Download the booklet on SME - financing products for - Banking Info
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Small and Medium Enterprises<br />
YOUR LOANS<br />
Small and Medium<br />
Enterprises –<br />
Financing Products <strong>for</strong><br />
Your Business<br />
A c<strong>on</strong>sumer educati<strong>on</strong> programme by:
c<strong>on</strong>tents<br />
1 Introducti<strong>on</strong><br />
2 The right product <strong>for</strong><br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> right purpose<br />
Asset acquisiti<strong>on</strong>/<br />
business expansi<strong>on</strong><br />
– Term loan<br />
– Leasing<br />
– Industrial hire-purchase<br />
4 Working capital<br />
– Overdraft<br />
– Revolving credit<br />
– Factoring<br />
6 Trade <strong>financing</strong><br />
– Letter of credit or documentary credit<br />
– Trust receipts<br />
– Banker’s acceptance<br />
– Bills of exchange purchased<br />
– Foreign exchange c<strong>on</strong>tracts<br />
– Export credit <strong>financing</strong><br />
10 Trade services<br />
– Outward/inward bills <strong>for</strong> collecti<strong>on</strong><br />
11 Guarantees<br />
– Bank guarantee<br />
– Shipping guarantee<br />
Disclaimer<br />
This document is intended <strong>for</strong> your general in<strong>for</strong>mati<strong>on</strong><br />
<strong>on</strong>ly. It does not c<strong>on</strong>tain exhaustive advice or<br />
in<strong>for</strong>mati<strong>on</strong> relating to <str<strong>on</strong>g>the</str<strong>on</strong>g> subject matter nor should<br />
it be used as a substitute <strong>for</strong> legal advice.<br />
Date: 1 March 2004
Introducti<strong>on</strong><br />
Financial instituti<strong>on</strong>s offer a<br />
wide range<br />
of <strong>financing</strong> <strong>products</strong> to cater<br />
<strong>for</strong> your business needs<br />
To cater <strong>for</strong> your business needs, financial instituti<strong>on</strong>s offer a wide range of<br />
<strong>financing</strong> <strong>products</strong> <strong>for</strong> small and medium enterprises (<strong>SME</strong>s) under both<br />
c<strong>on</strong>venti<strong>on</strong>al and Islamic banking. You can choose from a wide variety of <strong>products</strong><br />
offered in <str<strong>on</strong>g>the</str<strong>on</strong>g> market, depending <strong>on</strong> your <strong>financing</strong> needs and <str<strong>on</strong>g>the</str<strong>on</strong>g> suitability of<br />
such <strong>financing</strong> to your business.<br />
This <str<strong>on</strong>g>booklet</str<strong>on</strong>g> will provide you with <str<strong>on</strong>g>the</str<strong>on</strong>g> basic knowledge <strong>on</strong> different types of<br />
<strong>products</strong> available, its uses and benefits <strong>for</strong> <strong>SME</strong>s. It aims to help you identify <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
<strong>products</strong> which are most suitable <strong>for</strong> your <strong>financing</strong> needs.
