YO U R L O A N S
Small and Medium
Enterprises –
Financing Products for
Your Business
contents
Disclaimer
This document is intended for your general information only. It does not contain exhaustive advice or information relating to the subject matter nor should it be used as a substitute for legal advice. Date: 1 March 2004
1 Introduction
2 The right product for the right purpose Asset acquisition/ business expansion – Term loan – Leasing – Industrial hire-purchase 4 Working capital – Overdraft – Revolving credit – Factoring 6 Trade financing
– Letter of credit or documentary credit – Trust receipts
– Banker’s acceptance – Bills of exchange purchased – Foreign exchange contracts – Export credit financing 10 Trade services
– Outward/inward bills for collection 11 Guarantees
Introduction
To cater for your business needs, financial institutions offer a wide range of financing products for small and medium enterprises (SMEs) under both
conventional and Islamic banking. You can choose from a wide variety of products offered in the market, depending on your financing needs and the suitability of such financing to your business.
This booklet will provide you with the basic knowledge on different types of products available, its uses and benefits for SMEs. It aims to help you identify the products which are most suitable for your financing needs.
Financial institutions offer a
wide range
ASSET ACQUISITION/BUSINESS EXPANSION
Your business requires assets in order to operate. These assets could be immovable properties such as factories, shophouses and buildings, or other assets such as vehicles, equipment, fixtures and machineries. Should you decide to purchase or lease these assets, the available financing products are listed below:
TERM LOAN
• Usage
To aquire fixed assets (immovable properties i.e. land and buildings, as well as commercial vehicles).
• Features
A loan granted for a predetermined length of time (tenure), with repayments by instalments.
• Benefits
Facilitate management of funds, as repayment amount is predetermined.
THE RIGHT PRODUCT FOR THE RIGHT PURPOSE
In general, your business would require financing for asset acquisition and working capital. There are, however different types of financing that you can select from. For example, in acquiring business
equipment, fixtures and fittings, you can choose to finance the acquisitions through an industrial hire purchase, leasing or a term loan. The final choice is yours to make. However, you may need to find out more about the suitability of the products before making a decision on the type of financing for your business.
The information provided is aimed to be a guide, and as such you should consult your respective bankers for further clarification and information.
Your
business
would require
financing for asset
LEASING
•Usage
To acquire capital assets such as equipment and machineries.
•Features
– A facility which allows SMEs to lease equipment from financial institutions without having to purchase the equipment – There are 2 types of leasing facilities
available:
i. Operating Lease
Ownership is held by the financial institutions
ii. Finance Lease
Ownership is held by the financial institutions. However, the lessee has the option to purchase the asset at the end of the tenure.
•Benefits
– Facilitate management of funds, as leasing instalments amount is predetermined – For an operating lease, maintenance cost is
borne by the lessor (financial institution)
– Instalments paid for leasing are eligible for full tax relief
INDUSTRIAL HIRE-PURCHASE
• Usage
To acquire capital assets such as equipment and machineries.
• Features
– A form of financing whereby the asset is purchased by the financial institution and hired to SMEs, with the ownership being retained by the financial institution until the loan is repaid – SMEs make periodic repayments to the
financial institution
• Benefits
– Allow SMEs to own equipment and machineries without having to pay the full amount upfront
– Facilitate management of funds, as repayment amount is predetermined – Free up available funds for other
WORKING CAPITAL
Besides asset financing, your business needs working capital for the day-to-day running of the business. Generally, the most convenient form of financing would be an overdraft facility from commercial banks. Although flexible, overdraft can be quite costly. You may be charged commitment fees for the unutilised portion of the overdraft or revolving credit. The benefit and features of the products offered by financial institutions for working capital purposes are listed as follows:
OVERDRAFT (OD)
• Usage
To meet working capital needs i.e. payment of salaries, purchases, utilities etc.
