Business Financing

BUSINESS FINANCING CHAPTER 7

INTRODUCTION CAPITAL is the net value of a company that exists in the form of cash, inventories and facilities. •

Fixed Capital (Modal Tetap) – needed for purchasing of long term fixed asset

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Rolling Capital (Modal Kerja) – short term funds for financing operational cost

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Growing Capital (Modal Pertumbuhan) – financing for product development; increased production, labor and sales; and purchase of equipments

INTRODUCTION • How much capital is needed? • What form of financing is suitable? • How much ownership and control to be given away?

FINANCING METHOD Loan Financing (Pembiayaan Berbentuk Hutang) • Short Term Loan (Pembiayaan hutang jangka pendek) – duration of 12 months and less. In the form of overdrafts, rolling credits, commercial credits, credit card purchase or cash advance. • Used in daily operations for supplies, raw materials, salary and allowances. • Long Term Loans (Pembiayaan hutang jangka panjang) - more than 12 months. Used to purchase fixed assets of which can be used as collateral for the said loan

FINANCING METHOD Loan Financing (Pembiayaan Berbentuk Hutang) ADVANTAGE • Retain ownership and control of business • Freedom on financial decision • Creditors do not have any claim on loans after full settlement DISADVANTAGES • On-time payment regardless of company’s performance • Upon failure to pay: high interest rate, renewed payment term, lesser credit facility, creditor might claim in full • Creditor prefers long existing businesses with good records

FINANCING METHOD OVERDRAFT • Short term facility by a commercial bank: allows of withdrawal more than cash available in current account to a pre-agreed limit. •

Funds rolling capital for inventories, business credit facility or operational cost

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COLLATERAL (CAGARAN): accepted is in the form of easily liquidified assets such as deposit certificates, bonds etc.

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NO COLLATERAL (TANPA CAGARAN): does not need any form of asset if the client is high integrity, strong financial support and good business record

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GUARANTEE (JAMINAN): personal guarantee, corporate guarantee, debentures or lien

FINANCING METHOD OVERDRAFT • Interest rate is based on actual usage of facility •

Commitment fee is imposed on unused facility

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Interest rate is charged on unpaid balance for the day and debited into clients account monthly

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Interest rate depends on type of client, type of business, form of collateral and business trends

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Advantages of overdraft: flexible is funds management as it can be used continuously as long as it is well-organised and the business is conducted satisfactorily

FINANCING METHOD Rolling Credit (Kredit Pusingan) • Short term and used for rolling capital •

Does not need a current account with a bank

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Based on maturity term

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Suitable for a company with good financial status due to financing cost is lower to other type of financing

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Can be continuously used as it is a rolling facility

FINANCING METHOD Termed Loan (Pinjaman Berjangka) • Also known as fixed loan – a form of long term loan on a fixed duration of which the maturity is more than a year •

Finance fixed asset purchase

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Financing a particular project

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Dispense in full amount

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Can be dispense of progressively

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Usually for construction projects by the progress its completion

FINANCING METHOD Termed Loan (Pinjaman Berjangka) • Payback includes interest rate agreed upon during application •

Payback done by installment – 3 months, 6 months or annually

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Depends on reason of loan, payback capability and duration of payback

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Termed loan is normally given to clients that will receive a sum money in the future e.g. government contract

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Interest rate is based on BLR (Base Lending Rate) plus a predetermined margin by the bank on monthly basis

FINANCING METHOD Hire Purchase (Sewa Beli) • Offered by financial institution to purchase tools, facilities, machineries and vehicles via installments •

Banks will buy the goods and rent it out to clients

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Minimun 10% deposit on product cost, remaining balance to be borne by the bank

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Installment to the bank till the end of duration agreed

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Ownership is with the bank till full settlement of which the ownership is the clients

FINANCING METHOD Mortgage (Pajakan) • A contract of which the bank buy the fixed asset and rent it to the client •

Client till pay in installment for a certain period

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Client has full right to usage of asset during the term

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Ownership is of the bank

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Usage of asset without purchasing

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Increased of cash flow without spending money on asset

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Tax deductible on rental of equipment

FINANCING METHOD Operational Mortgage (Pajakan Operasi) • BANK will provide asset to the client complete with technical knowhow and maintenance of asset •

CLIENT agrees on a predetermined rental rate for the duration

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The duration of mortgage is normally shorter than the economic lifespan of the asset. Upon mortgage completion, it will be returned to the bank and mortgaged to another party, to the same client or sold of as a used asset.

