THE GREAT PLEBEIAN COLLEGE

Alaminos City, Pangasinan

SENIOR HIGH SCHOOL DEPARTMENT
SY 2021-2022

ABM – 12
LEARNING MODULE

Prepared by: Miss Jessa V. Gallardo

Email Account: [email protected]
Contact Number: (0930-005-0066)
Consultation time: M-F / 8:00AM-6:00PM

1
Module Week 5-6

Sources and Uses of Short- Term and Long- Term Funds

Introduction

In the previous lesson you learn about the various methods of raising long-term funds.
Normally the methods of raising finance are also termed as the sources of finance. But, as a
matter of fact the methods refer only to the forms in which the funds are raised, and hence
may or may not include the sources from, or through which the funds are raised. Hence, we
must also have an idea about the sources of finance. You will recall that the various sources of
long-term finance had been duly identified in the previous lesson. We shall now learn in detail
about those sources.

Lesson and Coverage:

1. Sources and Uses of Short- Term and Long- Term Funds

Week 5-6 Lesson Competencies(MELC) Activity

September 13- 1. Sources and Uses Compare and contrast Week 5.
October 2, 2020 of Short- Term and the loan requirements Pre- Assessment
Long- Term Funds of the different banks Activity 1.Express
and nonbank Yourself.
institutions and cite Activity 2.Debt Vs.
these institutions in Equity
the locality.

October 5-9, 2020

Week 6.
Activity 3.Bank
Lending
Activity 4.Monetary!
Post Assessment

2
 Module Map

Short- Term Funds

Long- Term Funds

Expected Skills:

1. Compare and contrast the loan requirements of the different banks and nonbank
institutions and cite these institutions in the locality.

3
 Pre- Assessment

True or False

Write true if the statement is correct and write false if the statement is incorrect. Write
your answer in a separate sheet of paper.

1. To borrow from credit cooperatives, you have to be a member. Credit cooperatives can lend
as much as five times of your equity or contributions.

2. Insurance Company are sources of different types of financing from short term to long-term.

3.Bond Market This market is gaining more popularity among our big publicly listed companies
for their fund raising activities.

4. Bank is a suppliers of raw materials and merchandise are the best sources of short-term
working capital. This is the reason why a good relationship has to be nurtured with suppliers

5. Debt Financing can be issued common stocks. This is the most patient source of capital. As
far as the company is concerned, this is the safest source of financing.

4
 Explore

Activity 1. Express Yourself

Explain the following phrase in your answer sheet.

1. “HIGH RISK, HIGH RETURN”

Financial Institutions

A financial institution (FI) MULTIPLE CHOICE

Choose the letter of the answer to each item/question.Write the letter of your answer in
your activity/answer sheet.

1. Which of the following is true about cash management?

a. A cost of holding cash is the liquidity it gives the firm.

b. A cost of holding cash is the interest income earned on the outstanding cash balance.

c. Effective cash management results in minimization of the total interest earnings involved
with holding cash.

d. The primary objective in cash management is to keep the investment in cash as low as
possible while still operating efficiently and effectively.

2. The speculative motive of holding cash refers to:

a. Utilize cash in internal projects

b. Use for any future loss the company is expecting

c. Avail of any future investment opportunity

d. Utilize cash for international project

3. It is called liquid assets which include cash and savings that can be converted to cash
quickly and easily.

a. Fixed Assets c. Current Assets

b. Liability d. Equity

4. Net Working Capital is defined as:

a. Total assets minus liabilities

b. Total assets minus equity

c. Current assets minus long-term liabilities

5
 d. Current assets minus current liabilities

5. Inventory management refers to:

a. management and control of inventory

b. management and control of services, inventory, and equipment

c. control of supplies coming into the organization and supplies used

d. control of materials purchased.

Financial institutions encompass a broad range of business operations within the financial
services sector including banks, trust companies, insurance companies, brokerage firms, and
investment dealers. Virtually everyone living in a developed economy has an ongoing or at
least periodic need for the services of financial institutions.

