BUSINESS

FINANCE
Loan Requirements of Bank
and Nonbank Institution
Kung mag lo loan ka sa
isang banko, anong
banko yun at bakit?
AS A BUSINESSMAN / OWNER WHY
IS IT IMPORTANT TO LOAN FROM
THE BANK?
LEARNING OBJECTIVE:

1. Identify bank and nonbank institutions in the locality

2. Compare and contrast the loan requirements of the
different banks and nonbank institutions
3.Financing defined
4.5 C’s of Credit
5. Short-term and Long-term loans
Financing - means to provide funding for a particular
need.

Two types of financing:

1. Debt Financing - borrowing money from lenders and not
giving up ownership.
2. Equity Financing - the method of raising
capital by selling company stock to
investors (stockholders) in exchange of
ownership interests in the company.
 Debt vs. Equity Financing
DEBT FINANCING EQUITY FINANCING
ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES

Cost It is limited to interest It does not require a It has the highest

payments. fixed dividend cost (see
payment. discussion on risk).

Control Lender has no control It may limit cash

over operations and dividend declaration by
investment decisions. management.

Maturity There is a specified There is no maturity

maturity date or periodic date. It is perpetual.
amortization payments.
 Debt vs. Equity Financing
DEBT FINANCING EQUITY FINANCING

ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES

Risk There is a risk of not Among the sources

meeting the obligation of financing, it is
(default risk) the riskiest.

Tax Interest expense is tax Dividends are not

deductible (it can tax deductible.
minimize tax expense)
 Short-term and Long-term of Funds
Short-term sources of funds
1. Suppliers Credit – refers to the extension of payment due date by
suppliers.
2. Advances from stockholders or other owners – personal funds advanced
by a stockholder to a company that usually requires interest.
3. Credit cooperatives – provided lending services to its members. Members
usually pay contributions to the cooperative.
4. Banks – provides several loan products catering to different types of needs.
5. Credit Cards – just take note of the high interest rates on this source of
funds
6. Lending Companies – companies that are dedicated to lending. They
usually charge higher interest than banks and their credit requirements are
more lenient compared to banks
7. Pawnshops – provides funds in exchange of collateral, usually jewellery or
other items which are of value.
8. Informal lending sources (5/6)

 Long Term of funds

1. Equity investors – these are the individuals/corporations which are issued
common stock/preferred stock
2. Internally generated funds – not all profits are distributed to stockholders.
Undistributed profits can be used by the company for their funding
requirements.
3. Banks – they provide long-term loans, depending on the nature of the
need.
4. Bonds – these are examples of debt securities that need to be registered
Securities and Exchange Commission before they are issued to the public
5. Lending companies – they can also provide long-term loans.
. Exercise: Identify whether Long-term or short term source of funds

Need/Activity Answer
Acquisition of equipment
Franchise of a fast-food outlet
Purchase of inventory for a clothing shop
Loan for agricultural needs (i.e. palay
production, mango, etc
Loan for purchase of a commercial space
Development of a subdivision
Auto-loan
Loan for sari-sari store supplies
Housing Loan
Emergency loans (advances)
. Exercise: Identify whether Long-term or short term source of funds

Need/Activity Answer
Acquisition of equipment Long-term
Franchise of a fast-food outlet Long-term
Purchase of inventory for a clothing shop Short-term
Loan for agricultural needs (i.e. palay Short-term
production, mango, etc
Loan for purchase of a commercial space Long-term
Development of a subdivision Long-term
Auto-loan Long-term
Loan for sari-sari store supplies Short-term
Housing Loan long-term
Emergency loans (advances) short-term
 5 C’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
 Short case on 5 Cs
Mr. Joe Salazar applied for a 1.5 million loan in behalf 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 has
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
900,000/year. The lot where the main restaurant is located is pledged
as collateral to the bank. This property is valued at PHP2 Million.
Shown below is an excerpt from Joe’s Restaurant’s 2014 consolidated
audited financial statements.
As of 31 December As of 31 December
2014 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 500,000 450,000
Operations
From Joe’s information, identify the
information to be used in analysing the
5C’s of Credit
• Character: Joe’s restaurant’s willingness to pay can be determined by its
payment history and the continuing operation of the business.
• 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 flows 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 audited financial statements give a preview on the borrower’s
resources.
• Condition: The income statement shows that the business is earning, and is even
growing. The business has already grown to 3 branches. This shows a preview
on the growth in the food industry. Learners may also research on other business
growth trends to know about macroeconomic conditions.
Financial institutions
Financial institutions otherwise known as
banking institutions, are corporations that
provide services as intermediaries of financial
markets. Broadly speaking, there are three
major types of financial institutions:
Financial institutions can be distinguished broadly
into two categories according to
ownershipstructure:

1. Commercial Banks

2. Cooperative Banks
1. Depository institutions - deposit-taking
institutions that accept and manage deposits and
make loans, including banks, building societies,
credit unions, trust companies, and mortgage loan
companies;
2. Contractual institutions insurance companies and
pension funds
3. Investment institutions - investment banks,
underwriters, brokerage firms.
 Bank and Nonbank Institutions
Banking Institution
Banking Institution also referred to as a
universal or commercial bank can range from a
large financial institution with a highly visible
brand name and an international presence to a
small organization with a local presence.
Loan Requirements of Banks
Lending is the bread and butter of banks. Government and private banks
earn income through interest while helping the community by financing short-
term and long-term loans. Some banks also provide credit facilities and business
loans from small and medium enterprises (SMEs) to large corporations.
Individuals can also avail loans in banks through personal loans.
 A banking institution's financing activities generally
involve various types of lnding, such finance, retail, short-
term finance, housing, project finance, small-medium as
corporate enterprises, trade, and others. Alternatively, the
focus of a banking institution may be only on specific
transactions with clients that meet certain requirements
and within certain industry sectors.Banking institutions
may also provide financial products with a focus on
environmental business opportunities.
Nonbank Financial Institutions
A nonbank financial institution (NBF) is a
financial institution that does not have a full
banking license and cannot accept deposits
from the public. However, NBFIs do facilitate
alternative financial services, such as investmen
(both collective and individual), risk pooling,
financial consulting, brokering, money
transmission, and check cashing.
These are other financial institutions which
engage in specific functions. They provide
services related to claims, financial infornmation
and advice, manage portfolios of financial assets
on behalf of other economic units, buy and sell
claims on institutions from clients, and assist in
finding sources for those economic units seeking
loans.
1. Risk pooling institutions
Insurance companies underwrite economic risks
associated with death, illness, damage to or loss of
property, and other risk of loss. They provide a
contingent promise of economic protection in the case of
loss. There are two main types of insurance companies:
life insurance and general insurance. General insurance
tends to be short-term, while life insurance is a longer
contract, ending at the death of the insured. Both types
of insurance, Iife and property, are available to all sectors
of the community.
2. Contractual savings institutions
Contractual savings institutions (also called
institutional investors) provide the opportunity
for individuals to invest in collective investment
vehicles in a fiduciary rather than a principle
role. Collective investment vehicles invest the
pooled resources of the individuals and firms
into numerous equity, debt, and derivatives
promises.
3. Other nonbank financial institutions
Market makers are broker-dealer institutions that quote both a
buy and sell price for an asset held in inventory. Such assets
include equities, government and corporate debt, derivatives,
and foreign currencies. NBFIs are a source of consumer credit
(along with licensed banks). Examples of nonbankfinancial
institutions include:
o Insurance firmns
O Venture capitalists
O Currency exchanges
o Microloan organizations
o Pawnshops.
4. Government Non-Bank Financial Institutions
As the banking system was evolving there was a parallel
development of the other financial institutions. Insurance for
workers under the Government Service Insurance System was in
operation by 1936. Compulsory social security insurance in the
private sector was founded in 1957 with the creation of the Social
Security System.
These institutions were created essentially to protect the
welfare of employees. The consequence was that they set up large
funds that were generated from the insurance premium of members
and their counterpart institutions. A logical result was the
corresponding effort to administer the welfare programs to protect
the insurance funds that are generated.
 Among these are institutions like PAG-IBIG fund. In
conjunction with the promotion of housing, the
government also created the National Home Mortgage
Financing Corporation which is
designed as a national mortgage bank that could
refinance the mortgage papers of other financial
institutions.
Component Institutions
1. Investment Houses.
These are stock corporations engaged in the underwriting of
securities of other corporationss on a guaranteed basis. Their
principal role is capital formation that can engage in portfolio
management, stockbrokerage, financial consultancy and lending
operations. As it applies to the US financial system, the investment
banking industry is part of the larger securities sector. It is basically
made up of firms engaged in issuing, distributing and selling
securities and related financial products. Investment banks,
brokerages and market- making entities comprise the securities
sector. Investment banks are global financial institutions which
perform any or all of the service functions of origination and issue,
management, underwriting and distribution.
2. Financing Companies.
Organized for the purpose of extending credit
facilities to consumers and to industrial, commercial, or
agricultural enterprises. They operate by discounting or
factoring commercial papers or accounts receivables, or
by buying and selling contracts, leases, chattel mortgages,
or other evidences of indebtedness, or by leasing motor
vehicles, heavy equipment and industrial machinery,
business and office machines and equipment, appliances,
and other movable properties.
3. Investment Companies.

