Small and Medium Enterprises YOUR LOANS Small and Medium Enterprises Financing Products for Your Business A consumer education programme by:
contents 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 Bank guarantee Shipping guarantee 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
Introduction Financial institutions offer a wide range of financing products to cater for your business needs 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.
Your business would require financing for asset acquisition and working capital 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. 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 To aquire fixed assets (immovable properties i.e. land and buildings, as well as commercial vehicles). A loan granted for a predetermined length of time (tenure), with repayments by instalments. Facilitate management of funds, as repayment amount is predetermined. 2
LEASING To acquire capital assets such as equipment and machineries. 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. 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 To acquire capital assets such as equipment and machineries. 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 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 purposes 3
Although flexible, overdraft can be quite costly 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) To meet working capital needs i.e. payment of salaries, purchases, utilities etc. 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 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. 4
REVOLVING CREDIT Similar to OD, it is short-term in nature and is used to meet short-term working capital requirements. 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 Lower financing costs compared to conventional financing instruments Continuous availability of funds, as facility can be rolled over 5
FACTORING To obtain short term financing of trade debts (sale of goods to customers on credit terms). 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. Cash advances are easily and quickly obtainable No collateral required Able to sell on more competitive terms to credit customers 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) For import or local purchases of goods, materials or equipment. 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 6
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 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. 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. 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) Financing of a bona fide trade i.e. export, import or domestic trade transaction. 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 international trade 7
The minimum amount of financing is RM50,000 and in multiples of RM1,000 (Bunching is allowed) 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) As a means of working capital financing for exporters. A facility provided by the financial institution for exporters, whereby the financial institution may purchase customers outward bills for collection and the customers account is credited immediately with the proceeds. 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) 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 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. 8
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) 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 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. Cheap source of financing exports. 9
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) Assist customer in making payments for trade transactions. 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: 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 i. obtain acceptance and/or payment ii. deliver commercial documents against acceptance and/or against payment iii. deliver documents on other terms and conditions 10
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) 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 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 issuing a guarantee 11
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 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 SHIPPING GUARANTEE (SG) To expedite the release of goods which have arrived before the original transport documents. 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 Facilitate meeting of production or contract deadlines. Allow customers to have access to funds especially where BG is issued for advance payment or release of retention funds under contracts 12
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