Philippine Banks & Financial Institutions

Asian Development Bank

AsianBank Corporation
Bancnet
Asiatrust Bank
Bank of the Philippine Islands
BPI Family Bank
Citibank
Equitable Bank
Far East Bank and Trust Company
First Commercial Bank
First People's Bank
International Exchange Bank
Land Bank of the Philippines
Metropolitan Bank and Trust Company
Philippine Banking Corporation
PCI Bank
Philippine Deposit Insurance Corporation
Philippine National Bank
Prudential Bank
Rizal Commercial Banking Corporation
Security Bank
Solid Bank
TA Bank of the Philippines
Traders Royal Bank
Union Bank
United Coconut Planters Bank

Debt Financing

When a company needs money through financing, it can take three routes to obtain
financing: equity, debt, or some hybrid of the two. Equity represents an ownership stake in the
company. It gives the shareholder a claim on future earnings, but it does not need to be paid
back. If the company goes bankrupt, equity holders are the last in line to receive money. The
other route is debt financing—where a company raises capital by issuing debt.

6
 Debt financing occurs when a firm sells fixed income products, such as bonds, bills, or
notes, to investors to obtain the capital needed to grow and expand its operations. When a
company issues a bond, the investors that purchase the bond are lenders who are either retail
or institutional investors that provide the company with debt financing. The amount of the
investment loan—also known as principal—must be paid back at some agreed date in the
future. If the company goes bankrupt, lenders have a higher claim on any liquidated assets
than shareholders. Debt Financing vs. Interest Rates

Some investors in debt are only interested in principal protection, while others want a
return in the form of interest. The rate of interest is determined by market rates and the
creditworthiness of the borrower. Higher rates of interest imply a greater chance of default and,
therefore, a higher level of risk. Higher interest rates help to compensate the borrower for the
increased risk. In addition to paying interest, debt financing often requires the borrower to
adhere to certain rules regarding financial performance. These rules are referred to as
covenants.

Debt financing can be difficult to obtain, but for many companies, it provides funding
at lower rates than equity financing, especially in periods of historically low-interest rates.
Another perk to debt financing is that the interest on the debt is tax-deductible. Still, adding too
much debt can increase the cost of capital, which reduces the present value of the company.

Equity Financing

Equity financing involves selling a portion of a company's equity in return for capital.
For example, the owner of Company ABC might need to raise capital to fund business
expansion. The owner decides to give up 10% of ownership in the company and sell it to an
investor in return for capital. That investor now owns 10% of the company and has a voice in
all business decisions going forward.

The main advantage of equity financing is that there is no obligation to repay the
money acquired through it. Of course, a company's owners want it to be successful and provide
the equity investors with a good return on their investment, but without required payments or
interest charges, as is the case with debt financing.

Equity financing places no additional financial burden on the company. Since there
are no required monthly payments associated with equity financing, the company has more
capital available to invest in growing the business. But that doesn't mean there's no downside
to equity financing.

In fact, the downside is quite large. In order to gain funding, you will have to give
the investor a percentage of your company. You will have to share your profits and consult with
your new partners any time you make decisions affecting the company. The only way to
remove investors is to buy them out, but that will likely be more expensive than the money they
originally gave you

Firm- Up

7
Activity 2. Debt vs. Equity

Answer the following questions in a separate sheet of paper.

1.Give at least two advantages and two disadvantages of debt financing?

2.Give at least two advantages and two disadvantages of equity financing?

SOURCES AND USES OF SHORT-TERM FUNDS

Imagesource:bm=isch&ved=2ahUKEwjkoIO5nIHsAhWEHaYKHewEAXEQ2cCegQIABAA&oq=sources+of+funds&gs_lcp=CgNpbWcQ
AzICCAAyAggAMgIIADICC

Short-term funds are normally used to finance day-to-day operations of the company.
It is used for working capital requirements such as accounts receivable and inventories. It can
also be used for bridge financing where a company has some maturing obligations and does not
have enough cash to pay such maturing obligations. There are occasions when the
management of a company decides to borrow short-term loan to address this problem. The
following can be sources of short-term funds:

1.Suppliers’Credit

Suppliers of raw materials and merchandise are the best sources of short-term working
capital. This is the reason why a good relationship has to be nurtured with suppliers. As much
as possible, honor the credit terms. If you want the credit terms negotiated, the chances of the
suppliers agreeing to the request increase when your company has been a very good customer,
that is, paying the obligations on time. Some suppliers charge a small interest rate on their

8
deliveries to their customers if not paid on a certain date. They can also ask their customers to
sign promissory notes under certain circumstances.

