Business Finance Lesson 4.1

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Questions and Answers

What is the main purpose of Mutual Building and Loan Association (MBLA)?

To manage government employee pensions

To assist members in acquiring real estate (correct)

To accumulate investments for hedge funds

To provide loans for commercial properties

What type of financing does equity financing involve?

Crowdfunding without ownership stakes

Grants from government institutions

Loans with interest rates

Selling shares of the business (correct)

Which of the following best describes angel investors?

High-net-worth individuals supporting early-stage businesses (correct)

Banks lending to established companies

Government organizations providing loans

Groups pooling resources for equity financing

What is a key characteristic of Venture Capital (VC)?

It provides funding to startups with growth potential Signup and view all the answers

Which of the following methods is considered a form of internal financing?

Bootstrapping Signup and view all the answers

How do supporters contribute in donation-based crowdfunding?

By giving funds for charitable purposes Signup and view all the answers

What do lenders expect in a lending-based equity financing model?

Interest payments in periodic installments Signup and view all the answers

What differentiates reward-based crowdfunding from donation-based crowdfunding?

Investors expect rewards for their contributions. Signup and view all the answers

Which of the following does NOT fall under the 5C’s of Credit?

Credit Value Signup and view all the answers

What is the primary purpose of an Initial Public Offering (IPO)?

To raise capital for various uses Signup and view all the answers

Which term describes the situation where a business primarily relies on its own resources?

Bootstrapping Signup and view all the answers

Which of the following best describes a corporate investor?

A company that invests for ownership and control Signup and view all the answers

What does the 'Capital' factor in the 5C's of Credit assess?

The total resources available to the applicant Signup and view all the answers

Why do financial institutions need to ensure borrowers can repay their loans plus interest?

To satisfy depositors' withdrawal requests Signup and view all the answers

What does the 'Character' aspect of the 5C's of Credit evaluate?

The applicant's credit history as a borrower Signup and view all the answers

What is NOT typically considered when assessing the 'Conditions' of a loan application?

Borrower's past loans Signup and view all the answers

What is the primary purpose of determining the loan purpose in a loan application?

To ascertain the amount of loan and interest Signup and view all the answers

What type of information is crucial to establish the legal identity of the borrower?

Personal Data Information Signup and view all the answers

Which of the following documents serves to prove a borrower's sources of income?

Financial Statements Signup and view all the answers

What does a borrower’s credit history typically indicate?

The character and reliability of payments Signup and view all the answers

What is the significance of outstanding loans and other debts in a loan application?

They indicate the borrower's financial risk Signup and view all the answers

In a loan application, which of the following can be used as collateral?

Houses and cars Signup and view all the answers

Which of the following reflects a borrower's capacity to repay their obligations?

Financial Statements and Payslips Signup and view all the answers

What does the 'Credit History' signify for a borrower during the loan application process?

Past payment performance and defaults Signup and view all the answers

What describes equity financing?

Investors provide assets in exchange for ownership. Signup and view all the answers

Which of the following is NOT a characteristic of commercial banks?

Primarily serve only rural communities. Signup and view all the answers

What type of financing is typically referred to as 'love money'?

Debt financing from family and friends. Signup and view all the answers

Which financial institution type is likely to provide quick access to loans without comprehensive banking licenses?

Nonbank financial institutions. Signup and view all the answers

What is commonly a characteristic of thrift banks?

They cater to low-paid sectors offering uncomplicated loans. Signup and view all the answers

In the context of debt financing, what do nonbank financial institutions primarily do?

Offer investment and lending services. Signup and view all the answers

Which of the following is the primary role of a rural bank?

Address community's basic financial needs. Signup and view all the answers

What typically motivates an investor to engage in equity financing?

Interest in obtaining part ownership in the company. Signup and view all the answers

Which statement about debt financing is accurate?

It requires repayment with interest at a set future date. Signup and view all the answers

Which of the following correctly describes specialized government banks?

They are created to address specific financial needs. Signup and view all the answers

Study Notes

Sources of Funds Overview

Funding sources for businesses can be categorized into debt financing and equity financing.

Debt Financing

Involves borrowing money from external sources, with repayment plus interest required at a future date.
Represents the total monetary obligation of one party to another.

Types of Debt Financing

Bank Financial Institutions:
- Accept public deposits and offer varied loans.
- Governed by Bangko Sentral ng Pilipinas.
Family and Friends ("Love Money"):
- Ideal for startups; terms are flexible based on personal agreements.
Nonbank Financial Institutions:
- Lack comprehensive banking licenses and do not accept public deposits.
- Engage in investment, brokering, consulting, lending, and risk pooling.

Nonbank Financial Institutions Examples

Private Nonbank Financial Institutions:
- Offer loans including equipment financing and venture capital.
Government Nonbank Financial Institutions (GNBFI):
- Examples include GSIS, SSS, and PAG-IBIG, providing various financial services.

Equity Financing

Involves selling business shares for liquidity needs; results in ownership for investors.

Types of Equity Financing

Angel Investors:
- High-net-worth individuals supporting small businesses with capital and expertise.
Venture Capital (VC):
- Investments from wealthy individuals targeting startups with growth potential; can be structured as debt or equity.
Bootstrapping:
- Relies on internal funds with limited external experience.
Crowdfunding:
- Fundraising via online platforms, offering various models: donation-based, reward-based, lending-based, and equity-based.

Corporate Investors and IPOs

Corporate Investors:
- Companies investing in other businesses for partial ownership.
Initial Public Offering (IPO):
- A strategy to raise substantial capital for business expansion and other expenditures.

Loan Requirements

Financial institutions act as intermediaries, assessing borrowers' loan requests based on the 5 C's of Credit.

The 5 C's of Credit

Character: Assessing the borrower's credit history and reliability.
Capacity: Evaluating if the borrower can repay obligations.
Capital: Reviewing the applicant's financial resources.
Collateral: Ensuring backup assets can support repayment.
Conditions: Evaluating the financial situation and the purpose of the loan.

Basic Requirements for Loan Applications

Essential documents include:
- Loan purpose, personal identification, financial statements, credit history, outstanding loans, and collateral.
The loan purpose helps determine the amount and terms of the loan.
Financial statements provide evidence of income sources for repayment capacity.
Collateral can comprise assets like property, vehicles, or savings to secure loans.

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Description

This quiz focuses on the various sources of funds in business finance, specifically exploring debt financing. Learn the implications of borrowing money from external sources and the obligations that follow. Test your understanding of financial concepts essential for Accountancy, Business, and Management.