SOURCES AND USES OF

SHORT-TERM AND
LONG-TERM FUNDS
PT 2
LEARNING OUTCOMES
• KNOW THE BASIC REQUIREMENTS IN
LOAN APPLICATION OF DIFFERENT
TYPES OF BORROWERS: AND
• DEFINE THE 5C’S OF CREDIT AND
THEIR APPLICABILITY IN LOAN
APPROVAL
 WHAT ARE THE LOAN
PRODUCTS FROM A BANKS?
 WHAT ARE THE LOAN
PRODUCTS FROM A BANKS?

• AUTO-LOAN
• HOUSING LOAN
• PERSONAL LOAN
 KNOW-YOUR-CUSTOMER
(KYC)
• BANKS ARE REQUIRED TO VERIFY THE
IDENTITY OF THEIR CUSTOMERS TO
ENSURE THAT THE FUNDS WILL NOT BE
USED FOR ILLEGAL ACTIVITIES SUCH AS,
BUT NOT LIMITED TO, MONEY
LAUNDERING AND TOURIST FINANCING.
 5C’S OF CREDIT

•THE INSTITUTION’S PRIMARY

CONSIDERATION IN APPROVING
LOAN APPLICATIONS.
 5C’S OF CREDIT

•CHARACTER –
 5C’S OF CREDIT

•CHARACTER – THE
WILLINGNESS OF THE
BORROWER TO REPAY THE LOAN
 5C’S OF CREDIT

•CHARACTER – THE WILLINGNESS

OF THE BORROWER TO REPAY THE
LOAN
•CAPACITY -
 5C’S OF CREDIT

•CHARACTER – THE WILLINGNESS OF

THE BORROWER TO REPAY THE LOAN
•CAPACITY – A CUSTOMER’S ABILITY TO
GENERATE CASH FLOWS
 5C’S OF CREDIT
• CHARACTER – THE WILLINGNESS OF THE
BORROWER TO REPAY THE LOAN
• CAPACITY – A CUSTOMER’S ABILITY TO
GENERATE CASH FLOWS
• COLLATERAL -
 5C’S OF CREDIT
• CHARACTER – THE WILLINGNESS OF THE BORROWER TO REPAY
THE LOAN
• CAPACITY – A CUSTOMER’S ABILITY TO GENERATE CASH FLOWS
• COLLATERAL – SECURITY PLEDGED FOR PAYMENT OF THE
LOAN
• CAPITAL
 5C’S OF CREDIT
• CHARACTER – THE WILLINGNESS OF THE BORROWER TO REPAY
THE LOAN
• CAPACITY – A CUSTOMER’S ABILITY TO GENERATE CASH FLOWS
• COLLATERAL – SECURITY PLEDGED FOR PAYMENT OF THE
LOAN
• CAPITAL – A CUSTOMER’S FINANCIAL RESOURCES