Your<br />
business<br />
would require<br />
<strong>financing</strong> <strong>for</strong> asset<br />
acquisiti<strong>on</strong> and<br />
working capital<br />
THE RIGHT PRODUCT FOR THE RIGHT<br />
PURPOSE<br />
In general, your business would require<br />
<strong>financing</strong> <strong>for</strong> asset acquisiti<strong>on</strong> and working<br />
capital. There are, however different<br />
types of <strong>financing</strong> that you can select from.<br />
For example, in acquiring business<br />
equipment, fixtures and fittings, you can<br />
choose to finance <str<strong>on</strong>g>the</str<strong>on</strong>g> acquisiti<strong>on</strong>s through<br />
an industrial hire purchase, leasing or a<br />
term loan. The final choice is yours to make.<br />
However, you may need to find out more<br />
about <str<strong>on</strong>g>the</str<strong>on</strong>g> suitability of <str<strong>on</strong>g>the</str<strong>on</strong>g> <strong>products</strong> be<strong>for</strong>e<br />
making a decisi<strong>on</strong> <strong>on</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> type of <strong>financing</strong><br />
<strong>for</strong> your business.<br />
The in<strong>for</strong>mati<strong>on</strong> provided is aimed to be a<br />
guide, and as such you should c<strong>on</strong>sult your<br />
respective bankers <strong>for</strong> fur<str<strong>on</strong>g>the</str<strong>on</strong>g>r clarificati<strong>on</strong><br />
and in<strong>for</strong>mati<strong>on</strong>.<br />
ASSET ACQUISITION/BUSINESS<br />
EXPANSION<br />
Your business requires assets in order<br />
to operate. These assets could be<br />
immovable properties such as factories,<br />
shophouses and buildings, or o<str<strong>on</strong>g>the</str<strong>on</strong>g>r assets<br />
such as vehicles, equipment, fixtures<br />
and machineries. Should you decide to<br />
purchase or lease <str<strong>on</strong>g>the</str<strong>on</strong>g>se assets, <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
available <strong>financing</strong> <strong>products</strong> are listed<br />
below:<br />
TERM LOAN<br />
• Usage<br />
To aquire fixed assets (immovable<br />
properties i.e. land and buildings, as<br />
well as commercial vehicles).<br />
• Features<br />
A loan granted <strong>for</strong> a predetermined<br />
length of time (tenure), with repayments<br />
by instalments.<br />
• Benefits<br />
Facilitate management of funds, as<br />
repayment amount is predetermined.<br />
2
LEASING<br />
• Usage<br />
To acquire capital assets such as equipment<br />
and machineries.<br />
• Features<br />
– A facility which allows <strong>SME</strong>s to lease<br />
equipment from financial instituti<strong>on</strong>s<br />
without having to purchase <str<strong>on</strong>g>the</str<strong>on</strong>g> equipment<br />
– There are 2 types of leasing facilities<br />
available:<br />
i. Operating Lease<br />
Ownership is held by <str<strong>on</strong>g>the</str<strong>on</strong>g> financial<br />
instituti<strong>on</strong>s<br />
ii. Finance Lease<br />
Ownership is held by <str<strong>on</strong>g>the</str<strong>on</strong>g> financial<br />
instituti<strong>on</strong>s. However, <str<strong>on</strong>g>the</str<strong>on</strong>g> lessee has<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> opti<strong>on</strong> to purchase <str<strong>on</strong>g>the</str<strong>on</strong>g> asset at<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> end of <str<strong>on</strong>g>the</str<strong>on</strong>g> tenure.<br />
• Benefits<br />
– Facilitate management of funds, as leasing<br />
instalments amount is predetermined<br />
– For an operating lease, maintenance cost is<br />
borne by <str<strong>on</strong>g>the</str<strong>on</strong>g> lessor (financial instituti<strong>on</strong>)<br />
– Instalments paid <strong>for</strong> leasing are eligible<br />
<strong>for</strong> full tax relief<br />
INDUSTRIAL HIRE-PURCHASE<br />
• Usage<br />
To acquire capital assets such as<br />
equipment and machineries.<br />
• Features<br />
– A <strong>for</strong>m of <strong>financing</strong> whereby <str<strong>on</strong>g>the</str<strong>on</strong>g> asset<br />
is purchased by <str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong><br />
and hired to <strong>SME</strong>s, with <str<strong>on</strong>g>the</str<strong>on</strong>g> ownership<br />
