When first starting out and lacking a track record with which to apply for funding, business owners typically raise money from friends and family, or tap their personal credit cards or loans to finance their business. However, as an SME grows and starts to bid for bigger projects or eye expansion, business owners need to consider business loans.
Why? Typically, since business loans are collateralised (backed by company assets or invoices) and SMEs would, at that point, have multi-year records of business transactions and a track record of cash flows, your banker is likely to offer you lower interest rates compared to if you took out a personal loan.
For instance, personal credit card interest rates range from 15%-18% per annum in Malaysia, whereas business loans can feature fixed interest rates as low as the Base Lending Rate -2% per annum (at the time of writing). Moreover, regularly servicing your business loans also allow you to build a credit profile for your SME to ensure creditworthiness and show your investors, shareholders, and business partners that you have a solid plan to grow the business over the long-term.
Depending on the age and track record of your SME, there is a wide variety of business loans available to support your growth ambitions, with differing levels of flexibility with repayment and interest rates, and maximum loan amounts allowed.
Here are five common types of business loans that should cover most of your needs: 1) term loans, 2) business lines of credit, 3) business premise loans, 4) invoice financing, 5) microfinance.
With a term loan, you borrow a lump sum of cash upfront in exchange for specific borrowing terms such as a specific repayment schedule. These loans can be used to fund business operations, cash flow for new stocks, marketing, manpower, equipment upgrade, renovation, digitalisation, and other aspects related to your business. Term loans can be both secured or unsecured, as well as feature fixed or floating interest rates. With collateral, your business may qualify for larger amounts or enjoy lower interest rates.
Also called a business overdraft, a business line of credit is tied to your business banking account and is a set amount of funding available to tap anytime your business needs it. Similar to credit cards, your overdraft allowance or business line of credit limit resets after you pay down on balance due. Unlike loans, typically, there is no application process for this, as banks will have the discretion to offer this to their business clients with a good track record. If you believe your SME needs this type of funding, talk to your bank relationship manager to request a business line of credit.
Similar to equipment financing, business premise financing is asset-backed by the commercial, retail, industrial or residential space you want to buy or refinance, so you don't have to put up any other collateral. Similar to a housing loan, business premises financing has longer-term repayment periods and very high financing margins, though you probably will still have to fork up an upfront down payment on the premise. Typically, the Loan-to-Value (LTV) ratio determines how much of an existing building can be mortgaged or refinanced. For instance, Alliance Bank's Business Premises Financing product offers up to 95% financing margin, a repayment period of up to 25 years, and a variable interest rate as low as the Base Lending Rate (BLR)-2% per annum.
Also called factoring or trade financing, invoice financing is suitable for B2B businesses with a lot of unpaid invoices. This is an asset-backed loan type because your unpaid invoices are essentially the collateral. Invoice financing helps you cover short-term gaps in your cash flow needs, such as paying employees wages, or overheads, while waiting for your customers to pay you. Due to the short-term nature of invoice financing, lenders may charge interest rates on a weekly basis, and these may compound to be quite high over a full year. If you approach peer-to-peer (P2P) financing sites that offer invoice financing, interest rates may be even higher or there may be hidden charges such as processing, utilisation and early repayment fees. So buyer beware!
Last but certainly not least is microfinance, a blanket term used to refer to financing offered to micro, small, and medium enterprises (MSMEs). Often these loans are partially guaranteed or offered by developmental banks or through government schemes to encourage entrepreneurship. In Malaysia, many local banks participate in Bank Negara Malaysia's microfinance scheme that enables easy, fast, and convenient access to business financing of up to RM50,000 without collateral from participating financial institutions. With no collateral required, repayment periods can range from as short as one month to as long as seven years. One participating Malaysian bank is Alliance Bank, with its Alliance Digital SME Express Financing product offering loans from RM20,000 for small and micro businesses with minimum one year track record and RM50,000 in turnover.
Now that you know the most common types of business loans available in Malaysia, you can choose which loan best fits your current business needs. Time is money for business owners and they don't need to be bogged down with paperwork or waiting for loan approvals.
With Alliance Digital SME Express Financing and Alliance Digital SME Cash Flow Financing products, you can apply for financing of up to RM1 million, without even leaving your business premises. Just submit one document online, and get your new funds approved within 24 hours. No branch visits, no time wasted, no sweat!