• Features
– A revolving loan made available to a business customer via a current account, whereby the borrower may withdraw the required amount each time by issuing cheques, as long as the OD limit is not exceeded
– A commitment fee of 1% is charged on the unutilized portion of the facility – Interest is calculated on a daily basis
based on the balance outstanding at the end of each business day
• Benefits
Flexibility in funds management in view that the OD is continuously available, provided the facilities are properly conducted and the business continues to operate satisfactorily.
Although flexible,
overdraft can be quite
REVOLVING CREDIT
•Usage
Similar to OD, it is short-term in nature and is used to meet short-term working capital requirements.
•Features
– A form of loan granted for a fixed period which can be rolled over upon expiry
– A convenient form of short term financing for companies with good financial standing
– Drawdowns by means of a letter from the SME to the financial institution stating the period of the loan required
•Benefits
– Lower financing costs compared to conventional financing instruments – Continuous availability of funds, as
TRADE FINANCING
In addition to the working capital financing, financial institutions also provide financing for SMEs that are involved in domestic and international trade. Some of the common trade financing facilities provided by financial institutions are as follows:
LETTER OF CREDIT (LC) OR DOCUMENTARY CREDIT (DC)
• Usage
For import or local purchases of goods, materials or equipment.
• Features
A written undertaking by a financial institution to pay a seller a given amount of money subject to the following conditions:
– On presentation of specified documents as set out in the terms and conditions of the LC
– Within a specified time limit – At a specified place
FACTORING
• Usage
To obtain short term financing of trade debts (sale of goods to customers on credit terms).
• Features
A method of financing, where the financial institution purchases the client’s trade invoices at a discount from the face value of the invoices, and provide cash advances for business purposes.
• Benefits
– Cash advances are easily and quickly obtainable
– No collateral required
• Benefits
– Can assure payment is made to the beneficiary
– Able to obtain a lower purchase price of the goods and longer payment terms, as the LC provides an indication of payment assurance, from the sellers’ perspective – Documents presented will be examined
by trade financing specialists
– Do not have to communicate with the foreign seller so often since the whole transaction will be routed through and handled by the financial institution
TRUST RECEIPTS
• Usage
Extends credit facility on bills drawn under the financial institution’s own LC. As such, customers do not have to make immediate payments on the LCs.
•Features
A financing facility that enables a customer to accept delivery of their local/foreign purchases prior to payment of the sight bills being made by them.
•Benefits
– Enables the customer to pay the seller promptly
– Enables the customer to take delivery of the goods without paying for it immediately
– Able to ease cashflow
BANKER’S ACCEPTANCE (BA)
•Usage
Financing of a bona fide trade i.e. export, import or domestic trade transaction.
•Features
– A draft (Bill of Exchange) drawn by customers to their order, payable on a specific future date and accepted by the financial institution for the purpose of financing a bona fide trade
Financial
institutions
also provide
financing for SMEs
that are involved in
domestic and
• Benefits
– Able to obtain immediate funds upon presentation of necessary documents – Able to improve cash flow of the
business since SMEs can obtain immediate funds from the financial institution
FOREIGN EXCHANGE CONTRACTS (FEC)
• Usage
Generally for businesses, with the following features:
– Regularly importing or exporting in foreign currencies
– Of a sizeable level
– With credit standing that is acceptable to the financial institution
• Features
The buying and selling of foreign exchange on a spot or forward basis, in respect of foreign proceeds or payments to be made at sight or at a future determinable date.
– The minimum amount of financing is RM50,000 and in multiples of RM1,000 (Bunching is allowed)
• Benefits
– Provides cash flow before proceeds for sale of goods on credit can be collected, or to finance purchases of raw materials for production
– Can always be sold at the prevailing market rate should the customer need immediate funds
– Provides two-way financing as BA financing is applicable for sales and purchases
BILLS OF EXCHANGE PURCHASED (BEP)
• Usage
As a means of working capital financing for exporters.
