YO U R L OA N S

Small and MediumEnterprises –Financing Products for Your Business

A consumer education programme by:

Small and Medium Enterprises

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Disclaimer

This document is intended for your general informationonly. 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– Bank guarantee– Shipping guarantee

Introduction

To cater for your business needs, financial institutions offer a wide range offinancing products for small and medium enterprises (SMEs) under bothconventional and Islamic banking. You can choose from a wide variety of productsoffered in the market, depending on your financing needs and the suitability ofsuch financing to your business.

This booklet will provide you with the basic knowledge on different types ofproducts available, its uses and benefits for SMEs. It aims to help you identify theproducts which are most suitable for your financing needs.

Financial institutions offer awide range

of financing products to cater for your business needs

ASSET ACQUISITION/BUSINESSEXPANSION

Your business requires assets in order to operate. These assets could beimmovable properties such as factories,shophouses and buildings, or other assetssuch as vehicles, equipment, fixtures and machineries. Should you decide topurchase or lease these assets, theavailable financing products are listedbelow:

TERM LOAN

• Usage

To aquire fixed assets (immovableproperties i.e. land and buildings, as well as commercial vehicles).

• Features

A loan granted for a predeterminedlength of time (tenure), with repaymentsby instalments.

• Benefits

Facilitate management of funds, asrepayment amount is predetermined.

THE RIGHT PRODUCT FOR THE RIGHTPURPOSE

In general, your business would requirefinancing for asset acquisition and workingcapital. There are, however different types of financing that you can select from.For example, in acquiring businessequipment, fixtures and fittings, you canchoose to finance the acquisitions throughan industrial hire purchase, leasing or aterm loan. The final choice is yours to make.However, you may need to find out moreabout the suitability of the products beforemaking a decision on the type of financingfor your business.

The information provided is aimed to be aguide, and as such you should consult yourrespective bankers for further clarificationand information.

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Yourbusinesswould require

financing for asset acquisition andworking capital

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LEASING

• Usage

To acquire capital assets such as equipmentand machineries.

• Features

– A facility which allows SMEs to leaseequipment from financial institutionswithout having to purchase the equipment

– There are 2 types of leasing facilitiesavailable:

i. Operating LeaseOwnership is held by the financialinstitutions

ii. Finance LeaseOwnership is held by the financialinstitutions. However, the lessee has the option to purchase the asset at the end of the tenure.

• Benefits

– Facilitate management of funds, as leasinginstalments amount is predetermined

– For an operating lease, maintenance cost isborne by the lessor (financial institution)

– Instalments paid for leasing are eligible for full tax relief

INDUSTRIAL HIRE-PURCHASE

• Usage

To acquire capital assets such asequipment and machineries.

• Features

– A form of financing whereby the asset is purchased by the financial institutionand hired to SMEs, with the ownershipbeing retained by the financialinstitution until the loan is repaid

– SMEs make periodic repayments to thefinancial institution

• Benefits

– Allow SMEs to own equipment andmachineries without having to pay thefull amount upfront

– Facilitate management of funds, asrepayment amount is predetermined

– Free up available funds for otherpurposes

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WORKING CAPITAL

Besides asset financing, your business needs working capital for the day-to-dayrunning of the business. Generally, the most convenient form of financing wouldbe an overdraft facility from commercialbanks. Although flexible, overdraft can be quite costly. You may be chargedcommitment fees for the unutilised portion of the overdraft or revolving credit.The benefit and features of the productsoffered by financial institutions for workingcapital purposes are listed as follows:

OVERDRAFT (OD)

• Usage

To meet working capital needs i.e. paymentof salaries, purchases, utilities etc.

• Features

– A revolving loan made available to abusiness customer via a current account,whereby the borrower may withdraw the required amount each time by issuingcheques, as long as the OD limit is notexceeded

– A commitment fee of 1% is charged onthe unutilized portion of the facility

– Interest is calculated on a daily basisbased on the balance outstanding at theend of each business day

• Benefits

Flexibility in funds management in viewthat the OD is continuously available,provided the facilities are properlyconducted and the business continues tooperate satisfactorily.

Although flexible,overdraft can be quite

costly

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REVOLVING CREDIT

• Usage

Similar to OD, it is short-term in natureand is used to meet short-term workingcapital requirements.

• Features

– A form of loan granted for a fixedperiod which can be rolled over uponexpiry

– A convenient form of short termfinancing for companies with goodfinancial standing

– Drawdowns by means of a letter fromthe SME to the financial institutionstating the period of the loan required

• Benefits

– Lower financing costs compared toconventional financing instruments

– Continuous availability of funds, asfacility can be rolled over

TRADE FINANCING

In addition to the working capitalfinancing, financial institutions alsoprovide financing for SMEs that areinvolved in domestic and internationaltrade. Some of the common tradefinancing facilities provided by financialinstitutions 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 financialinstitution to pay a seller a given amountof money subject to the followingconditions:

– 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 tradedebts (sale of goods to customers oncredit terms).

• Features

A method of financing, where thefinancial institution purchases the client’strade invoices at a discount from the facevalue of the invoices, and provide cashadvances for business purposes.