 5C’S OF CREDIT
• CHARACTER – THE WILLINGNESS OF THE BORROWER TO REPAY
THE LOAN
• CAPACITY – A CUSTOMER’S ABILITY TO GENERATE CASH FLOWS
• COLLATERAL – SECURITY PLEDGED FOR PAYMENT OF THE LOAN
• CAPITAL – A CUSTOMER’S FINANCIAL RESOURCES
• CONDITION -
 5C’S OF CREDIT
• CHARACTER – THE WILLINGNESS OF THE BORROWER TO REPAY
THE LOAN
• CAPACITY – A CUSTOMER’S ABILITY TO GENERATE CASH FLOWS
• COLLATERAL – SECURITY PLEDGED FOR PAYMENT OF THE LOAN
• CAPITAL – A CUSTOMER’S FINANCIAL RESOURCES
• CONDITION – CURRENT ECONOMIC OR BUSINESS CONDITIONS
 EXAMPLE/CASE
• MR. JOE SALAZAR APPLIED FOR A P1.5 MILLION LOAN IN
BEHALF OF HIS BUSINESS, ‘’JOE’S RESTAURANT”, FOR
ADDITIONAL CAPITAL IN 2015. HE IS THE CHAIRMAN OF
THE BOARD OF JOE’S RESTAURANT. IN THEIR MEETING,
THE BOARD DECIDED TO OPEN AN ADDITIONAL BRANCH
FOR THE RESTAURANT. JOE’S RESTAURANT CURRENTLY
HAS 3 BRANCHES IN METRO MANILA AND WOULD LIKE TO
OPEN UP A SMALL BRANCH IN QUEZON CITY. JOE’S
RESTAURANT HAS BEEN IN THE BUSINESS FOR 12
FRUITFUL YEARS AND HAS BEEN A PREVIOUS
• BORROWER OF THE BANK. THE COMPANY HAD PREVIOUS
LATE PAYMENTS BEFORE BUT THE REASONS ARE
USUALLY JUSTIFIABLE, AND THE BALANCE OF THE LOAN,
ALONG WITH ANY PENALTIES, IF ANY, IS PAID. THE THREE
BRANCHES EARN A NET INCOME OF P900,000/YEAR. THE
LOT WHERE THE MAIN RESTAURANT IS LOCATED IS
PLEDGED AS COLLATERAL TO THE BANK. THIS PROPERTY
IS VALUED AT P2 MILLION. SHOWN BELOW IS AN EXCEPT
BELOW IS FROM JOE’S RESTAURANT 2014 CONSOLIDATED
AUDITED FINANCIAL STATEMENTS.
SAMPLE CONSOLIDATED AUDITED FINANCIAL
STATEMENTS
As of 31 December 2014 As of 31 December 2013