2. Advances from Stockholders.

If you have personal assets and you control the company, advancing funds to the
company when there are financial requirements is an easy way for the company to raise funds.
Interest on these advances can be charged by the stockholder.

3.Credit Cooperatives.

To borrow from credit cooperatives, you have to be a member. Credit cooperatives

can lend as much as five times of your equity or contributions. If you own a company which is
in need of funds and you are at the same time a member of this credit cooperative, then, you
can borrow in your personal capacity from the cooperative and advance the proceeds from the
loan to your company. This practice, however, should not be encouraged because your
company must be able to raise money on its own merit.

4. Bank Loans.

Banks can provide both short-term and long-term loans. Some banks also provide
credit facilities, not just to big corporations, but also to small and medium enterprises.
Government banks, the Development Bank of the Philippines (DBP) and the Land Bank of the
Philippines (LBP), offer short-term credit facilities to small and medium enterprises. Private
banks such as Bank of the Philippine Islands (BPI) and Banco De Oro (BDO) also provide
working capital loans to small and medium enterprises. Securing loans from these credit
institutions may take some time as they have to do credit investigation. They also have to
evaluate the loanable values of the collateral that may be mortgaged to support a loan. Among
the collaterals that can be acceptable to banks possible sources of short-term funds:

5. Lending companies.

These are small lending normally to small and medium enterprises. The lending process much
faster as compared to banks but they charge higher interests, higher than the banks but lower
compared to a more informal lending popularly known as "5-6."

6. Informal lending sources such as "5-6."

This is a very expensive source of financing and should be avoided. The reason it is called "5-
6" because for every P5 that you borrow, you have to return P6. This 20% interest is just for a
month. Without interest compounding this translates to an annual interest rate of 240%. What
kind of legal business will provide a return of at least 240% a year? Therefore, this source of
financing should never be considered because you will end up working for the creditor.

9
Long-Term Sources of Finance
Image source: fund&tbm=isch&ved=2ahUKEwjzj7jEnIHsAhUKJqYKHalcCtIQ2-cCegQIABAA&oq=short+term+and+long+term+fund&gs_lc

Long-term financing means capital requirements for a period of more than 5 years to
10, 15, 20 years or maybe more depending on other factors. Capital expenditures in fixed
assets like plant and machinery, land and building, etc of business are funded using long-term
sources of finance. Part of working capital which permanently stays with the business is also
financed with long-term sources of funds. Long-term financing sources can be in the form of
any of them: Share Capital or Equity Shares, Preference Capital or Preference Shares, Retained
Earnings or Internal Accruals, Debenture / Bonds, Term Loans from Financial Institutes,
Government, and Commercial Banks, Venture Funding, Asset Securitization, International
Financing by way of Euro Issue, Foreign Currency Loans.

The following are the possible sources of long-term financing:

1.Equity investors.

Equity investors can be issued common stocks. This is the most patient source of
capital. As far as the company is concerned, this is the safest source of financing.
Unfortunately, it is not always available when the company needs it. Even big corporations have
to identify a correct timing or opportunity for them to issue more shares. For SMEs, there are
what we call venture capital companies who are willing to provide equity financing to small and
medium enterprises. Some of these even finance a start-up company but majority look for
companies which have already established a track record of operations.

2.Internally generated funds.