Any issuer which the Commission, upon

application by such issuer, finds and by order
declares to be primarily engaged in a business or
businesses other than that of investing, reinvesting,
or trading in securities either directly or (A) through
majority-owned subsidiaries or (B) through
controlled companies conducting similar types of
business.
4. Securities Dealers and Brokers.
A securities dealer buys and sells shares of stock of
another or acquires securities for profit. In contrast, a
securities broker facilitates transaction between a buyer
and seller of securities for a commission
5. Venture Capital Corporations.
These are organized jointly by private banks, the ology
Livelihood Research Center and/or other National Development
Corporation and the Tec government agencies to develop,
promote, and assist small and medium scale enterprises through
debt to equity financing.
6. Pawnshops.
Provide credit to small borrowers who are not
qualified to obtain small loans from other financial
institutions. Cost of borrowing and terms of payment are
generally fair making it as one of the components of the
country's financial system that plays a vital role in socio-
economic development. Compared with banks,
pawnshops do not impose as many documentary
requirements before releasing cash to customers.
Moreover, the latter are more accessible, as they may be
found even in remote areas where banks do not operate.
7. Lending Investors.
Lending investors are those who make a
practice of lending money for themselves or others.
They extend all types of loans, generally short term,
often without collateral, using their own capital.
8. Mutual Building and Loan Associations.

These are corporations whose capital stock must

be subscribed by the stockholders in regular equal
installments with the purpose of accumulating the
stockholders savings and repaying them with their
accumulated savings and profits upon surrender of
their shares in order to encourage industry, savings,
and home building among its stockholders.
Bank Loan Requirements
1. Purpose of Loan
While some lenders don't have usage restrictions, most will
want to know how you plan to spend it. For instance, some
businesses experience resistance from banks when they apply
for a loan to reduce existing debt.
In comparison, banks usually approve of businesses using loans
for the following reasons:
• Improve Cash Flow
• Purchase Equipment
• Pay for Expansion Projects
• Purchase Inventory
• Use as Payroll
2. Business Experience
When reviewing your loan application, banks will consider how much experience
you have. If you've owned your business for years, and have managed your
finances responsibly, this will be in your favor. In comparison, if you've recently
opened your business, or have struggled financially, this could be detrimental.

3. Business Plan
When applying for a bank loan, you might be asked to submit your business plan. It
might seem tedious, but your business plan can help the bank determine the right
loan amount and term for you.
4. Credit History
When considering your business for a loan, a bank will conduct a credit check.
They'll do this to determine your personal and business credit scores. Personal
credit history especially mattersfor businesses that operate as proprietors or
partnerships. In both cases, the business Owner assumes partial or full financial
responsibility for the company.
5. Personal Information
Even though you'll be borrowing money for your business, some
personal information could affect your ability to qualify. As we
mentioned in the previous section, your personal credit score will
affect your eligibility. In addition, banks usually also request the
following personal information in your application:
• Addresses
• Criminal record
• Information on your education
• Tax returns
• Financial statements
• Assets
• Personal Loan Balances
6. Financial Statements
In addition to personal financial information, you'll also
need to submit your business's financial statements. The
amount of statements will vary depending on the bank
yosu're applying to. Most banks will require a balance
sheet, profit and loss statement, cash flow statements,
income statements, and other financial projections. In
addition, they may want to see your business's bank
account balances.
7. Collateral
Even if your business or personal credit history falls
below bank loan requirements, youcould still receive
financing by submitting collateral. Banks define collateral
as business or personal property that you put up to
guarantee the repayment of a loan. Other forms of
collateral include automobiles, expensive jewelry, and
high-end antiques. The expected useful life of your
collateral must match the lifespan of the business loan.
8. Cash Flow
The primary financial concern for banks when it
comes to accepting applicants involves business cash
flow. In other words, does your business generate
enough cash flow to repay a bank loan on-time? To
determine this, the bank will ask you to present
information about your primary business cash sources.
Most banks understand that managing cash flow is a
common challenge for business owners, especially
entrepreneurs that own seasonal businesses.
 List of Bank Requirements for Loan Application for a Corporation
(Arthur S. Cayanan)
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)
List of Bank Reqts continued….

Collateral documents such as the following:

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 applicable)
List of Bank Reqts continued….

Post-approval Requirements

Original owner’s duplicate copy of TCT/CCT

Original certified true copy of latest tax declaration on land and
improvement
Master deed of declaration (for condominium)
Electronic-certified true copy of TCT/CCT with original official receipt
Original certified true copy of tax clearance
Original real estate tax receipts
Mortgage redemption insurance
Fire insurance
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