FM106 REV FINALS PDF

Module 4: Account Components of Financial Statement Profitability Analysis A.​ Balance Sheet -​ snapshot, financial health...

Module 4: Account Components of Financial Statement Profitability Analysis A.​ Balance Sheet -​ snapshot, financial health -​ shows what company owns/worth, how much Financial Analysis owes/stake helps identify and quantify the client’s Financial Risks -​ helps in forecast and prompts questions about possible operating risks. B.​ Income Statement Financial Statements -​ company's performance, profitability Purposes C.​ Statement of Cash Flow -​ Management report of the company’s financial -​ cash movements performance -​ helps analyst form opinion to company's ability -​ Measure management’s success or failure in running to generate cash the business. -​ projections are important in financing/expansion -​ Factors that have affected the company’s business. -​ Warning signals of existing and potential difficulties D.​ Statement of Changes in Owners' Equity -​ It shows the details of the increases or Requirements decreases in stockholders equity: -​ Historical – at least 4 years -​ Dividends distributed -​ Latest – obtain the latest AFS together with the -​ Increase in stock subscription or subscription Income Tax (ITR)filed with the Bureau of Internal paid- up Revenue (BIR) -​ Retained earnings -​ Audited – get FS audited by SEC accredited -​ Adjustments in retained earnings auditors, check if the opinion is Qualified or Not Qualified 4 most used Financial Ratio -​ Period Covered – 12 months ending December or A.​ Profitability and Performance Ratio Fiscal year. -​ Assessment of the viability of the business, survive in the long run Components of Financial Statement -​ continuous loss will erode company A.​ Balance Sheet Commonly used Ratios: B.​ Income Statement gross margin C.​ Statement of Cashflow tells you about the profitability of your goods and D.​ Statement of Changes in Owners' Equity services. It tells you how much it costs you to produce the product. 4 most used Financial Ratio -​ Profitability and Performance Ratio Operating profit margin -​ Liquidity & Financial Security Ratio takes into account the costs of producing the product or -​ Effectiveness of Working Capital Management services that are unrelated to the direct production of or Activity Ratios the product -​ Capital Structure / Leverage Ratios Return on Sales Financial Ratios measures how much of the sales/ revenues generated A tool in further understanding the movement of the translate to actual net profits. absolute figures found in the financial statements. Return on Equity assesses the company’s ability to effectively use the capital invested by the stockholders to generate an acceptable level of returns.  B.​ Liquidity & Financial Security Ratio D.​ Capital Structure / Leverage Ratios -​ refers to the speed with which an asset could be -​ describes the amount of debt that the firm has converted into cash used to finance its investments in assets. -​ short term obligation Commonly used Ratios: Commonly used Ratios: Total Debt Ratio Current Ratio It is a financial ratio that indicates the percentage of a measures if the company has adequate current assets company’s assets that are provided via debt. to cover its current liabilities. Debt-to-Equity Ratio Quick Ratio It is a financial ratio that calculates the weight of the Inventories are deducted from the Total Current Assets total debt and financial liabilities against total for a more conservative estimation of the company’s shareholder’s equity. liquidity position. Cash Ratio Technical words used in this lesson this ratio is used when there is doubt that the current and quick ratios can establish the Borrower’s very short- include: term ability to pay-off its current liabilities. fiscal year Liquidity / Financing Structure is a one-year period that companies and governments assess how the company finances its long term and use for financial reporting and budgeting. other non- current assets. -​ A good liquidity ratio is greater than 1. EBITDA - or earnings before interest, taxes, depreciation, and Cash Debt Service Cover ratio amortization measures adequacy of the company’s cash flow to - is a measure of a company's overall financial cover debt service requirements. performance and is used as an alternative to net income -​ The higher the cash DSCR, the lower the risk to in some circumstances. the lender. EBIT C.​ Effectiveness of Working Capital - Earnings before interest and taxes Management or Activity Ratios - are an indicator of a company's profitability. EBIT is also referred to as operating earnings, operating profit, Working Capital and profit before interest and taxes. pertains to the amount of money available during the business cycle allowing the business to operate daily. EBT - Earnings before tax Commonly used Ratios: - measures a company's financial performance. Collection Period It is the amount of time it takes for a business to receive payments owed by its clients in terms of account receivable. Payment Period It is the period from the point of debt is incurred to the due date of the repayment. The asset turnover ratio measures the efficiency of a company’s assets to generate revenue or sales.  its lenders that the company will operate within certain Module 5: Terms, Conditions rules set by the lenders. and Loan Covenants Loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain The main points covered in this module include: conditions, or which forbids the borrower from -Concept of loan / debt covenants undertaking certain actions or which possibly restricts -Purpose and types of loan covenants certain activities to circumstances when other conditions -Benefits of covenants to lenders and borrowers are met. -Example of financial covenants -Things to do in case of breach of covenants -Actual example of a terms, conditions and covenants Types of Loan Covenants governing personal loan There are generally 2 types of loan covenants: What is a Loan or Debt Covenant? 1.​ Positive/affirmative Debt Covenant Any loan agreement negotiated between a lender and a 2.