being retained by <str<strong>on</strong>g>the</str<strong>on</strong>g> financial<br />
instituti<strong>on</strong> until <str<strong>on</strong>g>the</str<strong>on</strong>g> loan is repaid<br />
– <strong>SME</strong>s make periodic repayments to <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
financial instituti<strong>on</strong><br />
• Benefits<br />
– Allow <strong>SME</strong>s to own equipment and<br />
machineries without having to pay <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
full amount upfr<strong>on</strong>t<br />
– Facilitate management of funds, as<br />
repayment amount is predetermined<br />
– Free up available funds <strong>for</strong> o<str<strong>on</strong>g>the</str<strong>on</strong>g>r<br />
purposes<br />
3
Although flexible,<br />
overdraft can be quite<br />
costly<br />
WORKING CAPITAL<br />
Besides asset <strong>financing</strong>, your business<br />
needs working capital <strong>for</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> day-to-day<br />
running of <str<strong>on</strong>g>the</str<strong>on</strong>g> business. Generally, <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
most c<strong>on</strong>venient <strong>for</strong>m of <strong>financing</strong> would<br />
be an overdraft facility from commercial<br />
banks. Although flexible, overdraft<br />
can be quite costly. You may be charged<br />
commitment fees <strong>for</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> unutilised<br />
porti<strong>on</strong> of <str<strong>on</strong>g>the</str<strong>on</strong>g> overdraft or revolving credit.<br />
The benefit and features of <str<strong>on</strong>g>the</str<strong>on</strong>g> <strong>products</strong><br />
offered by financial instituti<strong>on</strong>s <strong>for</strong> working<br />
capital purposes are listed as follows:<br />
OVERDRAFT (OD)<br />
• Usage<br />
To meet working capital needs i.e. payment<br />
of salaries, purchases, utilities etc.<br />
• Features<br />
– A revolving loan made available to a<br />
business customer via a current account,<br />
whereby <str<strong>on</strong>g>the</str<strong>on</strong>g> borrower may withdraw<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> required amount each time by issuing<br />
cheques, as l<strong>on</strong>g as <str<strong>on</strong>g>the</str<strong>on</strong>g> OD limit is not<br />
exceeded<br />
– A commitment fee of 1% is charged <strong>on</strong><br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> unutilized porti<strong>on</strong> of <str<strong>on</strong>g>the</str<strong>on</strong>g> facility<br />
– Interest is calculated <strong>on</strong> a daily basis<br />
based <strong>on</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> balance outstanding at <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
end of each business day<br />
• Benefits<br />
Flexibility in funds management in view<br />
that <str<strong>on</strong>g>the</str<strong>on</strong>g> OD is c<strong>on</strong>tinuously available,<br />
provided <str<strong>on</strong>g>the</str<strong>on</strong>g> facilities are properly<br />
c<strong>on</strong>ducted and <str<strong>on</strong>g>the</str<strong>on</strong>g> business c<strong>on</strong>tinues to<br />
operate satisfactorily.<br />
4
REVOLVING CREDIT<br />
• Usage<br />
Similar to OD, it is short-term in nature<br />
and is used to meet short-term working<br />
capital requirements.<br />
• Features<br />
– A <strong>for</strong>m of loan granted <strong>for</strong> a fixed<br />
period which can be rolled over up<strong>on</strong><br />
expiry<br />
– A c<strong>on</strong>venient <strong>for</strong>m of short term<br />
<strong>financing</strong> <strong>for</strong> companies with good<br />
financial standing<br />
– Drawdowns by means of a letter from<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> <strong>SME</strong> to <str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong><br />
stating <str<strong>on</strong>g>the</str<strong>on</strong>g> period of <str<strong>on</strong>g>the</str<strong>on</strong>g> loan required<br />
• Benefits<br />
– Lower <strong>financing</strong> costs compared to<br />
c<strong>on</strong>venti<strong>on</strong>al <strong>financing</strong> instruments<br />
– C<strong>on</strong>tinuous availability of funds, as<br />
facility can be rolled over<br />
5
FACTORING<br />
• Usage<br />