Instead of declaring cash dividends, the company can use internally generated funds
for expansion or to finance other types of capital investments. Based on the Corporation Code
of the Philippines, there is a limit regarding the amount of retained earnings that the company
can keep in its statement of financial position. Retained earnings cannot exceed 100% of the

10
value of common stocks or sometimes called paid-in capital. However, if the board can make a
resolution setting aside a specific amount of retained earnings for expansion, then this is
acceptable. There are other approaches on how to go about this provision in the law, but this
topic may be reserved for a more advanced subject in finance.

3.Banks.

Banks are sources of different types of financing from short term to long-term. They
provide lower interest rates as compared to other financial institutions but they have a lot of
requirements and a borrower goes through a process, normally taking a month to three months
before a loan gets approved.

4. Bond Market.

This market is gaining more popularity among our big publicly listed companies for
their fund raising activities. Philippine bonds are now traded through the electronic platform
provided by the Philippine Dealing System Holdings Corporation (PDS Group).

5. Lending companies.

These are the same lending companies previously discussed. Some of them also
provide long term loans ranging from two to five years. These lending companies can process
loans faster but they charge higher interest rate.

Deepen

Activity 3. Bank Lending

Answer the following questions in a separate sheet of paper.

1. How long does it take to process a loan application?

2. What are the general procedures in bank lending?
3. What are the common reasons encountered for rejecting a loan?

Non-Bank Financial Institutions

A non-bank financial institution (NBFI) is an institution that offers loans and financial
products but does not have a full banking license. These types of institutions are privately
owned which gives them more leverage and flexibility with the rates and fees they can offer
customers. This allows them to offer low-cost loans and generate competition in the banking
world, forcing the banks to lower their rates to compete.

Many people consider using an NBFI when looking to secure a small business, personal
or business loan. Some types of non-bank financial institutions include:

Insurance Companies

11
 Risk-pooling institutions like insurance companies work with economic risks such as
death, damage and risks of loss to make a return. The two main types of insurance companies
are general insurance and life insurance. General insurance is more of a short term contract
while life insurance is long term and is active until the insurer’s death.

Payday Lenders

Specialised sectoral financiers like payday lending companies and real estate financiers
provide short term loans and limited financial services to a targeted demographic. Payday
lenders can help with unsecured business loans and are a quick fix for borrowers. Those
struggling to get credit or with limited recourse to funds are more likely to use a payday lender
when securing a loan.

Financial Service Providers

Financial service providers are made up of management consultants, security and

mortgage brokers and financial advisors. They operate on a fee-for-service basis and offer
advice to investors and brokers. They improve informational efficiency for investors and offer a
transactions service for investors to liquidate their assets.

Institutional Investors

Institutional investors are organisations that trade securities in volumes that qualify for
lower commissions. This kind of non-bank financial institution can be found working with
pension funds and mutual funds.

Non-bank lenders are regulated and although they don’t hold a banking license, they
are still held to the same fair lending policies as banks. Compare your home loan offer from
non-bank institutions with bank lenders. One of the main reasons for using non-bank financial
institutions is eligibility. Non-bank lenders are more likely to give you a bigger line of credit than
a bank, who would take into account your earnings and expenditure. Be completely sure when
you take out a loan from a non-bank institution that you have the means to pay back the loan
and interest. It’s also important to check out the interest rates and comparison rates to avoid
any nasty surprises later down the track, and make sure the fees are suitable for you.

Transfer

Activity 4. Monetary!

1. What financial institution do you prefer when you want to establish/expand your
business? Why?

Post- Assessment

12
 I. Enumeration

Enumerate what is being asked for. Write your answer in a separate sheet of paper.

1. Give at least 4 examples of non bank institutions.

2. Give at least 5 examples of long tem sources of finances.
3. Give at least 5 examples of short term sources of finance.

13
References:

magesource:bm=isch&ved=2ahUKEwjkoIO5nIHsAhWEHaYKHewEAXEQ2cCegQIABAA&oq=sour
ces+of+funds&gs_lcp=CgNpbWcQAzICCAAyAggAMgIIADICC

Imagfund&tbm=isch&ved=2ahUKEwjzj7jEnIHsAhUKJqYKHalcCtIQ2-
cCegQIABAA&oq=short+term+and+long+term+fund&gs_lc

14