​ Negative Debt Covenant borrower is likely to come with a list of stipulations known as debt covenants. Terms stated in loan agreements that deal with a company’s financial performance, whether negative or These are the requirements and conditions imposed by positive, usually are referred to as financial covenants. the lender that the borrower promises to abide by until the loan is repaid. Positive debt covenants state what the borrower must do to remain in good A covenant therefore is simply a fancy term for the standing with the lender or is a clause in a loan contract word ‘promise’. Banks include covenants in their loan that requires a borrower to perform specific actions. agreements to preserve their position as the lender and Example, to improve the likelihood that a loan will be paid back by (1) a lender might require the borrower to always the business owner/borrower on time, in full, and in maintain a certain minimum level of working capital or accordance with the loan’s terms and conditions. keep financial ratios within specified ranges, or (2) include requirements to maintain adequate levels of A covenant is a commitment, promise, agreement, or insurance, requirements to furnish audited financial contract between two parties. As part of the covenant, statements to the lender, compliance with applicable the two parties agree that certain activities will or will not laws, and maintenance of proper accounting books and be carried out. credit rating, if applicable. Covenants in finance most often relate to terms in Negative debt covenants financial contract, such as a loan document or bond are put in place to make borrowers refrain from certain issue stating the limits at which the borrower can further actions that could result in the deterioration of their lend. credit standing and ability to repay existing debt. Detail borrower actions that the lender prohibits or forbid that In business, covenants are most often represented in something might happen in the future. The agreement, terms of financial ratios that must be maintained such for instance, might prohibit the borrower from using as maximum debt-to-asset ratio or other such ratios. company funds to acquire another company. Covenants are legally binding clauses, and if breach Example trigger compensatory or other legal action. include restricting a company from issuing dividends to its shareholders, restricting management fees from Debt covenants are restrictions that lenders (creditors, being paid to related parties or restricting the amount of debt holders, investors) put on lending agreements to debt a business can carry. limit the actions of the borrower (debtor). In other words, Debt covenants are agreements between company and What Is the Purpose of a Debt Here are examples of typical financial covenants lenders use in loan agreements: Covenant? Debt payments to Earnings Before Interest, Taxes, Debt covenants protect the lender by prohibiting certain Depreciation and Amortization (EBITDA) actions by the borrowers. They identify the “red flags” This ratio is key for lenders. It is calculated by dividing that will be used to indicate problems in a business that EBITDA by annual principal plus interest payments of might impair its ability to repay a loan. the loan. A ratio of 3:1 typically is a good ratio to have. That said, covenants aren’t meant to place unnecessary burdens on the borrower or hinder the operations of the Anything less, and a borrower could begin to have business. problems meeting their debt obligations. How Debt Covenants Benefit the Interest Coverage Ratio Borrower This is calculated by dividing EBITDA by the interest payments on loans. It should be in the range of 3 or Borrowers mainly benefit from debt covenants by more for adequate coverage. It doesn’t include any receiving lower borrowing costs. When borrowers agree allowance for principal payments. to certain restrictions on a loan, lenders are willing to lower interest costs and fees because their risks are Debt-to-Equity Ratio reduced. They are used to align the interests of the This is the ratio of total debt to a company’s equity principal and agent, as well as solve agency problems capital base. Lenders are generally comfortable with P1 between the management (borrower) and debt holders in debt for each P1 in equity. In some industries, higher (lenders). debt ratios are acceptable. Negotiating a loan agreement with a lender can be a Debt-to-Total Assets Ratio learning experience for borrowers who don’t have This ratio tells how much of a company’s assets are financial backgrounds. The positive and negative loan financed by creditors. In this ratio, debt includes long- covenants imposed by lenders tell borrowers which and short-term business loans plus all current liabilities. financial indicators they should be looking at in the operations of their businesses, which can make them Tangible Net Worth more successful in the long run. Tangible net worth is the net worth of a company excluding intangible assets such as intellectual property, How Debt Covenants Benefit the patents and copyrights. It represents the physical assets Lender of a company. Debt covenants protect lenders by restricting specific Dividend Payout Ratio actions by borrowers that could have adverse effects on The number of dividends paid to shareholders in their ability to repay the loan. relation to the amount of net income a company brings This reduces the overall risk for creditors by giving them in. This ensures the company doesn’t give too much to recourse in case there is a breach of debt covenants. shareholders, which can inhibit its ability to repay loans. Debt Covenant Examples Current Ratio All businesses need an adequate amount of liquidity to Debt covenants come in many forms depending on the pay vendors, purchase supplies and meet payroll. A lender, the state of your business and the details of the ratio of P2 in current assets for each P1 in current loan. liabilities is good. Some of the most common are based on a borrower keeping its financial ratios and spending within ranges that the lender is comfortable with. Examples of Positive Debt Covenants Sell key assets If a business gets tight on cash, the lenders don’t want Not all debt covenants are related to a borrower’s the company to start selling assets to meet loan specific financial numbers. Here are some examples of payments positive debt covenants: Make loans to insiders or affiliates Present financial statements annually within a Lenders see insider loans as an underhanded way to specified time frame take cash out of the business. Lenders require financial statements to make sure the company is in compliance with all financial loan Mergers and acquisitions covenants Lenders don’t want owners making