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E.g. : computers and photocopy machines

FINANCING METHOD Financial Mortgage (Pajakan Kewangan) • Clients determine what is needed and apply to the bank for purchase •

The asset is mortgage to the client via a predetermined installment rate and period. Maintenance and insurance of asset to be borne by client

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Mortgage contract is for the duration of economic lifespan of asset and cannot be ended before the term

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Amount of installment includes cost of asset, deposits, remaining value and interest rate. Payback is higher than actual cost of product.

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Upon mortgage completion, asset can be returned to the bank, bought at market price or sold off as a used asset to another party.

FINANCING METHOD Factoring (Pemfaktoran) • Financing for business offering 30 days to 120 days credit •

Bank buys over invoice and manage the collection

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Money generated through invoice sales

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Helps cash flow and rduce expenses in managing sales account

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Recursion Factoring (Pemfaktoran rekursa) – client must do the collection. Client must pay balance in case of collection failure.

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Non Recursion Factoring (Pemfaktoran itu tanpa rekursa) – client sell off rights to debt and uncollected accounts. Client has no obligation to the bank should the collection fail.

APPLYING FOR A LOAN • • • • • • • • • • •

Is the capital needed? Can the company manage the existing cash flow efficiently? What is the loan for? How soon is the loan needed? Desperation for loan might not allow for requirement fulfillment. Does he has a good personal credit record? Is the business capable of loan payback? Does the business has a positive net returns? Does the business has any outstanding loans or debts? Does the entrepreneur has enough personal capital for the business? Does the entrepreneur has any collateral? Is the entrepreneur willing to give personal guarantee to the business loan? Does the business has a good management team?

APPLYING FOR A LOAN Summary (Ringkasan) • It should be clear, compact and accurate. • Explain is brief how the loan will be utilized, how it will be repaid and how the loan will benefit the company. • Also includes the interesting and unique characteristics of the business.

APPLYING FOR A LOAN Management Profile (Profil Pengurusan) • Who plays the vital role in the management? • Background of academic qualifications and job experience are important of each team members.

APPLYING FOR A LOAN Area of Business (Keterangan Perniagaan) • Business explanation has to be solid. • Includes summary about history; past and current activities. • Show clearly that the entrepreneur fully understand the nature of business involved, its market trend and risks incurred. • Explain briefly about the product and/or offered.

APPLYING FOR A LOAN Forecast (Unjuran) • Show a 3-year revenue and cash flow forecast. • The forecast has to be clear and realistic. • Contingencies must be included IF the assumptions made are not met.

APPLYING FOR A LOAN Financial Statement (Penyata Kewangan) • Includes business and personal financial statement. • Ensure that the entrepreneur fully understand the implications of what was being presented in the financial statement.

APPLYING FOR A LOAN Loan Motive (Tujuan Pinjaman) • Prepare a detail statement on how the loan will be used. • Make sure the entrepreneur understand the type of loan applied for. • NEVER FORGET to include the loan and its payback period (including interest rates) in the forecasted cash flow and income statement.

APPLYING FOR A LOAN Amount of Loan (Jumlah) • Explain how much loan is needed and how much is the personal capital input. • Amount needed is based on the usage of loan and the entrepreneurs capacity of payback.

APPLYING FOR A LOAN Payback Plan (Rancangan Bayaran Balik) • There are a few assumptions to be made on the payback plan: • Explain how the payback will be made; installments by monthly, quarterly, half yearly or annually. • It should explain the entreprenuers capacity to payback in the future.

