FACTORS Nature and Definition

DIRECT CREDIT MARKET Financing in which DSUs issue financial claims on themselves and sell them for money directly to SSUs. SSUs and DSUs exchange money and financial claims directly. The SSUs claim is against the DSU, not a financial intermediary. To increase the efficiency of financial system by giving SSUs an outlet for their savings, which provides an expected return, and for DSUs having no longer need to postpone current consumption or forgo promising investment opportunities for lack of funds. Single institutional investor or small group of investors Wholesale transactions

FINANCIAL INTERMEDIARY MARKET Financing in which SSUs supply surplus funds to the financial markets in return for financial instruments, while these markets then provide the funds in return for financial instruments to those who require additional funds (DSUs). To provide more efficient financial system by resolving problems found in direct financing. Financial intermediaries transform financial claims in ways that make them more attractive to the ultimate investor, and have designed characteristics to meet the needs of DSUs.

Objectivity

Target Market

Business, commerce, industry, companies, government Significant amounts of both

Amount of Loanable funds

which the minimum amount or financial claim denomination is $1 million or more.

temporary and more permanent short-term financing for business; Retail transactions- small dollar amounts, normally less than $1 million. Lower amount of interest paid due to low interest rate Signed promissory note and disclosure statement; proof of income; if employed, latest BIR Form 2316 and one month payslip; if self-employed, latest ITR, audited financial statements, and SEC/DTI Certificate of Registration. Compensating balance Through bank/institution agents Term loans- initial maturities between 1 and 10 years usually repaid in instalments over the life of the loan; Periodic or lump-sum premium payments; certain future

Interest Paid by Borrower

Higher amount of interest paid due to high interest rate Promissory note; signed contract/ agreement.

Documentation Requirement

Collateral Requirement Accessibility to Borrowers Terms or Term of Loan

Usually no collateral requirement. Through investment banker, broker and dealer. Usually matures within a short period of time, normally by months.

contractual payments Risk of Creditor The borrower will default on scheduled repayments as specified in the agreement. By purchasing a wide variety of securities, financial intermediaries are able to spread risk. If the securities purchased are less than perfectly correlated with each other, the intermediary is able to reduce the fluctuation in the principal value of the portfolio.

TYPES OF BUSINESS ORGANIZATION SOLE PROPRIETORSHIP Definition The simplest form of business organization which is owned and managed by one person. PARTNERSHIP An organization where two or more persons bind themselves to contribute money, property, or industry into a common fund with the intention of dividing the profits among themselves. 1. Greater amount of capital; 2. better management because of the shared managerial skills of partners; 3. compared to a corporation, lesser legal requirements favour the formation of a partnership; CORPORATION An artificial being created by operation of law having the right of succession and powers, attributes, and properties expressly authorized by law or incident to its existence. 1. Large amount of resources can be easily acquired; 2. a shareholder is liable only to the extent only of his investment; 3. transferability of interest; 4. has a legal life of 50 years that can be renewed for

Advantages

1. No SEC registration needed; 2. easy to organize and manage; 3. owner has the sole right over the income; 4. does not require large amount of capital; and

5. is not subject to government scrutiny, as much as corporation does.

4. each partner is a fully authorized agent of the partnership; and 5. less subject to government scrutiny. 1. Conflicts may easily arise between partners; 2. tax liability of 30%; 3. partners are personally and individually liable for all partnership liabilities; 4. partnership can easily be dissolved or terminated; and 5. difficulty in transferring and increasing ownership. Liquidity risk may be faced by

another 50 years; and 5. a corporation may be managed by a team of professionals. 1. 30% tax liability; 2. corporations are required to file several legal requirements; 3. filing of financial reports periodically; 4. having no direct or active control of shareholders; and 5. incorporation requirement of 25%: 25% rule.

Disadvantages

1. limited sources of capital; 2. unlimited liability on the part of proprietor; 3. limited management skills; 4. limited opportunity to expand; and 5. life of the business is limited to the owners life span.

Risk

Normally, a sole proprietor invests

Just like with the sole proprietorship,

almost of his resources in the business. Bankruptcy of the business may force the owner to terminate its operation, making him faced investment risk where his expected return will not be realized. Income Technically, the owner has the sole right in the income of the business, therefore, the entire profit will be handed to the sole proprietor.

partners if realization of partnership resources is insufficient to pay all partnership and partners liabilities.

investors or stakeholders may experience investment risk where the return of their investments will slowly be realized.

Income is being distributed based on the profit and loss agreement stated in the Article of Co-Partnership. However, if theres no agreement made, partners will distribute income based on capital contributions or equally.

Dividends will be distributed based on the number of outstanding shares. The amount of dividends will be depended on the decision made by the Board of Directors. Usually, income per year is placed together with the Retained Earnings, which comprised of the corporations

income in the previous year/s. Control Business is being operated by one person only which is the owner, who is considered also as the manager. Partnership may involve different types of partners. A general partner is the one who manages the business while an industrial partner contributes his industry or service that is involved in business operation. The Board of Directors is responsible for the overall supervision of the corporation. They establish the goals and policies of the firm, and evaluate management performance and act on legal matters. The President and other officers are the ones responsible for implementing the policies. A large amount of resources can be easily acquired by selling the shares through stock market which can be used for business expansion. Team of

Growth and Stability

Capital of the business will depend on the amount of resources the owner will invest. Growth of the company will be attained if proper

Since there is a greater amount of capital that can be accumulated, there will also be a greater opportunity to expand services. A stable management will

managerial skills and knowledge is acquired by the owner, thus stability

result as well through better managerial skills, efforts and experiences shared by the partners.

professionals are hired to manage and oversee the daily operation of the firm. These managers are more likely to be specialists in the areas of marketing, finance, accounting and production that will contribute further in the stability of the corporation.

SANTOS, Anjanette B. 2-AAC