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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
<strong>the</strong> 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 <strong>the</strong> 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 <strong>the</strong> market, depending on your financing needs and <strong>the</strong> suitability of
such financing to your business.
This <strong>booklet</strong> will provide you with <strong>the</strong> basic knowledge on different types of
products available, its uses and benefits for SMEs. It aims to help you identify <strong>the</strong>
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 <strong>the</strong> 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 <strong>the</strong> suitability of <strong>the</strong> products before
making a decision on <strong>the</strong> 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 fur<strong>the</strong>r 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 o<strong>the</strong>r assets
such as vehicles, equipment, fixtures
and machineries. Should you decide to
purchase or lease <strong>the</strong>se assets, <strong>the</strong>
available financing products are listed
below:
TERM LOAN
• Usage
To aquire fixed assets (immovable
properties i.e. land and buildings, as
well as commercial vehicles).
• Features
A loan granted for a predetermined
length of time (tenure), with repayments
by instalments.
• Benefits
Facilitate management of funds, as
repayment amount is predetermined.
2

LEASING
• Usage
To acquire capital assets such as equipment
and machineries.
• Features
– A facility which allows SMEs to lease
equipment from financial institutions
without having to purchase <strong>the</strong> equipment
– There are 2 types of leasing facilities
available:
i. Operating Lease
Ownership is held by <strong>the</strong> financial
institutions
ii. Finance Lease
Ownership is held by <strong>the</strong> financial
institutions. However, <strong>the</strong> lessee has
<strong>the</strong> option to purchase <strong>the</strong> asset at
<strong>the</strong> end of <strong>the</strong> tenure.
• Benefits
– Facilitate management of funds, as leasing
instalments amount is predetermined
– For an operating lease, maintenance cost is
borne by <strong>the</strong> lessor (financial institution)
– Instalments paid for leasing are eligible
for full tax relief
INDUSTRIAL HIRE-PURCHASE
• Usage
To acquire capital assets such as
equipment and machineries.
• Features
– A form of financing whereby <strong>the</strong> asset
is purchased by <strong>the</strong> financial institution
and hired to SMEs, with <strong>the</strong> ownership
being retained by <strong>the</strong> financial
institution until <strong>the</strong> loan is repaid
– SMEs make periodic repayments to <strong>the</strong>
financial institution
• Benefits
– Allow SMEs to own equipment and
machineries without having to pay <strong>the</strong>
full amount upfront
– Facilitate management of funds, as
repayment amount is predetermined
– Free up available funds for o<strong>the</strong>r
purposes
3

Although flexible,
overdraft can be quite
costly
WORKING CAPITAL
Besides asset financing, your business
needs working capital for <strong>the</strong> day-to-day
running of <strong>the</strong> business. Generally, <strong>the</strong>
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 <strong>the</strong> unutilised
portion of <strong>the</strong> overdraft or revolving credit.
The benefit and features of <strong>the</strong> products
offered by financial institutions for working
capital purposes are listed as follows:
OVERDRAFT (OD)
• Usage
To meet working capital needs i.e. payment
of salaries, purchases, utilities etc.
• Features
– A revolving loan made available to a
business customer via a current account,
whereby <strong>the</strong> borrower may withdraw
<strong>the</strong> required amount each time by issuing
cheques, as long as <strong>the</strong> OD limit is not
exceeded
– A commitment fee of 1% is charged on
<strong>the</strong> unutilized portion of <strong>the</strong> facility
– Interest is calculated on a daily basis
based on <strong>the</strong> balance outstanding at <strong>the</strong>
end of each business day
• Benefits
Flexibility in funds management in view
that <strong>the</strong> OD is continuously available,
provided <strong>the</strong> facilities are properly
conducted and <strong>the</strong> business continues to
operate satisfactorily.
4

REVOLVING CREDIT
• Usage
Similar to OD, it is short-term in nature
and is used to meet short-term working
capital requirements.
• Features
– 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
<strong>the</strong> SME to <strong>the</strong> financial institution
stating <strong>the</strong> period of <strong>the</strong> loan required
• Benefits
– Lower financing costs compared to
conventional financing instruments
– Continuous availability of funds, as
facility can be rolled over
5

FACTORING
• Usage
To obtain short term financing of trade
debts (sale of goods to customers on
credit terms).
• Features
A method of financing, where <strong>the</strong>
financial institution purchases <strong>the</strong> client’s
trade invoices at a discount from <strong>the</strong> face
value of <strong>the</strong> invoices, and provide cash
advances for business purposes.
• Benefits
– 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 <strong>the</strong> working capital
financing, financial institutions also
provide financing for SMEs that are
involved in domestic and international
trade. Some of <strong>the</strong> common trade
financing facilities provided by financial
institutions 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 financial
institution to pay a seller a given amount
of money subject to <strong>the</strong> following
conditions:
– On presentation of specified documents
as set out in <strong>the</strong> terms and conditions
of <strong>the</strong> LC
– Within a specified time limit
– At a specified place
6

