you have learned.

Activity 1: Citing My Source of Fund

Direction: Make a list of bank and nonbank financial institutions in your locality to help you solve the problem in the given
situation.

Suppose you are a business owner in your place and because of the existing COVID-19 pandemic, your fund which is necessary to
continue your business operations in the New Normal is running low. You need to procure face masks, disinfectants, sanitation boxes
and thermal scanners in compliance with the health and safety protocols of the Inter-Agency Task Force in your municipality.

Where would you go to apply for a loan if informal lenders or “5-6” are not available for you to generate additional funds?

Banks Nonbanks

Lesson 1
Compare and Contrast the Loan Requirements of the Different Banks and Nonbank
Institutions and Cite these Institutions in the Locality
Introduction: Businesses need sources of funds to aid in the financial aspect of their business operations such as for working capital
requirements or business expansions. One of the sources of financing is acquired through debt financing. It can make through
borrowing from banks and nonbank financial institutions like lending companies. It creates an obligation for the borrower to pay the
interest and the principal amount being loaned.
 During this challenging time brought about by the COVID-19 pandemic, businesses and even individuals resort to applying
for loans in banks and nonbank financial institutions to support their businesses and/or finances. It is therefore necessary to know the
loan requirements of various financial institutions so that the loan application will be approved.

What is It!

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.

Debt Financing Versus Equity Financing?

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.

Why Bank and Nonbank Financial Institutions Demand Loan Requirements?

Before granting a loan or any credit accommodation, financial institutions demand for the loan requirements to assess whether the loan
amount matches the financial capacity of the borrower; verify the identity of the borrower to avoid identity theft; and see to it that the
borrower has the capability to sustain loan payments. The credit analyst will analyze the financial track record of the borrower which
is referred to as credit ratings.

The credit ratings will serve as the borrower’s scorecard that will reflect his credit history and serves as means to formally evaluate the
borrower without bias.

These credit ratings are submitted to the credit bureau or the agency that gathers the credit history of a borrower and sells this
information for a fee. In the Philippines, the operational credit bureau is the Credit Information Corporation.

If the borrower is found financially capable of paying the loanable amount, then the loan application will be approved. However, if the
credit analyst found out that the borrower has a negative credit rating or inability to pay, the loan application will be disapproved.

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.

a. 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.
b. 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.
c. 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.

What are the usual loan requirements and application? See table below.
 Loan Applications Requirements Loan Application process
Demographics –includes the name or business name, birthdate,  Receipt of application form and required documents;
address, SSS no., TIN no., phone no., and other identifying
information such as valid government-issued identification
cards

Income or revenue refers to current personal income and  Verification of information in the application form and
employer, employment and salary history, and business required documents may include interview;
revenue, if there is already an existing business.

Assets and Liabilities-applicants may ask to disclose their  Checking credit history
checking savings and investment accounts and their outstanding
loans and credit cards, if there are any.  Writing credit report with appropriate
recommendations

Contact or references-require identification and contact  Documenting final decision

information of existing employers, previous employers, or even
nearest relative not living with the identified contact  If approved, final documents sign-off (interest rate and
other terms) and loan release

Attest and authorization require affixing applicant’s  If rejected, rejection letter sent to applicant
signature on the 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.

What is More !

Activity 2: Valuing what is required

Direction: Explain key points why bank and nonbank financial institutions demand for loan requirements. Devise a creative mind-
bender for each explanation using the beginning letters.

What I have Learned !

Activity 3: Forecast Your Credit Profile

Direction: Imagine yourself five (5) years from now, you are a businessman/woman and still single. Provide the requirements asked so
that your loan application will be approved.

Situation: AMAZING Finance Corporation is one of the lending companies within your municipality. You wanted to avail a loan and
you have already submitted their general requirements. Now you are asked to provide only three Income requirements and a collateral.
You are just renting an apartment but you own a car.

Income
Answer 1:
Answer 2:
Collateral
Answer 3:

What I Can Do!

Activity 5:

Direction: Choose one bank, one credit cooperative and one commercial finance company. Research on the following:
a. compare the loan application requirements
b. loan application process.

Rubrics in Rating Activity 6: Valuing What Is Required

Score Standards
Content and Reasoning Grammar
5 Comprehensively explained the stated comparisons; All statements are grammatically correct
coherent and completely organized and began with the correct letters
4 Satisfactorily explained the stated comparisons; Statements have a number of
reasonably coherent grammatical errors but not critical for
comprehension
3 Fairly explained the stated comparisons and fairly Statements have few careless writing
coherent errors that moderately impede
comprehension
2 Provided comparisons but vague and confusing Statements have many careless writing
errors that impede comprehension
1 Barely reasonable Most statements are erroneous

References:

Banko Sentral ng Pilipinas. Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). 2008 Cayanan, A. and Borja, D.
Business Finance First Edition. Philippines: Rex Book Store. Inc., 2017 Yumang, K., Pao, T., Benito, P. and Pefianco, E. Exploring
Small Business and Personal Finance. Philippines: The Phoenix Publishing House, Inc., 2016
Vibal group Inc. and Florenz C. Tugas, Aeson Luiz C. Dela Cruz, Alloysius Joshua S. Paril, and Alger C. Tang. Business Finance,
Araneta Avenue, Quezon City
The Commission on Higher Education in collaboration with the Philippine Normal University: Teaching guide for Senior High
School,

Internet link:
Image:https://gbr.pepperdine.edu/2017/12/religious-beliefs-influence-financial-decision-making/
Image:https://smallbiztrends.com/2016/01/small-business-finance-basics.html
Image:https://www.dmu.ac.uk/study/courses/postgraduate-courses/international-business-and- ifinance-msc-degree/international-
business-and-finance-msc.aspx
Image:https://www.credibly.com/incredibly/trending/debt-vs-equity-financing