• Features
A facility provided by the financial institution for exporters, whereby the financial
• Benefits
– Customers are able to fix their exchange rates for purpose of costing/hedging – No further exposure to exchange risk
fluctuations especially in volatile markets or conditions
EXPORT CREDIT FINANCING (ECR)
• Usage
– Commonly used by exporters with the following criteria:
i. Exporting products with a value added of at least 20% and uses a minimum of 30% domestic raw materials/input content (a tolerance allowance of 2% is permitted) and not in the negative list as provided by Bank Negara Malaysia
ii. Direct exporter must have exported at least RM3 million of eligible goods per annum in the last financial year and RM3 million in the preceding 12 months
– For agricultural products, the amount is a minimum of RM1 million in the last financial year and preceding 12 months
• Features
– Administered by the EXIM Bank. – 2 types of facilities available:
i. Pre-shipment
Amount of financing can be calculated using 2 methods: Order Base
80% of value of export order or sales contract rounded to the nearest thousand.
Certificate of Performance (CP) Eligible amount specified in the CP. ii. Post-shipment
Amount of financing can be up to 100% of the export bill, rounded to the nearest thousand.
• Benefits
• Benefits
– Buyer:
i. A safe method of payment as the payment can be deferred by the buyer until the goods arrive or even later if delayed payment arrangements are agreed to
ii. Customers will have time to inspect the documents before paying/accepting – Seller:
i. Documents of value, i.e. title documents, are not released to the buyer (drawee) until payment or acceptance has been affected ii. Once the bill is accepted by the buyer
(drawee), the seller (drawer) can seek legal remedy in case of non-payment on maturity date
TRADE SERVICES
To assist customers in trade transactions, financial institutions also provide payment services. The outward/inward bills for collection services is listed below.
OUTWARD/INWARD BILLS FOR COLLECTION (OBC/IBC)
•Usage
Assist customer in making payments for trade transactions.
•Features
– Documents are channeled through the financial institution with specific instructions
– Financial institutions handle documents on instructions received (from customer or another branch or financial institution) to:
i. obtain acceptance and/or payment ii. deliver commercial documents against
acceptance and/or against payment iii. deliver documents on other terms
GUARANTEES
In addition to financing your business, you may need guarantee facilities for various purposes. A guarantee is basically a legal undertaking by a financial
institution on your behalf (the third party), where it guarantees the payment of a certain sum of money up to a certain limit to a beneficiary, in the event that your business fails to settle a debt or perform a legal obligation. This is however subject to full compliance of all terms specified in the relevant guarantee. There are several types of guarantees which can be arranged by the financial institution depending on the specific requirements of the borrower. A financial institution may take into account a number of factors before issuing a guarantee, such as, the extent of liability, period and expiry, and credit standing of the customer. The normal types of guarantees are:
BANK GUARANTEE (BG)
• Usage
– Provides guarantee favouring a third party for performance, payment etc – Generally, businesses that have a
particular need for BGs are contractors, such as building and supplier contractors. On the corporate side, BGs could also be given for the issuance of private debt securities
• Features
– Types of guarantees:
i. Tender Guarantee or Bid Bond ii. Performance Guarantee iii.Advance Payment Guarantee iv. Warranty of Maintenance Guarantee v. Retention Guarantee
vi. Security Guarantee
– Commission is charged based on the amount and period of the guarantee
A financial institution
will consider
a
number
of
factors
before
– Maximum period of guarantee is guided by the rules of the Association of Banks in Malaysia i.e. guarantee should not be issued for more than 1 year except for Government contracts. The expiry of the guarantee must not be more than 12 months after the expiry of the original contract
• Benefits
– Shows the customer’s/applicant’s capability to perform work as specified in the contract
– Able to obtain more favourable trade terms from the beneficiary if a BG is produced
– There is no necessity to raise cash to meet the deposit requirements and funds could be used to support working capital requirements
– Allow customers to have access to funds especially where BG is issued for advance payment or release of retention funds under contracts
SHIPPING GUARANTEE (SG)
• Usage
To expedite the release of goods which have arrived before the original transport documents.
• Features
– Guarantee or undertaking by the issuing financial institution to the shipping agent to release the goods without production of original transport documents
– Usually issued where the goods are initially imported under LC and is to be earmarked against TR/BA facilities
• Benefits