• Benefits
– Can assure payment is made to <strong>the</strong>
beneficiary
– Able to obtain a lower purchase price of
<strong>the</strong> goods and longer payment terms, as
<strong>the</strong> LC provides an indication of payment
assurance, from <strong>the</strong> sellers’ perspective
– Documents presented will be examined
by trade financing specialists
– Do not have to communicate with <strong>the</strong>
foreign seller so often since <strong>the</strong> whole
transaction will be routed through and
handled by <strong>the</strong> financial institution
TRUST RECEIPTS
• Usage
Extends credit facility on bills drawn under
<strong>the</strong> financial institution’s own LC. As such,
customers do not have to make immediate
payments on <strong>the</strong> LCs.
• Features
A financing facility that enables a
customer to accept delivery of <strong>the</strong>ir
local/foreign purchases prior to payment
of <strong>the</strong> sight bills being made by <strong>the</strong>m.
• Benefits
– Enables <strong>the</strong> customer to pay <strong>the</strong> seller
promptly
– Enables <strong>the</strong> customer to take delivery
of <strong>the</strong> goods without paying for it
immediately
– 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 by
customers to <strong>the</strong>ir order, payable on a
specific future date and accepted by
<strong>the</strong> financial institution for <strong>the</strong> 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)
• Benefits
– 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 <strong>the</strong> prevailing
market rate should <strong>the</strong> customer need
immediate funds
– Provides two-way financing as BA financing
is 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 <strong>the</strong> financial institution
for exporters, whereby <strong>the</strong> financial
institution may purchase customers’ outward
bills for collection and <strong>the</strong> customers’ account
is credited immediately with <strong>the</strong> proceeds.
• Benefits
– Able to obtain immediate funds upon
presentation of necessary documents
– Able to improve cash flow of <strong>the</strong>
business since SMEs can obtain
immediate funds from <strong>the</strong> financial
institution
FOREIGN EXCHANGE CONTRACTS (FEC)
• Usage
Generally for businesses, with <strong>the</strong>
following features:
– Regularly importing or exporting in
foreign currencies
– Of a sizeable level
– With credit standing that is acceptable
to <strong>the</strong> financial institution
• Features
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

• Benefits
– Customers are able to fix <strong>the</strong>ir exchange
rates for purpose of costing/hedging
– No fur<strong>the</strong>r exposure to exchange risk
fluctuations especially in volatile markets
or conditions
EXPORT CREDIT FINANCING (ECR)
• Usage
– Commonly used by exporters with <strong>the</strong>
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 <strong>the</strong> negative list as provided
by Bank Negara Malaysia
ii. Direct exporter must have exported
at least RM3 million of eligible
goods per annum in <strong>the</strong> last
financial year and RM3 million in
<strong>the</strong> preceding 12 months
– For agricultural products, <strong>the</strong> amount
is a minimum of RM1 million in <strong>the</strong> last
financial year and preceding 12 months
• Features
– Administered by <strong>the</strong> EXIM Bank.
– 2 types of facilities available:
• Benefits
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 <strong>the</strong>
nearest thousand.
Certificate of Performance (CP)
Eligible amount specified in <strong>the</strong> CP.
ii. Post-shipment
Amount of financing can be up to
100% of <strong>the</strong> export bill, rounded
to <strong>the</strong> 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)
• Usage
Assist customer in making payments
for trade transactions.
• Features
– Documents are channeled through
<strong>the</strong> financial institution with specific
instructions
– Financial institutions handle documents
on instructions received (from customer
or ano<strong>the</strong>r branch or financial institution)
to:
• Benefits
– Buyer:
i. A safe method of payment as <strong>the</strong>
payment can be deferred by <strong>the</strong> buyer
until <strong>the</strong> goods arrive or even later
if delayed payment arrangements are
agreed to
ii. Customers will have time to inspect <strong>the</strong>
documents before paying/accepting
– Seller:
i. Documents of value, i.e. title
documents, are not released to <strong>the</strong>
buyer (drawee) until payment or
acceptance has been affected
ii. Once <strong>the</strong> bill is accepted by <strong>the</strong> buyer
(drawee), <strong>the</strong> 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 o<strong>the</strong>r 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 (<strong>the</strong> third party),
where it guarantees <strong>the</strong> payment of a
certain sum of money up to a certain limit
to a beneficiary, in <strong>the</strong> 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 <strong>the</strong>
relevant guarantee. There are several types
of guarantees which can be arranged by
<strong>the</strong> financial institution depending on <strong>the</strong>
specific requirements of <strong>the</strong> borrower.
A financial institution may take into
account a number of factors before issuing
a guarantee, such as, <strong>the</strong> extent of liability,
period and expiry, and credit standing
of <strong>the</strong> customer. The normal types of
guarantees are:
BANK GUARANTEE (BG)
• Usage
– 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 <strong>the</strong> corporate side, BGs could also
be given for <strong>the</strong> 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 <strong>the</strong>
amount and period of <strong>the</strong> guarantee
A financial institution
will consider
a number of
factors before
issuing a guarantee
11

– Maximum period of guarantee is
guided by <strong>the</strong> rules of <strong>the</strong> Association
of Banks in Malaysia i.e. guarantee
should not be issued for more than
1 year except for Government contracts.
The expiry of <strong>the</strong> guarantee must not
be more than 12 months after <strong>the</strong> expiry
of <strong>the</strong> original contract
• Benefits
– Shows <strong>the</strong> customer’s/applicant’s
capability to perform work as specified
in <strong>the</strong> contract
– Able to obtain more favourable
trade terms from <strong>the</strong> beneficiary if a
BG is produced
– There is no necessity to raise cash to
meet <strong>the</strong> deposit requirements and
funds could be used to support working
capital requirements
SHIPPING GUARANTEE (SG)
• Usage
To expedite <strong>the</strong> release of goods
which have arrived before <strong>the</strong> original
transport documents.
• Features
– Guarantee or undertaking by <strong>the</strong> issuing
financial institution to <strong>the</strong> shipping agent
to release <strong>the</strong> goods without production
of original transport documents
– Usually issued where <strong>the</strong> goods are
initially imported under LC and is to be
earmarked against TR/BA facilities
• Benefits
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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