To obtain short term <strong>financing</strong> of trade<br />
debts (sale of goods to customers <strong>on</strong><br />
credit terms).<br />
• Features<br />
A method of <strong>financing</strong>, where <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
financial instituti<strong>on</strong> purchases <str<strong>on</strong>g>the</str<strong>on</strong>g> client’s<br />
trade invoices at a discount from <str<strong>on</strong>g>the</str<strong>on</strong>g> face<br />
value of <str<strong>on</strong>g>the</str<strong>on</strong>g> invoices, and provide cash<br />
advances <strong>for</strong> business purposes.<br />
• Benefits<br />
– Cash advances are easily and quickly<br />
obtainable<br />
– No collateral required<br />
– Able to sell <strong>on</strong> more competitive terms<br />
to credit customers<br />
TRADE FINANCING<br />
In additi<strong>on</strong> to <str<strong>on</strong>g>the</str<strong>on</strong>g> working capital<br />
<strong>financing</strong>, financial instituti<strong>on</strong>s also<br />
provide <strong>financing</strong> <strong>for</strong> <strong>SME</strong>s that are<br />
involved in domestic and internati<strong>on</strong>al<br />
trade. Some of <str<strong>on</strong>g>the</str<strong>on</strong>g> comm<strong>on</strong> trade<br />
<strong>financing</strong> facilities provided by financial<br />
instituti<strong>on</strong>s are as follows:<br />
LETTER OF CREDIT (LC) OR DOCUMENTARY<br />
CREDIT (DC)<br />
• Usage<br />
For import or local purchases of goods,<br />
materials or equipment.<br />
• Features<br />
A written undertaking by a financial<br />
instituti<strong>on</strong> to pay a seller a given amount<br />
of m<strong>on</strong>ey subject to <str<strong>on</strong>g>the</str<strong>on</strong>g> following<br />
c<strong>on</strong>diti<strong>on</strong>s:<br />
– On presentati<strong>on</strong> of specified documents<br />
as set out in <str<strong>on</strong>g>the</str<strong>on</strong>g> terms and c<strong>on</strong>diti<strong>on</strong>s<br />
of <str<strong>on</strong>g>the</str<strong>on</strong>g> LC<br />
– Within a specified time limit<br />
– At a specified place<br />
6
• Benefits<br />
– Can assure payment is made to <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
beneficiary<br />
– Able to obtain a lower purchase price of<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> goods and l<strong>on</strong>ger payment terms, as<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> LC provides an indicati<strong>on</strong> of payment<br />
assurance, from <str<strong>on</strong>g>the</str<strong>on</strong>g> sellers’ perspective<br />
– Documents presented will be examined<br />
by trade <strong>financing</strong> specialists<br />
– Do not have to communicate with <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
<strong>for</strong>eign seller so often since <str<strong>on</strong>g>the</str<strong>on</strong>g> whole<br />
transacti<strong>on</strong> will be routed through and<br />
handled by <str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong><br />
TRUST RECEIPTS<br />
• Usage<br />
Extends credit facility <strong>on</strong> bills drawn under<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong>’s own LC. As such,<br />
customers do not have to make immediate<br />
payments <strong>on</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> LCs.<br />
• Features<br />
A <strong>financing</strong> facility that enables a<br />
customer to accept delivery of <str<strong>on</strong>g>the</str<strong>on</strong>g>ir<br />
local/<strong>for</strong>eign purchases prior to payment<br />
of <str<strong>on</strong>g>the</str<strong>on</strong>g> sight bills being made by <str<strong>on</strong>g>the</str<strong>on</strong>g>m.<br />
• Benefits<br />
– Enables <str<strong>on</strong>g>the</str<strong>on</strong>g> customer to pay <str<strong>on</strong>g>the</str<strong>on</strong>g> seller<br />
promptly<br />
– Enables <str<strong>on</strong>g>the</str<strong>on</strong>g> customer to take delivery<br />
of <str<strong>on</strong>g>the</str<strong>on</strong>g> goods without paying <strong>for</strong> it<br />
immediately<br />
– Able to ease cashflow<br />
BANKER’S ACCEPTANCE (BA)<br />
• Usage<br />
Financing of a b<strong>on</strong>a fide trade i.e. export,<br />
import or domestic trade transacti<strong>on</strong>.<br />
• Features<br />
– A draft (Bill of Exchange) drawn by<br />