major, potentially disruptive changes to the core business Maintain life insurance policies on key employees The loss of certain employees, such as a sales manager or production supervisor could cause a serious A Breach of Debt Covenants: What setback for the company Happens Next? Keep all facilities in good working condition Companies that don’t take pride in their property and A debt covenant violation creates a legal breach of equipment are typically inattentive to other aspects of contract between the borrower and lender. The their business consequences of violating the debt covenant can be severe. Pay all property and income taxes on time Tax liens can take precedence over repaying loans Here are some actions that lenders might take on your loan: Maintain property insurance and a reasonable amount of liability insurance Request an increase in the amount of collateral A disastrous uninsured loss from a fire or flood could Raise the interest rate ruin the business and wipe out any chance to repay Impose immediate penalty payments creditors. Terminate the loan agreement Accelerate the loan and demand immediate repayment Examples of Negative Debt Covenants If a borrower is having difficulty meeting loan payments Here are examples of negative debt covenants, or and is becoming noncompliant with debt covenants, the restrictions on what a borrower can do: best course of action is to meet with the lender and ask for waivers. Lenders aren’t anxious to call their loans for Incur additional debt immediate payment and would more than likely be Lenders don’t want to have to compete with other willing to work out the situation. creditors to be repaid Lenders want borrowers to be successful because that Make a change in ownership improves their chances of getting the loan repaid and Owners of small businesses are the founders and working with them again. creators of the company and the loss of any of them could be devastating to the survival of the business. Any Below is an example of Terms and Conditions changes in ownership would need the lender’s approval governing personal loan. The lender or the bank cannot proceed with the release of the loan without a Enter into certain types of lease agreements confirmation from the borrower that he/ she fully Lease agreements require payments and additional understand and agrees the terms, conditions and loan payments would put more burden on the company’s covenants stipulated in the promissory note. cash flow. Confirmation is being done by affixing the borrower’s signature in the credit instrument such as promissory Other Deeds. The Borrower shall execute and deliver such further instruments note and disclosure statement. and perform such other acts as the Bank may deem necessary or proper to more effectively carry out the intention of this PN; and Sample Terms and Conditions of a Loan Fees. The Borrower shall pay any and all taxes, fees, and expenses in TERMS AND CONDITIONS GOVERNING connection with the execution of this PN, including any extension, EASTWEST PERSONAL LOAN renewal, amendment, or cancellation of this PN. Fees and charges which are deducted from the loan proceeds shall be non-refundable in any case. IMPORTANT: Please carefully read these Terms and Conditions Governing EastWest Personal Loan that Performance of Agreement. constitute the Agreement between East West Banking The Borrower shall pay the Obligation and perform all covenants Corporation ("Bank") and the Borrower. By signing the and agreements set forth in this PN. Promissory Note, the Borrower acknowledges receipt of a copy of the instrument including the Disclosure Statement on 5. Due Date. loan transaction and loan amortization schedule prior to the If the due date of this PN or of any installment payable hereunder consummation of the credit transaction. The Borrower further falls on a holiday or a non-working day, the Due Date shall be understood to be the immediately following business day. confirms that he/she has read, fully understands and fully agrees with the Terms and Conditions of the Promissory Note 6. Adjustment. and acknowledges that he did not sign the instrument with If there is any extraordinary increase or decrease in the effective any blank space thereon. purchasing power of the Philippine currency, the Bank shall have the right to make corresponding adjustments in the interest rate under 1.​ The Obligation. this PN which, except for manifest error in the computation thereof, The Obligation refers to the obligations arising from the loan shall be conclusive upon the Borrower. A change of at least fifteen extended by the Bank to the Borrower under this Promissory Note percent (15%) in the Consumer Price Index (“PN”), including increases, renewals, extensions, restructurings, for Manila from the date of this PN as set forth in the figures amendments, or novations thereof. The Obligation shall include the released by the Bangko Sentral ng Pilipinas (“BSP”), or other principal, interest, penalties, fees, and other charges that appear in agencies of the Philippine Government should the figures of the BSP the accounts, books, and records of the Bank, whether direct or be unavailable, shall be regarded as an extraordinary increase or indirect, principal or accessory, contingent or otherwise, which are decrease in the effective purchasing power of the Philippine presently or hereafter owing to the Bank, and all expenses which the currency. If the Borrower disagrees with the adjustment, the Bank may advance or incur in enforcing any of its rights, powers, Borrower shall, subject to Section 8 hereof, have the right to prepay and remedies under this PN. this PN within thirty (30) days from receipt of the notice of adjustment from the Bank. If 2.Applicability of the Terms and Conditions of the Promissory the Borrower does not prepay this PN within the said 30-day period, Note. the Borrower shall be deemed to have agreed to the adjustment. Whenever this PN refers to the Borrower, the same shall also refer to the Co-Borrower. Therefore, all obligations of the Borrower under 7. Additional Taxes and Statutory Fees. this PN shall also be deemed the obligations of the Co-Borrower. Any additional taxes, fees, and charges that may be imposed on the Obligation under this PN, pursuant to law, executive issuances, or 3.Representations and Warranties of the Borrower. other rules and regulations enacted and issued by the Philippine The Borrower represents and warrants that: Government, its agencies and other instrumentalities during the This PN has been authorized by all necessary acts and deeds, and effectivity of this PN, shall be automatically included herein and the when executed and delivered as contemplated herein, will be valid Borrower shall be liable for these additional charges without and binding in accordance with its terms and conditions; and necessity of executing any notice, new agreement or other There is no pending, impending, or threatened action or proceeding document. The Bank shall have the right but has no obligation to before any court or government agency which may materially and apply any installment payment for the payment of these additional adversely affect the financial condition or capacity of the Borrower to taxes, fees, or charges. promptly and fully pay the Obligation and such capacity shall remain unimpaired. 