Current assets 1,200,000 900,000

Long-term assets 4,400,000 4,200,000
Short-term liability 500,000 460,000
Long-term liability 2,300,000 3,500,000
Equity 2,800,000 1,140,000
Net income 900,000 950,000
Cash flow from operations 500,000 450,000
 CHARACTER:
• CHECK JOE’S RESTAURANT’S PAYMENTS
HISTORY AND EXPERIENCE IN THE BUSINESS.
THE FRUITFULNESS OF THE BUSINESS
PROVES MR. SALAZAR AND THE BOD’S
ABILITY TO MANAGE THE BUSINESS WELL.
 CAPACITY:
• THE POSITIVE INCOME FROM THE BUSINESS AND
POSITIVE CASH FLOWS FROM OPERATIONS PROVES
THE BORROWER’S CAPACITY. CURRENT ASSETS ALSO
SHOW THAT THE BORROWER HAS FUNDS EASILY
AVAILABLE FOR REPAYMENT IF NECESSARY. THE
TERM OF THE LOAN, SHOULD BE ADJUSTED TO THE
CASH FLOW OF THE BORROWER.
 COLLATERAL:
• THE PROPERTY PLEDGED SERVES AS
COLLATERAL. ITS VALUE IS USUALLY
GREATER THAN THE LOAN TO PROVIDE
THE BANK SECURITY FOR SUDDEN
CHANGES IN VALUE OF THE COLLATERAL,
AS WELL AS TO COMPENSATE THE BANK
FOR THE COLLATERAL’S ILLIQUID NATURE.
 CAPITAL:
•THE AUDIT FINANCIAL
STATEMENTS GIVE A PREVIEW OF
THE BORROWER’S RESOURCES.
 CONDITION:
• THE INCOME STATEMENTS SHOWS THAT THE
BUSINESS IS EARNING AND IS EVEN
GROWING. THE BUSINESS HAS ALREADY
GROWN TO 3 BRANCHES. THIS SHOWS A
PREVIEW OF THE GROWTH IN THE FOOD
INDUSTRY. LEARNERS MAY ALSO RESEARCH
ON OTHER BUSINESS GROWTH TRENDS TO
DUTIES OF THE BORROWER TO
CREDITORS
1. PAY THE CREDITORS BASED ON THE
PAYMENT SCHEDULE AGREED UPON. IF
YOU CANNOT PAY ON TIME, NOTIFY
THE CREDITORS AHEAD OF TIME. BUT
AS MUCH AS
2. PROVIDE THE COLLATERALS AS AGREED UPON
IN THE LOAN NEGOTIATION WITH PROPER
DOCUMENTATION, IF NECESSARY AND IF
APPLICABLE (E.G. ANNOTATION OF THE TCT OR
CCT). ENSURE THAT THESE COLLATERALS ARE IN
THE PHYSICAL CONDITION PERCEIVED BY THE
CREDITORS IN DETERMINING THE LOANABLE
VALUE OF THE LOANS.
3. COMPLY WITH THE PROVISIONS OF LOAN
COVENANT SUCH AS MAINTAINING CERTAIN
LIQUIDITY AND LEVERAGE RATIOS. THESE
CONDITIONS ARE SUPPOSED TO BENEFIT THE
BORROWER SO THAT HIS COMPANY WILL NOT
BE OVER-EXPOSED TO BORROWING OR HE
WILL MONITOR THE LIQUIDITY POSITION ON A
MORE REGULAR BASIS.
4. NOTIFY THE CREDITOR IF THE COMPANY IS A
ACQUIRING ANOTHER COMPANY OR THE
COMPANY IS NOW THE SUBJECT OF SUBJECT
OF ACQUISITION. THE INTEREST OF CREDITORS
MAY BE JEOPARDIZED IF NEW OWNERS TAKE
OVER THE COMPANY OR IF THE COMPANY IS
GOING TO ACQUIRE ANOTHER COMPANY.
5. DO NOT DEFAULT ON THE LOANS
AS MUCH AS POSSIBLE. ASIDE FROM
THE CREDITORS, THERE MAY BE
OTHER PARTIES SUCH AS THE
GUARANTORS OF THE LOAN WHO
WILL BE PUT A DISADVANTAGE IF
THE BORROWER DEFAULTS.
IMPORTANCE OF BANKING
INDUSTRY
• PROVISION OF CREDIT AND LIQUIDITY –
BANKS PROVIDE CREDIT FACILITIES TO
BORROWERS WHICH ALLOW THEM TO
ADDRESS THEIR LIQUIDITY CONCERNS.
• RISK MANAGEMENT SERVICES – BANKS
PROVIDE ADVISORY SERVICE ON ASSET,
LIABILITY MANAGEMENT AND CAN ALSO
PROVIDE RECOMMENDATIONS REGARDING
THE APPROPRIATE FINANCING SCHEMES FOR
A COMPANY’S FUNDING REQUIREMENT.
• MONEY REMITTANCE – BANKS CAN ACT AS
CONDUITS OR INTERMEDIARIES FOR MONEY
REMITTANCES.
• ECONOMIC DEVELOPMENT
• CHANNEL FOR SAVING AND INVESTMENT
• PROMOTION OF ENTREPRENEURSHIP
• BANKS PROVIDE A MECHANISM TO PEOPLE OR SAVE WHICH
GROUP REPORT
 GROUP REPORT RESEARCH

