Top 9 Methods to Finance Your Business in Malaysia! Part I

Top 9 methods to finance your business in Malaysia.

Business owners face the dilemma of whether to expand their current businesses constantly, as they are unsure of the most efficient and effective ways to finance their businesses.

Undoubtedly, running a business is challenging, every single step and decision needs to be planned as it might lead to massive impact or even ripples on your business. Planning is the key to financing a business. Before starting to finance a business, there’s a must to have your own business’s financial statement analysis and business valuation to better understand the financial position of your business. Research and seeking opinions from professionals are ways to avoid making a wrong decision.

Established BusinessStart Up Companies
Working Capital Financing
Unsecured Loan
Secured Loan
Invoice Financing
Bridging Loan
Angel Investors
Government Grant & Fund
Venture Capital or Risk Management
Table 1. Business Finance Methods for Different Stages of Business

Let’s look at top 9 methods to finance a business in Malaysia. Each financing method is suitable for different stages of a business, from startup to growth.


Working Capital Financing

Working Capital Financing is a loan when a business borrows money to cover day-to-day operations and payroll rather than purchasing equipment or investment. Hence, SMEs can gain the cash flow to ensure their business’s operation or expand their business.

This is a financing solution that companies often use. It is not only to solve unstable cash flow challenges, but also a way to better manage the cash flow, which is conducive to the sustainable development of the company. Large and small companies in any industry use working capital financing to expand their operations, for example, large companies provide funds for other businesses for expansion. In this case, the loan will act as a buffer until the business becomes mature.

Small companies are meant to close the gap difference between cash inflows and outflows as the business grows. Working capital financing is beneficial to companies with different business types and operating purposes, such as: to bridge the payment gap of the business, to meet its working capital requirements, to help the business maintain daily operations, to rely on accounts payable to drive its capital turnover, and to support its day-to-day operations.


Unsecured Loan

Unsecured Loan is a loan that doesn’t require any type of collateral which also implies greater risk as the businesses will be facing lawsuit if they are unable to pay the liabilities. Hence, the interest rate is usually higher too.

It involves smaller loan amounts and shorter payment terms. The loan amount will be approved based on the borrower’s creditworthiness, financial situation and ability to pay. All these factors are the keys to determining the interest rates. Borrowers who have higher credibility have higher chance to get the loan at a lower interest rate. This helps SMEs or business owners who do not own valuable assets or are reluctant to risk personal or company property, to improve the cash flow of the business without any collateral. Banks in Malaysia that provide unsecured loans including:

  • Maybank
  • Public Bank
  • CIMB Bank
  • Ambank
  • OCBC Bank
  • UOB Bank
  • Hong Leong Bank
  • RHB Bank
  • Bank Islam
  • HSBC Bank

Although the loan amount is lower, it is suitable for businesses that only need a small amount of funds without any collateral, and face the risk of losing the collateral. Compared with the mortgage loan, the risk that the lender needs to bear is the case where no collateral is required, but the interest rate is higher. The flexible repayment period allows you to choose the repayment period based on your repayment ability. The repayment period is usually set within 3 to 5 years; however, the application threshold is high, and it will be difficult to obtain an unsecured loan, especially if the credit history is poor and the businesses who have an unstable income. Because of the unnecessary of providing any collateral, it omits the long application processes. Businesses get the funds quickly and help with turnover. Since businesses are utilizing personal credit as collateral, the loan amount normally is not that high.

Since December 2019, Covid19 has affected the whole world especially large organizations and SMEs. Following with war in Ukraine, inflation and the cancellation of petrol subsidies, it makes peoples even struggle in this period. If the first 5 methods are not suitable for your business, you may consider the next 5 methods.


Secured Loan

Secured Loan is business loan that require some type of collateral as a condition of borrowing. Collateral is a tangible asset that serves as a “guarantee” for payment of a loan, such as: fixed assets, machinery, real estate with a lien (Caveat). In the event of default on the secured loan, the borrower may repossess, foreclose or overtake the assets to pay the outstanding balance.