8. Continuing Liability. The Borrower shall continue to be liable with respect to his/her 4.Borrower Covenants and Undertakings. obligations to the Bank during any extension or renewal, in whole or The Borrower covenants and undertakes that: in part, of this PN and/or following a partial payment of this PN, and/or following any change in the interest rate or other terms and Use of Loan Proceeds. conditions of this PN as a result of such extension, renewal and/or The proceeds of his/her Personal Loan will not be used for any partial payment, without the necessity of executing a new purpose or in any endeavor which is against Philippine laws, rules or promissory note. regulations. Furthermore, the proceeds of his/her Personal Loan will be used for the purpose stated on his/her application. 9. Loan Processing Fee. 12. Check Disposition. The Borrower shall pay a one-time fee imposed to answer for the Checks issued by the Borrower which the Bank will no longer cost of processing the loan application. The loan processing fee negotiate due to replacement, payment over the counter or for any shall be One Thousand Nine Hundred Pesos (Php1,900.00) and other reason shall be destroyed within a period of thirty (30) days shall be deducted from the loan proceeds. from the date of check replacement or Borrower’s notification of pre-payment, full payment, or payment over-the-counter duly 10. Prepayment. supported by the proof of payment without notice to the Borrower. In the case of prepayment of this PN, the outstanding net obligation The Borrower holds the Bank free and harmless from any liability in shall be computed based on the principle of diminishing balance. If connection with the destruction of the checks. the Loan is prepaid before maturity, the Borrower is entitled to an interest rebate (where the computation is also based on the principle 13. Payments. of diminishing balance). The Borrower, however, will be charged a Check payments received after clearing up the cut-off time shall be processing fee equivalent to Five Hundred Pesos (PhP500.00) or valued the next banking day. Payments made by check or other eight percent (8%) of the principal balance of the Obligation, negotiable instruments shall produce the effect of payment only whichever is higher. Furthermore, whenever applicable, the when the same shall have been cleared. Acceptance by the Bank of Borrower shall be charged the cost of any item given to him as an payments made after the Borrower has delayed or defaulted in the incentive for the availment of a Personal Loan in accordance with performance of his/her obligations shall not prejudice the Bank’s the terms and conditions governing the grant of such incentive. rights to claim full payment and exercise its rights and remedies Prepayment of this PN shall be processed and posted only after the under this PN or prejudice pending legal actions filed by the Bank. Borrower have paid the prepayment processing fee, the outstanding Acceptance of late or partial payments shall not be construed as a net obligation and the cost of any item given to the Borrower as waiver or estoppel on the part of the Bank. incentive for the availment of a Personal Loan, if applicable, through Payment/s made by third person/s shall not constitute a novation of any of the Bank’s branches. Proof of payment of said items must be the original loan agreement. submitted to the Bank at least ten (10) banking days before the due date of his/her next amortization. Failure of the Borrower to submit 14.Default. the proof of payment of said items within the prescribed time shall Each of the following events, irrespective of the reasons for its entitle the Bank to deposit the post-dated check issued by the occurrence or whether it is voluntary or involuntary, constitutes an Borrower for the next amortization and the Borrower shall hold the event of default: Bank free and harmless for any fees, charges, and losses that the Failure to pay on a due date any installment, interest, penalty, or Borrower may incur in case such post-dated check is deposited by amount payable under this PN, whether at maturity, by acceleration the Bank. The Borrower hereby authorizes the Bank to destroy any or otherwise; and all post-dated checks issued by the Borrower to the Bank in Failure to perform any of the terms and conditions of this PN or of connection with the Obligation and/or this PN thirty (30) days after any agreement evidencing indebtedness; Death of the Borrower; receipt by the Bank of the proof of payment of the prepayment Severance or termination of employment of the Borrower; The processing fee, the outstanding net obligation and the cost of any insolvency of the Borrower, the making by the Borrower of a general item given to the Borrower as incentive for the availment of a assignment for the benefit of other creditors, the commencement by Personal Loan. The Borrower hereby agrees to hold the Bank free or against the Borrower or any proceeding for insolvency, and harmless from any liability in connection with such destruction of suspension of payments, appointment of receiver, foreclosure, or the the subject post-dated checks. issuance of a writ or order of attachment, garnishment, execution or similar act against the property, assets or income of the Borrower; 11. Check Retrieval and Replacement. Any information, representation, or warranty made by the Borrower Retrieval and replacement of post-dated checks initially issued by in connection with the Obligation shall become or shall prove to have the Borrower to the Bank upon claiming