•VISIT A BANK. INQUIRE ON THE

DIFFERENT LOAN
REQUIREMENTS AND STEPS IN
LOAN APPLICATION, AND
COMPARE THE DIFFERENT RATES
FOR THE DIFFERENT LOAN
 TOPIC TO REPORT
GROUP 1: DIFFERENT LOAN REQUIREMENTS FOR
SMALL BUSINESS LOAN, LOANS TO CORPORATION,
PERSONAL CONSUMPTION LOANS, AND OTHER
DESIRED LOAN PRODUCTS.
GROUP 2: STEPS IN LOAN APPLICATION FOR
SECURED AND SECURED LOANS.
GROUP 3: PAWNSHOP
GROUP 4: LENDING COMPANY
WHAT ARE THE GENERAL
STEPS ON LOAN
APPLICATION?
 GENERAL STEPS ARE AS FOLLOWS:
• LOAN APPLICANT INQUIRES WITH THE LOAN OFFICER TO APPLY
FOR A LOAN.
• THE LOAN OFFICER PROVIDES THE LOAN APPLICANT A LOAN
APPLICATION FORM AND INTERVIEWS THE CLIENT.
• THE LOAN OFFICER THEN DECIDES WHAT TYPE OF LOAN PRODUCT
THE BORROWER QUALIFIES IN, AND THEN PROVIDES THEM A LIST
OF REQUIREMENTS.
• THE APPLICANT THEN SUBMITS THE REQUIREMENTS ALONG WITH
THE LOAN APPLICATION FORM.
• IF COLLATERAL IS REQUIRED, THE
CORRESPONDING MORTGAGE DOCUMENTS
ARE MADE READY.
• THE LOAN OFFICER THEN FORWARDS THE
DOCUMENTS TO THE CREDIT EVALUATION
DEPARTMENT.
• THE CREDIT EVALUATION DEPARTMENT
CHECKS WHETHER THE APPLICANT
• CREDIT INVESTIGATION IS DONE, AND THE CREDIT
WORTHINESS OF THE LOAN APPLICANT IS EVALUATED.
• THE CREDIT ANALYST PREPARES A RECOMMENDATION AND
WILL PRESENT THE RECOMMENDATION BEFORE A LOAN
COMMITTEE WHO APPROVES THE LOAN APPLICATION. THE
LOAN COMMITTEE IS GENERALLY COMPOSED OF TOP
EXECUTIVES FROM THE BANK.
• IF THE LOAN IS APPROVED, THEN THE POST-APPROVAL
REQUIREMENTS WILL BE SENT TO THE LOAN APPLICANT
FOR COMPLIANCE.
 LIST OF BANK REQUIREMENTS FOR LOAN
APPLICATION FOR A CORPORATION
• PRE-APPROVAL REQUIREMENTS:
• DULY ACCOMPLISHED APPLICATION FORM
• SECURITIES AND EXCHANGE COMMISSION (SEC)
REGISTRATION
• ARTICLES OF INCORPORATION AND BY-LAWS
• LIST OF ELECTED OFFICERS
• BOARD RESOLUTION OR CORPORATE SECRETARY’S
CERTIFICATE REGARDING LOAN APPLICATION
• COMPANY PROFILE OR BUSINESS BACKGROUND
• LIST OF MAJOR SUPPLIERS AND CUSTOMERS
WITH CONTACT INFORMATION
• AUDITED FINANCIAL STATEMENTS (2 TO 5
YEARS DEPENDING ON THE BANK)
• BANK STATEMENTS (MOST BANKS REQUIRE
BANK STATEMENTS FOR THE PAST 6 MONTHS)
• COLLATERAL DOCUMENTS SUCH AS
FOLLOWS:
COPY OF TRANSFER CERTIFICATE OF
TITLE (TCT) OR CONDOMINIUM
CERTIFICATE OF TITLE (CCT)
COPY OF TAX DECLARATION
APPRAISAL FEE WITH OFFICIAL RECEIPT
 FOR CONSTRUCTION LOAN:
• BUILDING PLAN OR FLOOR PLAN
• BILL OF MATERIALS AND LABOR COST
• BUILDING SPECIFICATIONS CERTIFIED
BY ARCHITECT/CIVIL ENGINEER
• DEVELOPMENT PERMIT
• COPY OF LEASE CONTRACTS (IF
 POST-APPROVAL REQUIREMENTS
• ORIGINAL OWNER’S DUPLICATE COPY OF
(TCT/CCT)
• ORIGINAL CERTIFICATE TRUE COPY OF
LATEST TAX DECLARATION ON LAND AND
IMPROVEMENT
• MASTER DEED OF DECLARATION (FOR
CONDOMINIUM)
• ELECTRONIC-CERTIFIED TRUE COPY OF
• ORIGINAL CERTIFIED TRUE COPY OF
TAX CLEARANCE
• ORIGINAL REAL ESTATE TAX RECEIPTS
• MORTGAGE REDEMPTION INSURANCE
• FIRE INSURANCE
 QUIZ
1. ENUMERATE THE 5C’S OF CREDIT
2. WHAT DO YOU THINK IS THE MOST
IMPORTANT CONSIDERATION OF BANKS IN
APPROVING A LOAN?
3. WHY IS IT IMPORTANT FOR BANKS TO
COLLECT ALL THE LOAN REQUIREMENTS?
4. WHICH ARE MEANT TO BE USED TO
EVALUATE EACH OF THE 5C’S OF CREDIT?