• Benefits

– Cash advances are easily and quicklyobtainable

– No collateral required

– Able to sell on more competitive termsto credit customers

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• Benefits

– Can assure payment is made to thebeneficiary

– Able to obtain a lower purchase price ofthe goods and longer payment terms, asthe LC provides an indication of paymentassurance, from the sellers’ perspective

– Documents presented will be examinedby trade financing specialists

– Do not have to communicate with theforeign seller so often since the wholetransaction will be routed through andhandled by the financial institution

TRUST RECEIPTS

• Usage

Extends credit facility on bills drawn underthe financial institution’s own LC. As such,customers do not have to make immediatepayments on the LCs.

• Features

A financing facility that enables acustomer to accept delivery of theirlocal/foreign purchases prior to paymentof the sight bills being made by them.

• Benefits

– Enables the customer to pay the sellerpromptly

– Enables the customer to take delivery of the goods without paying for itimmediately

– 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 bycustomers to their order, payable on aspecific future date and accepted by the financial institution for the purposeof financing a bona fide trade

Financialinstitutionsalso provide financing for SMEsthat are involved indomestic andinternational trade

• Benefits

– Able to obtain immediate funds uponpresentation of necessary documents

– Able to improve cash flow of thebusiness since SMEs can obtainimmediate funds from the financialinstitution

FOREIGN EXCHANGE CONTRACTS (FEC)

• Usage

Generally for businesses, with thefollowing features:

– Regularly importing or exporting inforeign currencies

– Of a sizeable level

– With credit standing that is acceptableto the financial institution

• Features

The buying and selling of foreignexchange on a spot or forward basis, inrespect of foreign proceeds or paymentsto be made at sight or at a futuredeterminable date.

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– The minimum amount of financing isRM50,000 and in multiples of RM1,000(Bunching is allowed)

• Benefits

– Provides cash flow before proceeds for sale of goods on credit can be collected, orto finance purchases of raw materials forproduction

– Can always be sold at the prevailing market rate should the customer needimmediate funds

– Provides two-way financing as BA financingis 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 institutionfor exporters, whereby the financialinstitution may purchase customers’ outwardbills for collection and the customers’ accountis credited immediately with the proceeds.

• Benefits

– Customers are able to fix their exchangerates for purpose of costing/hedging

– No further exposure to exchange riskfluctuations especially in volatile markets or conditions

EXPORT CREDIT FINANCING (ECR)

• Usage

– Commonly used by exporters with thefollowing criteria:

i. Exporting products with a valueadded of at least 20% and uses aminimum of 30% domestic rawmaterials/input content (a toleranceallowance of 2% is permitted) andnot in the negative list as providedby Bank Negara Malaysia

ii. Direct exporter must have exportedat least RM3 million of eligiblegoods per annum in the lastfinancial year and RM3 million inthe preceding 12 months

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– For agricultural products, the amount is a minimum of RM1 million in the lastfinancial year and preceding 12 months

• Features

– Administered by the EXIM Bank.

– 2 types of facilities available:

i. Pre-shipmentAmount of financing can becalculated using 2 methods:

Order Base80% of value of export order or sales contract rounded to thenearest thousand.

Certificate of Performance (CP)Eligible amount specified in the CP.

ii. Post-shipmentAmount of financing can be up to100% of the export bill, roundedto the nearest thousand.

• Benefits

Cheap source of financing exports.

• Benefits

– Buyer:

i. A safe method of payment as thepayment can be deferred by the buyeruntil the goods arrive or even later if delayed payment arrangements areagreed to

ii. Customers will have time to inspect thedocuments before paying/accepting

– Seller:

i. Documents of value, i.e. titledocuments, are not released to thebuyer (drawee) until payment oracceptance has been affected

ii. Once the bill is accepted by the buyer(drawee), the seller (drawer) can seeklegal remedy in case of non-paymenton 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 specificinstructions

– Financial institutions handle documentson instructions received (from customeror another branch or financial institution)to:

i. obtain acceptance and/or payment

ii. deliver commercial documents againstacceptance and/or against payment

iii. deliver documents on other terms and conditions

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GUARANTEES

In addition to financing your business, you may need guarantee facilities forvarious purposes. A guarantee is basically a legal undertaking by a financialinstitution on your behalf (the third party),where it guarantees the payment of acertain sum of money up to a certain limitto a beneficiary, in the event that yourbusiness fails to settle a debt or perform alegal obligation. This is however subject tofull compliance of all terms specified in therelevant guarantee. There are several typesof guarantees which can be arranged bythe financial institution depending on thespecific 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 ofguarantees are:

BANK GUARANTEE (BG)

• Usage

– Provides guarantee favouring a thirdparty for performance, payment etc

– Generally, businesses that have aparticular 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 theamount and period of the guarantee

A financial institutionwill consider

a number of

factors beforeissuing a guarantee

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– 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 expiryof the original contract

• Benefits

– Shows the customer’s/applicant’scapability 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 workingcapital requirements

– Allow customers to have access to fundsespecially where BG is issued for advancepayment or release of retention fundsunder contracts

SHIPPING GUARANTEE (SG)

• Usage

To expedite the release of goods which have arrived before the originaltransport documents.

• Features

– Guarantee or undertaking by the issuingfinancial institution to the shipping agentto release the goods without productionof original transport documents

– Usually issued where the goods areinitially imported under LC and is to beearmarked against TR/BA facilities

• Benefits

Facilitate meeting of production orcontract deadlines.

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