by the Borrower of his/her been false when so made, given or furnished, including the use of loan proceeds shall be charged a fee of Two Hundred Pesos the loan or a purpose other than that stated in this PN; or (PhP200.00). Check retrieval and replacement shall be processed The Bank's good faith belief at any time that the prospect of only after the Borrower shall have paid the check retrieval and payment of the Obligation or the performance of this PN is impaired replacement fee through any of the Bank’s branches and submitted as shown by a default with respect to other obligations of the the complete replacement checks and proof of payment of the check Borrower to the Bank under any other credit accommodation, the replacement fee to the Bank at least ten (10) banking days before sale or disposition of any substantial portion of the assets or the due date of the Borrower’s next amortization. Should the property of the Borrower, a default in any obligations of the Borrower Borrower fail to submit the complete replacement checks and proof to a third party, or such other circumstances and conditions which of payment for the check retrieval and replacement fee within the materially and adversely affect the financial standing of the Borrower prescribed time, the Borrower must settle his/her next amortization or the ability of the Borrower to perform his/her obligations under this by funding the checking account from which he issued his/her PN. original post-dated checks or through an over-the-counter payment at any of the Bank’s branches. The Borrower shall not hold the Bank 15. Remedies. liable for any fees, charges, and losses that the Borrower may incur Upon the occurrence of any event of default, the Bank shall have all in case any post-dated check intended to be replaced by the the rights and remedies available under the law, including but not Borrower is deposited by the Bank due to the Borrower’s failure to limited to: submit the said requirements for check replacement within the -​ Acceleration. The Bank may, without notice or demand to the prescribed time. Borrower, accelerate the payment or performance of any or all of the obligations of the Borrower hereunder. -​ Right to Set-off. All deposits, placements, or other properties of the installments or as a modification of the conditions hereof. No belonging to the Borrower that are in the possession, custody, failure, omission, or delay on the part of the Bank in exercising any or control of the Bank may be applied by the Bank to the of the said rights, privileges, and remedies shall operate as a waiver payment of the Obligation without need of further notice to the thereof. No modification or waiver of any provision or consent by the Borrower. The Bank is hereby irrevocably constituted and Bank shall be effective unless the same shall be in writing. appointed the attorney-in-fact of the Borrower, with full power and authority and without prior notice, to debit from and set-off 21.Assignment. or apply to the payment of the Obligations any funds which the The Bank may assign, cede, sell, or otherwise transfer part or all its Borrower may have deposited with the Bank, or which the Bank rights and/or obligations under this PN. The Borrower will be notified may have in its possession or control, including all or any in the manner provided under Section 23 hereof in event of any interests or other income which may accrue thereon, including completed assignment, sale or transfer of part or all of the rights but not limited to time deposit accounts and/or long-term and/or obligations under this PN. investments, which the Bank is hereby authorized to pre-terminate accordingly, to convert the funds into 22.Venue of Actions. Philippine peso if denominated in foreign currency at the All actions for the enforcement of the rights and obligations under prevailing exchange rate at the time of set- off or this PN shall be filed in the proper courts of Metro Manila; all other pre-termination, it being understood that all taxes, expenses, venues are hereby waived. and charges arising from the pre-termination or the account or investment shall be shouldered by the Borrower. 23. Notices. -​ Cumulative Rights. The Bank’s rights hereunder are All notices and correspondence relative to this PN, including but not cumulative and not alternative. limited to demand letters, summonses, and subpoenas, shall be sent to the Borrower’s address above stated or to such other address as 16.Late Payment Fee (LPF). the Borrower may hereinafter give in writing to the Bank. The mere In the event any installment to or advance made by the Bank is not act of sending any communication by mail or personal delivery to paid when due or when this PN is deemed in default, the Borrower is said address shall be valid and effective notice to the Borrower for liable to pay the Bank an LPF equivalent to Five Hundred Pesos all legal purposes. The fact that such notice or communication is not (PhP500.00) per month or eight percent (8%) per month of the past actually received by the Borrower, or has been returned unclaimed due amount, whichever is higher, with a fraction of a month to be to the Bank, or that no person is found at said address or that said considered as one (1) whole month, until such time the unpaid address is fictitious, shall not excuse the Borrower from the effects installment, the advances made by the Bank, or the whole sum of such notice or communication. remaining unpaid, as applicable, is paid in full. 24. Severability. 