Loans: Sources, Requirements, and 5Cs of Credit PDF

Lesson 4.1 Sources of Funds Business Finance Accountancy, Business, and Management 1 Sources of Funds 2  Sources of Funds Debt Financing when the company borrows money from an...

Lesson 4.1 Sources of Funds Business Finance Accountancy, Business, and Management 1 Sources of Funds 2  Sources of Funds Debt Financing when the company borrows money from an outside source and pays it back with interest at a future date 3  The Sources of Funds Equity Financing when the investors or financing institutions put money or assets into the business in exchange for part ownership of the company 4  Debt Financing the amount of money borrowed by one party from another which needs to be Debt repaid back 5 Debt Financing 6  Debt Financing Bank Financial Institutions accept deposits from the public offer different types of loans earn income from interest payments governed by Bangko Sentral ng Pilipinas 7  Examples of Bank Financial Institutions Closer where people usually do their banking activities, characterized Look Commercial by depository and safekeeping functions Banks generate small savings and offer long-term unsecured loans Thrift banks and uncomplicated terms to low-paid or underprivileged sectors or individuals built in the rural areas whose task primarily is providing Rural Banks fundamental needs of the residents in the community Cooperative similar to rural banks but owned by the cooperative or by the Banks alliance of cooperatives Specialized created by the government in response to particular needs Government Banks 8  Debt Financing Family and Friends (Love Money) ideal for startups who lack credentials comes from family and friends who believe in your capacity to succeed terms of payment depends on agreement 9  Debt Financing Nonbank Financial Institution do not possess a comprehensive banking license cannot accept deposits from the public 10  Debt Financing Nonbank Financial Institution can manage other banking activities ○ investment, brokering, financial consulting, lending, risk pooling, money transmission 11  Examples of Private Nonbank Financial Institutions Closer provide short-term and long-term financing Look typically offer loan services such as Accounts Receivable Private Nonbank Financing, Equipment Loan, Risk Pooling (Insurance), Financial Venture Capital Financing, Pawning, and debentures. Institutions Mutual Building and Loan Association (MBLA), created for the purpose of accumulating subscriptions to assist Private Nonbank members in acquiring real estate by making loans Thrift Institutions Non-stock Saving and Loan Association, which accepts deposits and grants only from its members Government Service Insurance System (GSIS) Government Social Security System (SSS) Nonbank Home Development Mutual Fund (HDMF) or PAG-IBIG Financial Fund Institutions (GNBFI) 12  Equity Financing means being equal or fair in business, it means Equity ownership or right 13  Equity Financing selling shares of the business to meet liquidity needs Equity financing investors in return will have shares in the business 14 Equity Financing 15  Equity Financing Angel Investors high-net-worth investors who support small investors especially in the early stages willing to give their knowledge and experiences in the business to make it grow 16  Equity Financing Venture Capital (VC) provides well-off investors to startup small businesses that have long-term growth potential can be debt financing or equity financing 17  Equity Financing Bootstrapping highly dependent on internal sources used by businesses that lack experience in business planning, promotion, and relationship with other businesses 18  Equity Financing Crowdfunding typically conducted through an online platform or application 19  Equity Financing (Crowdfunding) Donation-based Reward-based Supporters of this type Investors in this type pool their resources for expect to get rewards charitable purposes. which are the product itself. 20  Equity Financing (Crowdfunding) Lending-based Equity-based Lenders expect to be paid Investors of this type through the interest expect to have shares in agreed upon and in the company which is in the periodic payments. form of dividends. 21  Equity Financing Corporate Investor a company that invests in other companies or businesses in exchange for part ownership and control of the business 22  Equity Financing Initial Public Offering (IPO) a means to raise capital that can be used for expenditures, expansion, debt payments, trading participants 23  Loan Requirements Financial institutions are intermediaries between sources and users of funds. 24  Loan Requirements Banks pool deposits and lend them to borrowers. They need to return the money to depositors. ○ They need to ensure that borrowers can repay the loan plus interest. 25  5C’s of Credit Financial institutions do not immediately approve loan requests from any individual or entity. They establish a set of criteria to determine whether a borrower is eligible for loan. 26 5C’s of Credit capital capacity 5C’s of Credit conditions collateral character 27  5C’s of Credit Capacity Capital How much resources does Can the applicant repay the applicant have? Is it his/her obligations? sufficient to cover his/her obligations? 28  5C’s of Credit Collateral Character What other assets does What is the applicant’s the applicant have which character as a borrower? can be used to repay the What is his/her credit obligations? history? 29  5C’s of Credit Conditions What is the financial condition of the applicant? Is the loan purpose aligned with his/her financial condition? 30  Basic Requirements for Loan Applications Basic loan requirements are common to most financial institutions because they correspond to the 5C’s of credit. 31 Basic Requirements for Loan Applications loan purpose Personal collateral information Basic Requirements outstanding financial loan and statment/bank other debts account/payslips credit history 32  Basic Requirements for Loan Applications the underlying reason of the borrower for pursuing a loan or mortgage Loan Purpose used to determine the amount of loan and interest 33 Basic Requirements for Loan Applications establishes the legal Personal Data identity of the borrower Information with whom the financial obligation will be tied to 34  Basic Requirements for Loan Applications show the applicant’s Financial sources of income or statements funds Bank Accounts proves their capacity to Payslips repay their obligations 35  Basic Requirements for Loan Applications indicates the applicant’s character as a borrower whether the applicant had a bad credit record Credit History or history of defaults in payment 36  Basic Requirements for Loan Applications indicates whether the Outstanding Loans applicant can afford to take and Other Debts additional obligations 37  Basic Requirements for Loan Applications can be in the form of houses/lots, cars, credit cards, ATM cards (salary), Collateral or savings account 38