WHAT BANKERS LOOK FOR IN AN ENTREPRENEUR • PERSONALITY (KEPERIBADIAN) is often related to ethics such as honesty, integrity, trustworthy and accepted morality in a society. • CAPABILITY (KEUPAYAAN) is the entrepreneurs capacity to be able to payback the loan amount.

WHAT BANKERS LOOK FOR IN AN ENTREPRENEUR • CAPITAL (MODAL) is the financial strength of an entrepreneur. This financial capacity is determined by the entrepreneur’s equity share in the business. • COLLATERAL (CAGARAN) is used as a security or insurance should the entrepreneur fails in the loan repayment.

WHAT BANKERS LOOK FOR IN AN ENTREPRENEUR • ENVIRONMENT (KEADAAN) refers to the environment of the business core. Environment includes all factors that could affect the capability of an entrepreneur to repay the loan which is sometimes cannot be controlled by both banker and entrepreneur.

Equity Financing Equity Financing does not include the responsibility to pay back any form of funds forwarded. Equity Financing offers the investor a form of ownership in the business.

Equity Financing ADVANTAGES • Entrepreneur does not have to payback the money invested in the company. • A business capable of attracting outside investors shows that the business has a good growth potential and profitable future. • An investor dedicated to the success of the company is a good source of consultation and networks.

Equity Financing DISADVANTAGES • The entrepreneur does not have total control of the company. It might be more difficult to manage in the future. • The investors do not always agree to the plans of the business growth. This is because the investors are also part of the shareholders and that their views might be against the views of the entrepreneur’s. • Equity financing is much more complex and sometimes requires a third party intermediary that could include lawyers and accountants.

Sources of Equity Financing • Owners Capital (Modal pemilik) is the most common source of fund for a new business. It could either be a personal saving or sale of personal asset.

Sources of Equity Financing • Family and Friends (Keluarga dan kenalan) is also considered an important source of equity financing. It is normally a source for financing new business and easily attainable for small time entrepreneurs.

Sources of Equity Financing • Informal Investor (Pelabur tak formal) also known as “angels” consists of financially strong individuals that invests their money for start-up projects or new business ventures.

Sources of Equity Financing • Venture Capital (Modal teroka) is funds by companies or professional bodies to invest with the project owner or new growing business.

Sources of Equity Financing Venture Capital • High Returns (Pulangan tinggi): Venture capitalist takes high risk in investing in a new business, thus they require a high return that compensates the risks involved; sometimes much more returns than the initial investments. The expected returns for a venture capitalist is between 5 to 10 years.

Sources of Equity Financing Venture Capital • Ease of Exit (Mudah Keluar): Venture Capitalist will only invest in projects that enables them to leave easily through profitable sale in the future.

Stages of Equity Financing Seed (Benih) • Financing for research and product development. • Hard to get financing as businesses must prove that the product has market potential. • Normally, a small fund is needed for research and to prove the viability of the concept.

Stages of Equity Financing Start-up (Permulaan) • Funds for companies to develop and market the product. • The company is in the midst of organizing process or has been in the market for a short period of time but did not make any form of sale as yet. • Hard to obtain funds.

Stages of Equity Financing Development (Pembangunan) Funds for development and growth of companies with previous track records. Venture capitalist plays most important role at this stage which can be divided into: • First Stage: Funds needed to increase production capacity • Second Stage: Funds needed to increase production capacity and marketing.

Stages of Equity Financing Mezzanine (Mezanin) Funds needed for public offering. The company is already making profits but needed extra financing to increase production capacity; factory or plant Funds needed to reduce financing cost and to attract potential investors towards share value offered in the future.

Stages of Equity Financing Management Buy Out (Belian Oleh Pengurusan) • Comes in forms of loan or equity investment that enables an existing management to buy over an existing business or part of it from an existing owner.

CONCLUSION An entrepreneur must understand the form, type and sources for business financing. He/she must understand the evaluation criteria to get a fund. • Loan Financing • Equity Financing • Criteria seached for by a venture capitalist is a strong management team, product uniqueness, market opportunity and growth potential. • Stages to Equity Financing starts with seed, start-up, development, mezzanine and management buy out.