17. Collection and Litigation Fees and Expenses. The unenforceability or invalidity of any provision of this PN by a If the Bank is compelled to engage the services of a collection agent court of competent jurisdiction shall not affect the validity, legality, or attorney to enforce any of its rights under this PN, the Borrower and enforceability of the remaining provisions. shall pay the Bank the reasonable costs and expenses of engaging such collection agent and/or lawyer and such other expenses 25. Effect of Agreement. reasonably incurred by the Bank in recovering such payment and The rights and privileges of the Bank hereunder shall inure to the enforcing its rights under this PN. benefit of its successors and assigns, and the duties and obligations of the Borrower shall bind his heirs, representatives, successors, 18. Application of Payment. and assigns. The Borrower waives his/her right to make application of payment under Article 1252 of the Civil Code and the Bank shall have the 26. Cooling Off. right to apply payments made by the Borrower to any of his/her The Borrower is granted a “cooling off” period of seven (7) banking obligations to the Bank, regardless of the source and nature of the days immediately following the signing of the loan documents to said obligation. Payments for the Obligation shall be applied in the cancel the loan without penalty, subject to an administrative following order: (1) first to the expenses or payments advanced or processing fee of One Thousand Nine Hundred Pesos incurred by the Bank, (2) to the fees and charges imposed on the (Php1,900.00) and provided that the Manager’s Check issued to the Obligation; (3) to penalties incurred; (4) to the interest then accrued Borrower will be returned to the Bank and that no drawdown has and unpaid, and; (5) the remainder, to the principal balance. been made on the loan. The cancellation shall be communicated to the Bank through a written notice. 19. Change of Borrower’s Information. The Borrower shall immediately notify the Bank in writing of any 27. Amendments. change in his/her Personal Data (including civil status, residence, The Borrower agrees that the Bank may change any of the office and/or residence address and/or telephone number/s, and all provisions in this PN, including but not limited to the data privacy related information) and change of his/her financial status which may policy, and/or the Fee Schedule, from time to time and the Borrower prejudice or adversely affect his/her being a Borrower. agrees to be notified of such changes through notice sent through any of the following means, at 20. No Implied Waiver. the option of the Bank unless the Borrower requests otherwise: (i) The exercise of the rights, privileges, and remedies in this PN shall mailed and/or emailed notices (sent to the Borrower’s mailing or be at the discretion and option of the Bank. Acceptance by the Bank email addresses indicated in the Bank’s records), (ii) notices posted of payment of any installment or any part thereof after any due date at the Bank’s branches, or (iii) notices in the Bank’s website, and the shall not be considered as extending the time for the payment of any Borrower agrees to be bound by such changes unless the Borrower expressly notifies the Bank otherwise through the contact subsidiaries, affiliates, agents, representatives and third parties, to information provided by the Borrower. The Bank’s non-receipt of conduct verification with the BIR, any other appropriate government advice from the Borrower within thirty (30) days from receipt of agency or third party including banks and financial institutions, to notice from the Bank in relation to said changes shall be deemed the establish the authenticity of the information he/she declared and the Borrower’s agreement to all such changes or modifications. Where documents he/she submitted in relation to his/her application as it such Amendments are to the Fee Schedule or affect the fees and may be necessary for the processing and evaluation of his/her charges and the Borrower’s liabilities or obligations under this PN, application and he/she hereby waives any rights on the the Borrower will be given not less than thirty (30) days’ notice confidentiality of his/her income information as required by BSP before the Amendments take effect unless such changes are not Circular 622, as amended by BSP Circular 855. The Borrower within the Bank’s control. further consents and authorizes the disclosure of personal and sensitive personal information by the Bank, provided that such 28. Complaints. disclosure is in accordance with the provisions of Republic Act (R.A.) The Borrower must immediately communicate to the Bank upon No. 10173 or the Data Privacy Act of 2012, its Implementing Rules his/her knowledge of a possible cause of complaint, unauthorized and Regulations, and other rules and regulations relating to data application, or any dispute regarding his/her loan account through privacy,including the Bank’s Data Privacy Policy published in its EastWest Bank's 24-Hour Customer Service at (+632) 8888-1700 or website. e-mail [email protected]. The Bank shall acknowledge the complaint/dispute no later than two (2) banking days upon 31. Account Maintenance and Servicing. receipt of report by responding to the said complaint/dispute or The Borrower hereby authorizes the transfer, disclosure and requiring from the Borrower additional information or such other communication of the Bank of any information, including personal instructions as may be necessary to properly resolve it. and sensitive personal information, relating to his/her account/s with the Bank together with all of the documents submitted for his/her 29. Agreement. application to any of its offices, branches, subsidiaries, affiliates, The Borrower acknowledges that he/she has fully read and agents, representatives of the Bank and third parties for application understood the Terms and Conditions Governing EastWest Personal processing, data processing/storage, customer satisfaction surveys, Loan, and the Data Privacy Policy as published in the Bank’s and for any other purpose as the Bank may deem appropriate, website: https://www.eastwestbanker.com/info/ew_privacy.asp. The and/or as described in the Bank’s Data Privacy Policy, and as may Borrower agrees to abide by and be bound by the said Terms and be required by law or regulation. The Borrower hereby also Conditions and Data Privacy Policy, any and all amendments thereto authorizes the regular submission and disclosure to any and all as well as all laws, rules, regulations, and official issuances credit information service providers listed in the Bank’s Data Privacy applicable to the Bank which may hereinafter be issued, including Policy published in its website, of any information, whether positive other terms and conditions governing the use of other facilities, or negative, relating to his/her basic credit data (as defined under benefits, products or services which shall be made available to Republic Act No. 9510) with the Bank, as well as any updates or him/her. The Borrower hereby certifies that all information and corrections thereof. The foregoing constitutes his/her written consent documents given are complete, true and correct, and the signatures for any such submission and disclosure of information relating to therein are genuine. The Borrower