customers to <str<strong>on</strong>g>the</str<strong>on</strong>g>ir order, payable <strong>on</strong> a<br />
specific future date and accepted by<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong> <strong>for</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> purpose<br />
of <strong>financing</strong> a b<strong>on</strong>a fide trade<br />
Financial<br />
instituti<strong>on</strong>s<br />
also provide<br />
<strong>financing</strong> <strong>for</strong> <strong>SME</strong>s<br />
that are involved in<br />
domestic and<br />
internati<strong>on</strong>al trade<br />
7
– The minimum amount of <strong>financing</strong> is<br />
RM50,000 and in multiples of RM1,000<br />
(Bunching is allowed)<br />
• Benefits<br />
– Provides cash flow be<strong>for</strong>e proceeds <strong>for</strong><br />
sale of goods <strong>on</strong> credit can be collected, or<br />
to finance purchases of raw materials <strong>for</strong><br />
producti<strong>on</strong><br />
– Can always be sold at <str<strong>on</strong>g>the</str<strong>on</strong>g> prevailing<br />
market rate should <str<strong>on</strong>g>the</str<strong>on</strong>g> customer need<br />
immediate funds<br />
– Provides two-way <strong>financing</strong> as BA <strong>financing</strong><br />
is applicable <strong>for</strong> sales and purchases<br />
BILLS OF EXCHANGE PURCHASED (BEP)<br />
• Usage<br />
As a means of working capital <strong>financing</strong><br />
<strong>for</strong> exporters.<br />
• Features<br />
A facility provided by <str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong><br />
<strong>for</strong> exporters, whereby <str<strong>on</strong>g>the</str<strong>on</strong>g> financial<br />
instituti<strong>on</strong> may purchase customers’ outward<br />
bills <strong>for</strong> collecti<strong>on</strong> and <str<strong>on</strong>g>the</str<strong>on</strong>g> customers’ account<br />
is credited immediately with <str<strong>on</strong>g>the</str<strong>on</strong>g> proceeds.<br />
• Benefits<br />
– Able to obtain immediate funds up<strong>on</strong><br />
presentati<strong>on</strong> of necessary documents<br />
– Able to improve cash flow of <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
business since <strong>SME</strong>s can obtain<br />
immediate funds from <str<strong>on</strong>g>the</str<strong>on</strong>g> financial<br />
instituti<strong>on</strong><br />
FOREIGN EXCHANGE CONTRACTS (FEC)<br />
• Usage<br />
Generally <strong>for</strong> businesses, with <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
following features:<br />
– Regularly importing or exporting in<br />
<strong>for</strong>eign currencies<br />
– Of a sizeable level<br />
– With credit standing that is acceptable<br />
to <str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong><br />
• Features<br />
The buying and selling of <strong>for</strong>eign<br />
exchange <strong>on</strong> a spot or <strong>for</strong>ward basis, in<br />
respect of <strong>for</strong>eign proceeds or payments<br />
to be made at sight or at a future<br />
determinable date.<br />
8
• Benefits<br />
– Customers are able to fix <str<strong>on</strong>g>the</str<strong>on</strong>g>ir exchange<br />
rates <strong>for</strong> purpose of costing/hedging<br />
– No fur<str<strong>on</strong>g>the</str<strong>on</strong>g>r exposure to exchange risk<br />
fluctuati<strong>on</strong>s especially in volatile markets<br />
or c<strong>on</strong>diti<strong>on</strong>s<br />
EXPORT CREDIT FINANCING (ECR)<br />
• Usage<br />
– Comm<strong>on</strong>ly used by exporters with <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
following criteria:<br />
i. Exporting <strong>products</strong> with a value<br />
added of at least 20% and uses a<br />
minimum of 30% domestic raw<br />
materials/input c<strong>on</strong>tent (a tolerance<br />
allowance of 2% is permitted) and<br />
not in <str<strong>on</strong>g>the</str<strong>on</strong>g> negative list as provided<br />
by Bank Negara Malaysia<br />
ii. Direct exporter must have exported<br />
at least RM3 milli<strong>on</strong> of eligible<br />
goods per annum in <str<strong>on</strong>g>the</str<strong>on</strong>g> last<br />
financial year and RM3 milli<strong>on</strong> in<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> preceding 12 m<strong>on</strong>ths<br />
