Bank and Nonbank Loan Requirements

Debt Financing

Overview

• Definition: Debt financing can be borrowing from banks or other lending institutions or issuing debt securities like commercial papers and bonds. It may also include advances from stockholders to expedite fund-raising.

Benefits

1. Interest expense is tax-deductible.
2. Allows company growth without diluting the interest of controlling stockholders.
3. Creditors generally do not interfere in management decisions.

Disadvantages

1. Cash dividends are not tax-deductible.
2. Offering new shares to investors may dilute ownership for existing stockholders.
3. It is the most expensive source of financing:
   • Most companies prefer debt financing.
   • Under Philippine law, companies in liquidation cannot distribute to stockholders until creditor claims are satisfied.
   • Unlike loans with assured interest and principal payments, cash dividends are not guaranteed.
   • Poor company performance means stockholders absorb losses.

Types of Financial Institutions

1. Banking Institutions

Definition

• Supervised and regulated by the Bangko Sentral ng Pilipinas (BSP). They accept deposits and provide loans.

Types

• Universal and commercial banks
• Thrift banks
• Rural and cooperative banks

Loan Requirements for Banks

1. Application form
2. Valid personal identification documents
3. Financial statements
4. Bank statements
5. Certificate of business registration
6. Company profile
7. Collateral documents

2. Nonbanking Institutions

Definition

• Offer bank-like services but cannot accept deposits due to lack of a banking license.

Examples

• Insurance Companies: Transfer of risk transactions (e.g., GSIS, SSS, Sun Life, Metrobank AXA).
• Currency Exchange: Buying and selling currencies (e.g., Western Union, Cebuana Lhuillier).
• Microloan Organizations: Offer small credits with fewer requirements (e.g., Home Credit, GCash, Paymaya).
• Pawnshops: Offer quick cash loans based on collateral (e.g., Cebuana Lhuillier, Villarica Pawnshop).

Loan Requirements for Nonbanking Institutions

1. Application form
2. Valid personal identification document
3. Credit information/collateral file
4. Credit investigation

Generalization

Businesses should be cautious when choosing lending companies. Many individuals avoid bank loan applications due to stringent requirements, which can lead to falling prey to loan sharks. Proper engagement and understanding of requirements are essential to avoid burdensome situations.

Differences Between Banking and Nonbanking Institutions

Criteria	Banking Institutions	Nonbanking Institutions
Accept Deposits	Yes	No
Financial Statements Required	No	Yes
Banking License	Yes	No

Similarities

1. Both offer loans to individuals or entities.
2. Similar requirements for application forms and valid personal identification.
3. Both are regulated by the Bangko Sentral ng Pilipinas.