understands that non-disclosure his/her account/s for the purpose indicated above and under and/or falsification of information and documents herein required applicable laws, rules and regulations. The Borrower agrees to hold shall be grounds for the filing of legal action/s against him/her, as the Bank free and harmless from any liabilities that may arise from may be appropriate under the circumstances. any transfer, disclosure or storage of information relating to his/her account/s. 30. Disclosure and Sharing of Information. The Borrower consents and authorizes 32. Marketing and Sales Offers. the Bank to disclose information relating to the Borrower, the The Borrower hereby authorizes the transfer, disclosure, and Obligation and/or the performance of the Borrower’s obligations communication of the Bank of any information, including personal under this PN to the Bank’s subsidiaries, affiliates, agents, and third and sensitive personal information, relating to his/her accounts with parties that are authorized by the Bank to receive such information, the Bank together with all of the documents submitted for his/her for confidential use in connection with the Bank’s exercise of its application to any of its offices, branches, subsidiaries, affiliates, functions to provide banking and related services. The Borrower also agents, representatives, and third parties for product and service consents and authorizes the Bank or the parties to whom the Bank offers to be made to him/her through mail/e- mail/fax/SMS/telephone makes the disclosure to collect, process, store, record, organize, or through other forms of media, and for any other purpose as the update, modify, block, erase and destroy information obtained from Bank may deem appropriate, unless the Borrower expressly notifies third parties in connection to Borrower’s Obligation. The Borrower the Bank otherwise through the following contact information: further consents and authorizes the Bank to disclose, receive, process information for any business purposes (including but not limited to sales and marketing, credit investigation and collection, The Borrower agrees that such disclosure or exchange of information technology systems and processes, data processing, information shall not be the basis of any claim against the Bank or imaging and storage, back-up and recovery, and statistical and risk the parties to whom the Bank makes the disclosure. analysis purposes). The Borrower hereby gives permission for the Bank to request information and to make necessary inquiries about The Borrower agrees and authorizes the Bank to enroll his/her the Borrower from third parties in connection with any of the personal loan account in the Bank’s online banking facility. Borrower’s Obligation, including its updates, renewals, re-issuance, or extensions. Processing of Application.The Borrower hereby For purposes of this authority to verify and disclose information, the consents and authorizes the Bank, any of its offices, branches, Borrower waives confidentiality of any such information relating to him/her and/or his/her business under applicable laws such as but 4.​ Negotiation not limited to Republic Act Nos. 1405, 6426 and other laws relating -​ The word negotiation is derived from a Latin to the secrecy of bank deposits. word negōtiārī and simply means the art of dealing with people. Through negotiations you Technical words used in this lesson include: can resolve problems, since most problems arise from unmet needs. Working Capital the amount of money a company has available to pay 5.​ Goal-oriented for day-to- day functions. This equation forms an -​ understands that their personal success is linked essential part of financial modeling, and it refers to a to their organization’s success and therefore company’s ability to pay off its short-term debts. aims to achieve their goals on a personal level. Delinquent promissory note describes something or someone who fails to is a financial instrument that contains a written promise accomplish that which is required by law, duty, or by one party (the note's issuer or maker) to pay another contractual agreement, such as the failure to make a party (the note's payee) a definite sum of money, either required payment or perform a particular action. on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the A debt becomes delinquent when: indebtedness, such as the principal amount, interest -​ Payment is not made by the due date or the end of rate, maturity date, date and place of issuance, and the “grace period” as established in a loan or issuer's signature repayment agreement, in the case of a debt being paid in installments. The date of delinquency is the disclosure statement payment due date. may also refer to a document outlining the specific terms and conditions of a loan, including its interest -​ Payment is not made by the due date specified in the rate, any fees, the amount borrowed, insurance, and initial billing notice, in the case of administrative any prepayment rights and the responsibilities of the debts such as fines, fees, penalties, and borrower. overpayments. The due date is usually 30 days after the agency mailed the notice. The date of delinquency is the date the agency mailed or Module 6: Collection System delivered the billing notice. Various Types of Delinquent Debtors 5 Traits Any Debt Collector Should Master 1.​ The Negligent 1.​ Communication 2.​ The Boaster/Debtor boasts of being well -​ you put yourselves in a position to resolve connected with powerful people differences while you build a trust relationship 3.​ Heavily Leveraged Debtor between you and them 4.​ Seasonal Delinquent 5.​ Debtor who deliberately commits fraud 2.​ Persistence 6.​ Chronically Slow -​ there is no such thing as overnight success. To 7.​ Wittingly Late be successful you will need to define some goals 8.​ Stretcher and be persistent in carrying them out. 9.​ Tightrope Walker 10.​Vanishing Debtor 3.​ Empathy -​ A successful debt collector must have the ability to view the situation from the clients’ PRINCIPLES OF COLLECTION perspective.  1.​ Collect the Money The primary job of the person responsible for collecting 1.​ Client Call Checklist is to collect the money as close to the terms of the -​ Plan your call- know your creditor and his policies obligation as possible. There should never be any doubt -​ Have all the information materials ready as to why the individual is engaged in this task. -​ Make the call 2.