– For agricultural <strong>products</strong>, <str<strong>on</strong>g>the</str<strong>on</strong>g> amount<br />
is a minimum of RM1 milli<strong>on</strong> in <str<strong>on</strong>g>the</str<strong>on</strong>g> last<br />
financial year and preceding 12 m<strong>on</strong>ths<br />
• Features<br />
– Administered by <str<strong>on</strong>g>the</str<strong>on</strong>g> EXIM Bank.<br />
– 2 types of facilities available:<br />
• Benefits<br />
i. Pre-shipment<br />
Amount of <strong>financing</strong> can be<br />
calculated using 2 methods:<br />
Order Base<br />
80% of value of export order or<br />
sales c<strong>on</strong>tract rounded to <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
nearest thousand.<br />
Certificate of Per<strong>for</strong>mance (CP)<br />
Eligible amount specified in <str<strong>on</strong>g>the</str<strong>on</strong>g> CP.<br />
ii. Post-shipment<br />
Amount of <strong>financing</strong> can be up to<br />
100% of <str<strong>on</strong>g>the</str<strong>on</strong>g> export bill, rounded<br />
to <str<strong>on</strong>g>the</str<strong>on</strong>g> nearest thousand.<br />
Cheap source of <strong>financing</strong> exports.<br />
9
TRADE SERVICES<br />
To assist customers in trade transacti<strong>on</strong>s,<br />
financial instituti<strong>on</strong>s also provide<br />
payment services. The outward/inward<br />
bills <strong>for</strong> collecti<strong>on</strong> services is listed below.<br />
OUTWARD/INWARD BILLS FOR<br />
COLLECTION (OBC/IBC)<br />
• Usage<br />
Assist customer in making payments<br />
<strong>for</strong> trade transacti<strong>on</strong>s.<br />
• Features<br />
– Documents are channeled through<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong> with specific<br />
instructi<strong>on</strong>s<br />
– Financial instituti<strong>on</strong>s handle documents<br />
<strong>on</strong> instructi<strong>on</strong>s received (from customer<br />
or ano<str<strong>on</strong>g>the</str<strong>on</strong>g>r branch or financial instituti<strong>on</strong>)<br />
to:<br />
• Benefits<br />
– Buyer:<br />
i. A safe method of payment as <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
payment can be deferred by <str<strong>on</strong>g>the</str<strong>on</strong>g> buyer<br />
until <str<strong>on</strong>g>the</str<strong>on</strong>g> goods arrive or even later<br />
if delayed payment arrangements are<br />
agreed to<br />
ii. Customers will have time to inspect <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
documents be<strong>for</strong>e paying/accepting<br />
– Seller:<br />
i. Documents of value, i.e. title<br />
documents, are not released to <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
buyer (drawee) until payment or<br />
acceptance has been affected<br />
ii. Once <str<strong>on</strong>g>the</str<strong>on</strong>g> bill is accepted by <str<strong>on</strong>g>the</str<strong>on</strong>g> buyer<br />
(drawee), <str<strong>on</strong>g>the</str<strong>on</strong>g> seller (drawer) can seek<br />
legal remedy in case of n<strong>on</strong>-payment<br />
<strong>on</strong> maturity date<br />
i. obtain acceptance and/or payment<br />
ii. deliver commercial documents against<br />
acceptance and/or against payment<br />
iii. deliver documents <strong>on</strong> o<str<strong>on</strong>g>the</str<strong>on</strong>g>r terms<br />
and c<strong>on</strong>diti<strong>on</strong>s<br />
10
GUARANTEES<br />
In additi<strong>on</strong> to <strong>financing</strong> your business,<br />
you may need guarantee facilities <strong>for</strong><br />
various purposes. A guarantee is basically<br />
a legal undertaking by a financial<br />
instituti<strong>on</strong> <strong>on</strong> your behalf (<str<strong>on</strong>g>the</str<strong>on</strong>g> third party),<br />
where it guarantees <str<strong>on</strong>g>the</str<strong>on</strong>g> payment of a<br />
certain sum of m<strong>on</strong>ey up to a certain limit<br />
to a beneficiary, in <str<strong>on</strong>g>the</str<strong>on</strong>g> event that your<br />
business fails to settle a debt or per<strong>for</strong>m a<br />
legal obligati<strong>on</strong>. This is however subject to<br />
full compliance of all terms specified in <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
relevant guarantee. There are several types<br />
