Sources & Uses of Short & Long-Term Funds PDF

SOURCES & USES OF SHORT- TERM AND LONG-TERM FUNDS PREPARED BY: MS. MARGIE A. CIRERA  A. Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire amount using a one-year short-term loan. The company’s average annual operating cash flows for t...

SOURCES & USES OF SHORT- TERM AND LONG-TERM FUNDS PREPARED BY: MS. MARGIE A. CIRERA  A. Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire amount using a one-year short-term loan. The company’s average annual operating cash flows for the last three years is PHP1.5 million. What will happen to the company? B. Dragon Inc. is in the business of fireworks production. Their peak season is usually during holidays, especially during Christmas and New Year. The company needs additional PHP500,000 to finance their working capital needs during the holiday season. How should this be financed? raising capital by Borrowing money selling company from lenders and stock to investors not giving up in exchange of ownership ownership interests in the company  Debt Financing Equity Financing Capital is repayable to the lender Capital is generally not be returned to owner Interest is mandatory Dividends are not compulsory Interest is tax deductible Dividends are not tax deductible Financial risk is increased No increase in financial risk Increases profitability if leverage is No increase in profitability if the firm positive is in financial distress Restrict covenants or conditions No restrictive covenants No dilution or decrease in control New issue may lead to dilution of unless terms of restrictive covenants control and income of current owners are broken Cheaper issuance costs Higher issuance cost Often easier to issue to financial More complex rights issue or new issue institutions Less future financing flexibility Greater future financing flexibility Possible adverse effect on credit No adverse effect on credit rating rating FINANCIAL INSTITUTION – source of whether short-term or long-term fund FUND – pool of money that is allocated for a specific purpose  Short-term financing = is debt scheduled to be paid within a year Long-term financing = is debt to be paid in more than a year  Liquidity risk refers to the inability of an investor to buy or sell an asset to avoid financial loss. It also refer to the inability to meet obligations since assets are tied up with investments or inventory. FINANCIAL INTERMEDIARIES - classified as bank or non-bank company - both provides financial services and assistance to individuals, business and government  BANK is a commercial or state institution that provides financial services.  NON-BANK FINANCIAL COMPANIES provides banking service but doesn’t hold a banking license Types of Banks  Commercial Bank  Universal Bank  Thrift Bank  Savings Bank  Rural bank and Cooperative bank  Types of Non-Bank Financial Companies  Life and Non-Life Insurance  Pension Fund and Mutual Fund Companies  Investment House and Lending Investor Companies  Trust companies and Partnership (Pawnshop) Types of Loans 1. Personal Loan – may or may not require any form of collateral as a security of payment 2. Housing Loan – either for buying a real estate or for dwelling purposes or house construction or renovation purposes 3. Auto Loan – allows individual to buy a vehicle that is more expensive than what could be afforded in a lump sum or  Documentation Required for Processing Loan Application The following are the generic requirements of bank and non- bank in securing loans in different type of business: 1. INDIVIDUAL / SINGLE PROPRIETORSHIP  A certified photocopy of its trade name or style registered with the Department of Trade and Industry  Mayor’s Permit  Licensed to engage in business issued by the city or municipality  Income Tax Return (ITR) for the preceding year and official receipt  Latest audited / unaudited financial statement 2. PARTNERSHIP  A certified photocopy of its trade name or style registered with the Department of Trade and Industry  Copy of Article of Partnership, duly signed with the SEC  Latest audited / unaudited financial statement of the partnership  Income Tax Return (ITR) for the preceding year of each member of partnership  Licensed to engage in business issued by the city or municipality  Resolution of partnership authorizing negotiation of the loan and authorizing the partner to sign for and in behalf of the partnership  Curriculum vitae or personal information 3. CORPORATION  A certified photocopy of its trade name or style registered with Bureau of Department of Trade and Industry and Security and Exchange Commission  Copy of Article of Incorporation and by-laws. Duly registered with the SEC  Latest audited financial statement  Certified list of stockholders of company as of date of application to include the following: * name of its stockholders * nationality * number of shares subscribe * amount subscribe * amount paid on subscription  Certified list of incumbent officers  Curriculum vitae or personal information of the officers  Board resolution (with corporate secretaries certification) authorizing the person to undertake the application  Licensed to engage in business issued by the city or municipality  Alien registration certification of alien officers of the company Filing up the loan application form: Name of borrower Amount of loan Address of borrower Purpose of loan Credit history / Information of the borrower: Employer Present salary Credit Other sources of income Committee Marital status No. of dependents Credit Approved Credit Denied  OBLIGATIONS OF ENTREPRENEURS TO CREDITORS  General obligation is based on moral duty that ties two or more parties  Accounting obligation is the duty to make future payments when a purchase order is placed  Legal obligation is based on what is agreed upon like the provisions or terms as stated in a contract under terms of the loan agreement Alternative Uses of Funds - management has to deal with different tools for evaluating alternatives. The major capital use decisions consideration varies with the size of business and its company background