​ Systematic Follow-up 2.​ Opening the Call-Tips After the initial contact with the delinquent customer, it is -​ Be positive important to keep additional contacts on a strict -​ Identify the person you are talking with schedule. -​ Identify yourself -​ State the reason for your call 3.​ Discussing the Account 3.​ Body of the Call Once the collector gets the customer to talk about the -​ Ask and get information for causes of non- delinquent account, the collector is well on the way to payment receiving payment. -​ Request for his repayment plan -​ Give the debtor alternative courses of action 4.​ Preserve Goodwill -​ Tell him the benefits of your suggestions Even though the customer may be experiencing some -​ Overcome objections difficulty in meeting payments, it does not preclude them -​ Use trial closes from becoming a good customer in the future. 4.​ Statements that Collect TOOLS AND AID IN COLLECTION -​ You want to maintain a good credit record. a.​ STATEMENT OF ACCOUNT -​ You need a good credit record in business. -​ It must request payment -​ Show your good faith by paying the account -​ Inform the debtor how much he owes now. -​ Itemize the loan or debt -​ Unless you pay the amount due, we will be -​ Easy to understand constrained to undertake drastic action to -​ States’ due date, interest rates and penalty charges recover our fund exposure. -​ Do you want your loan account to be referred to b.​ COLLECTION LETTER an attorney? -​ It must be concise and direct to the point -​ You will save on litigation expenses if you will -​ Should give the debtor a chance to state his settle the loan amicably. repayment problems -​ Should request the debtor to give his repayment plan at the same time his commitment to comply BASIC COLLECTION APPROACHES with it 1. Educate the debtor of the credit policies and -​ It should contain details of the loan procedures of the creditor. -​ It should mention any penalty under the law if the loan remains unpaid. For example: penalty charges will be imposed once payment is not done on time. c.​ TELEPHONE OR CELL PHONE CALLS -​ Plan your calls and strategize on how to persuade 2. Firm persuasion done in the a friendly atmosphere the debtor to pay -​ Speak clearly and talk at the debtor’s language level 3. Assist the debtor if he has repayment problems with -​ Pay attention to the debtor’s story and do not the end in view of formulating a mutually acceptable interrupt repayment plan -​ Persuade the debtor to commit to a time-bounded repayment plan 4. Use coercion in collection under applicable laws -​ Remember to persuade the debtor to do the next step in the process of loan collection. WISE TIPS FOR COLLECTING LOANS 4.​ Sale of free assets 1.​ Give the debtor a clear choice of action It involves sale of debtor’s other free assets and the proceeds to be applied to the loan. 2.​ Prefer a short repayment term to minimize risks of payment defaults 5.​ Dacion en pago (Payment in kind) It is where real estate property or personal property 3.​ Identify the debtor’s vulnerability as a such as car can be used to pay off the loan using a persuasion tool mutually agreed upon value of the property to be applied to liquidate the loan. 4.​ Convince the debtor that settling the loan amicably is better than pursuing court litigation Major Workout Strategies These are strategies to settle delinquent accounts: PENALTY AND SERVICE AND OTHER CHARGES 1.​ Restructuring It includes change in the original credit terms such as 1.​ PROCESSING FEE extension of grace period, reduction or waiver of interest A Processing Fee deducted from the loan to cover and penalty charges, reduction of amount to be paid per processing costs. Some banks have no cash-out amortization on a step ladder basis policies but may still deduct a small amount. 2.​ Refinancing 2.​ LATE PAYMENT PENALTY It is a mode of settlement that is thru extension of a new Late payments penalty generally incur a penalty of 5% loan or line with major part of proceeds to be applied to per month, although this rate may vary among lenders. outstanding past due loan and any remaining balance to be utilized for the borrower’s project. 3.​ EARLY PAYMENT FEE An early payment fee is a charge that may apply if you Some considerations in refinancing: decide to pay off your loan balance in full before the -​ The company is viable and the market continues maturity date. Each lender has its own rules about early to exist. payments. -​ flat fee -​ Cash flows are still adequate under a -​ percentage of the outstanding balance restructured mode. -​ no charge or any fee -​ Collaterals are adequate. 4.​ DOCUMENTARY STAMP TAX (DST) The Philippines applies to loan agreements and other -​ Emergency operating/financial controls are legally binding documents. For loans over P250k, the instituted. tax rate is P1 for every P200 of the approved loan amount. -​ Use of new loans is justified/controlled and monitored. Types of documents: -​ Loan Agreements -​ Borrowers enjoy suppliers’ support, other -​ Contracts creditors’ support, government support. -​ Legal documents -​ Other law binding documents 3.​ Sale of mortgaged assets with or without FEES AND CHARGES INVOLVED assumption of obligation It involves the sale of the mortgaged collateral to an WITH A CREDIT CARD interested buyer and the proceeds applied to the loan. TRANSACTION A. FINANCE CHARGE OR FEE The finance charge or fee is applied when cardholders fail to fully pay off their credit card balance. The longer you take to completely pay off your balance, the higher finance charge will be. B. LATE PAYMENT FEE A late payment fee is applied to cardholders who miss the minimum payment deadline, increasing their balance and interest. C. CASH ADVANCE FEE Cash advances allow users to withdraw cash from ATMs using credit cards, subject to their credit limits. These transactions incur a one-time fee and are directly deducted from the available credit. D. BALANCE TRANSFER FEE A balance transfer fee is a charge applied when you transfer debt from one credit card to another. The balance transfer fee is usually 3% to 5% of the transferred amount. E. OVER LIMIT FEE An over-limit fee is a penalty charge imposed by a credit card issuer when you spend more than your credit limit. F. RETURNED PAYMENT FEE A returned payment fee is applied when a payment to your credit card fails, often due to insufficient funds, resulting in a "bounced" check or blocked automatic payment.