Besides, loans are protected and secured loans pose less risk to the borrower. Compared to unsecured loans, the interest rates and borrower requirements are generally lower. Of course, some lenders do not set a limit to their maximum loan amount, and usually the final loan amount is determined according to the appraisal value of the collateral. Different lenders may have different Loan-to-Value Ratios, so business owners have to their own research to find the best loan solution.

If you have multiple assets and are willing to use them as collateral for higher loan amounts, lower interest rates, and more beneficial payment terms, you can choose to apply for a secured loan. Alternatively, if you need to get cash on short notice, an unsecured loan can meet your financing needs too!

After all, mortgages benefit from lower monthly payments, lower interest rates and more beneficial payment terms, making them ideal for new businesses to solve cash flow crisis. Although higher loan amounts are secured against relatively large value of real estate, high loan amounts are available for large projects and programs such as buying machinery or financing purchase orders; but backed by assets – if the business doesn’t have enough cash to pay the loan, the lender can overtake the assets that used as collateral. Longer and more flexible payment terms allow you to have more time to pay the loan up to 20 to 30 years. The longer the payment terms mean a higher interest rate of the loans.


Invoice Financing

Invoice financing is suitable for SMEs who provide amounts due. It helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full. It is easy to manage as the businesses’ clients are unaware the invoice had been financed.

Shortage of fund and cash flow are the most common problems faced by SMEs. It can be solved by invoice financing for the short run. Businesses use their unpaid invoices as collateral for financing.

How invoice financing is structured?

The business provides their services and invoices to their clients. The clients pay the outstanding amount after a period of time, normally in 1-3 months. The invoices are managed by financial companies and provide cash to businesses around 82% to 92% upfront of what the invoices are ultimately worth. Assuming the lender receives full payment for the invoices, it will then remit the remaining 10% to 20% of the invoice amounts to the business, and the business will pay interest for the service. Last, as a representative of the businesses, the financial companies will collect the outstanding amounts from the clients.


Bridging Loan

Bridging Loan is a short-term loan used until the company secures permanent financing or pays an existing obligation It can be paid after they receive the outstanding amount. It solves the temporary needs of cash flow capital of listed companies or pre-listed companies. It is mainly used to meet the capital expenditures required in the early stage when the raised funds have not yet been in place.

Working capital loans provided by banks to listed companies or pre-listed companies are short-term financing. Its payment period is relatively shorter, from half a year to maximum of one year. SMEs especially real estate developer can obtain cash flow to start projects through bridge financing.

Bridge financing mainly takes the form of debt or equity in a shorter period, but a very high interest rate.

If the business is not performing well and credibility still not improved, then the mortgage contract will have some issues. Working capital loans are not suitable for business that lacks the cash flow to meet regular payments. It is because the working capital ratio indicates – how well a business can meet its current debt and how much working capital financing will be required in the future.

In current global situation, government grants and crowdfunding are the ways that can finance a business. While unsecured loans, working capital financing, and invoice financing are the options to manage the current Covid19 situation.

As the average age of business owners younger, traditional financing methods may become less viable. Young owners are less likely to own a property, so it makes the banks reluctant to borrow the loan. The best financial loan that suits your business depends on your business nature as well.

If you need professional advices for your business’s financial status, you may seek for professional firms such as Vanta Capital – a one-stop business financing solution firm, who has comprehensive business finance knowledge and experience. They provide one-to-one professional financial consultation, various financial aid, and responding to the financial needs of enterprises at different stages of operation.

The first step is to engage a business financial advisor who provides professional reviews and analysis for the business. Recommendations based on analysis of financial status is always the most effective way.

Vanta Capital has over years of experience in commercial loan and they are capable in helping companies avoid leaving bad records in bank. Hence, they ensure that your company’s future applications and strategies can be successful to grow your business.

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