of guarantees which can be arranged by<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> financial instituti<strong>on</strong> depending <strong>on</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
specific requirements of <str<strong>on</strong>g>the</str<strong>on</strong>g> borrower.<br />
A financial instituti<strong>on</strong> may take into<br />
account a number of factors be<strong>for</strong>e issuing<br />
a guarantee, such as, <str<strong>on</strong>g>the</str<strong>on</strong>g> extent of liability,<br />
period and expiry, and credit standing<br />
of <str<strong>on</strong>g>the</str<strong>on</strong>g> customer. The normal types of<br />
guarantees are:<br />
BANK GUARANTEE (BG)<br />
• Usage<br />
– Provides guarantee favouring a third<br />
party <strong>for</strong> per<strong>for</strong>mance, payment etc<br />
– Generally, businesses that have a<br />
particular need <strong>for</strong> BGs are c<strong>on</strong>tractors,<br />
such as building and supplier c<strong>on</strong>tractors.<br />
On <str<strong>on</strong>g>the</str<strong>on</strong>g> corporate side, BGs could also<br />
be given <strong>for</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g> issuance of private<br />
debt securities<br />
• Features<br />
– Types of guarantees:<br />
i. Tender Guarantee or Bid B<strong>on</strong>d<br />
ii. Per<strong>for</strong>mance Guarantee<br />
iii.Advance Payment Guarantee<br />
iv. Warranty of Maintenance Guarantee<br />
v. Retenti<strong>on</strong> Guarantee<br />
vi.Security Guarantee<br />
– Commissi<strong>on</strong> is charged based <strong>on</strong> <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
amount and period of <str<strong>on</strong>g>the</str<strong>on</strong>g> guarantee<br />
A financial instituti<strong>on</strong><br />
will c<strong>on</strong>sider<br />
a number of<br />
factors be<strong>for</strong>e<br />
issuing a guarantee<br />
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– Maximum period of guarantee is<br />
guided by <str<strong>on</strong>g>the</str<strong>on</strong>g> rules of <str<strong>on</strong>g>the</str<strong>on</strong>g> Associati<strong>on</strong><br />
of Banks in Malaysia i.e. guarantee<br />
should not be issued <strong>for</strong> more than<br />
1 year except <strong>for</strong> Government c<strong>on</strong>tracts.<br />
The expiry of <str<strong>on</strong>g>the</str<strong>on</strong>g> guarantee must not<br />
be more than 12 m<strong>on</strong>ths after <str<strong>on</strong>g>the</str<strong>on</strong>g> expiry<br />
of <str<strong>on</strong>g>the</str<strong>on</strong>g> original c<strong>on</strong>tract<br />
• Benefits<br />
– Shows <str<strong>on</strong>g>the</str<strong>on</strong>g> customer’s/applicant’s<br />
capability to per<strong>for</strong>m work as specified<br />
in <str<strong>on</strong>g>the</str<strong>on</strong>g> c<strong>on</strong>tract<br />
– Able to obtain more favourable<br />
trade terms from <str<strong>on</strong>g>the</str<strong>on</strong>g> beneficiary if a<br />
BG is produced<br />
– There is no necessity to raise cash to<br />
meet <str<strong>on</strong>g>the</str<strong>on</strong>g> deposit requirements and<br />
funds could be used to support working<br />
capital requirements<br />
SHIPPING GUARANTEE (SG)<br />
• Usage<br />
To expedite <str<strong>on</strong>g>the</str<strong>on</strong>g> release of goods<br />
which have arrived be<strong>for</strong>e <str<strong>on</strong>g>the</str<strong>on</strong>g> original<br />
transport documents.<br />
• Features<br />
– Guarantee or undertaking by <str<strong>on</strong>g>the</str<strong>on</strong>g> issuing<br />
financial instituti<strong>on</strong> to <str<strong>on</strong>g>the</str<strong>on</strong>g> shipping agent<br />
to release <str<strong>on</strong>g>the</str<strong>on</strong>g> goods without producti<strong>on</strong><br />
of original transport documents<br />
– Usually issued where <str<strong>on</strong>g>the</str<strong>on</strong>g> goods are<br />
initially imported under LC and is to be<br />
earmarked against TR/BA facilities<br />
• Benefits<br />
Facilitate meeting of producti<strong>on</strong> or<br />
c<strong>on</strong>tract deadlines.<br />
– Allow customers to have access to funds<br />
especially where BG is issued <strong>for</strong> advance<br />
payment or release of retenti<strong>on</strong> funds<br />
under c<strong>on</strong>tracts<br />
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