Case study 3 - Resubmission of application

Some banks has a policy that says an application which has been rejected within certain time frame is not allowed to re-submit its new application again.

My client recently submitted its fresh application to a bank which has rejected his application about 6 months ago for some non-compliance issues. Thinking that the company had rectified all those non-compliance issues and re-submit its application, the borrower was told that the bank is unable to accept its fresh application for its previous unsuccessful record.

My advice, do not submit your full documents to a bank for official application. Discuss with the bank officer if you have any special requests which may trigger any of the non-compliance issues. For eg. one of the director not able to stand as a guarantor or you want a very high proportion of overdraft facility. Remember, these requests are not to banks' favour.

If you put in an official application with these special requests, very likely your application will be rejected and leave a record in the bank system that your application has been "REJECTED".

Change of Government policy

On 29 Oct, major local newspapers have front paged the Government announcement on the overhaul of NAP (National Automotive Policy). Among the key measures to be implemented include prohibition of import of used auto parts from June 2011.

What is the implication of this message from the perspective of bank facility?

Everybody knows importers of cars used parts, especially from Japan, have been making good profit from the trade for years. If you are one of these importers and have been relying on bank facilities to facilitate your imports, don't you think your bankers is already trying to structure an exit plan so that your loan can be fully settled by June 2011 which is less than 2 years from now.

If you are now in the business, at least there are 2 things you need to look into :

1. Voluntarily restructure your bank facility now by converting partial trade line into term loan so that your outstanding amount is paid down by then. Do not wait until the banks come to you and recall your facilities without yourself preparing for it.
2. Tighten your credit policy if you are giving credit term to your dealers. This will helps you generate sufficient cashflow to meet the above term loan repayment and to prevent huge bad debt when other banks recall the bank facility of your dealers later.

This message is also useful for other trades which are sensitive to change of Government's policies from time to time.

If bank offer me a business loan, should I take it ?

Sometimes bank will approach SME business and offer a small loan for their business when they do not need this money, the business owner will start asking whether they should take it.

Here's are my advice.

Take it :

1. If this loan can helps you to generate additional business. Make sure the profit is sufficient to cover the interest and other associated costs (legal fee, and stamp duty, CGC guarantee fee).
2. If the interest rate of this loan is lower than any of your existing facility so that you can have some savings from using less of your existing facility.
3. If you foresee that you may need the money in near future to finance your increasing sales or anticipated new contracts.

Do not take it :

1. If you do not know what to do with the money for time being and do not foresee any new business or contracts coming. Normally there is a fixed cost associated with this loan, eg. legal fee and stamp duty, and CGC guarantee fee. I do have clients who took up bank facility but did not in any way increase its turnover and the these costs eat into his profit.
2. If you intend to use the money for a new business which is not related to your existing business or do not complement your existing business.
3. If you intend to keep the money for personal use.

Some business owners regretted for not accepting the loan when their subsequent application was rejected by banks especially when the business environment gets tougher. In fact, they should be happy that the loan was not taken up since it is more difficult to make money now to repay the loan.

What is the definition of SME/SMI ?

SME/SMI can be categorized into 3 goups based on EITHER no. of emplyees (depending on industry) or yearly turnover as summarized below :

Primary agriculture Manufacturing Services

Micro

Small 5 - 19 5 - 50 5 - 19

Medium 20 - 50 51 - 150 20 - 50

Case study 2 - Sudden increase in turnover

Lets examine the following reported turnover of my client :

F/Y 2008 - RM 13 mil.
F/Y 2007 - RM 10 mil.
F/Y 2006 - RM 9 mil.

In my experience, it shouldn't be too much of problem if this client wants to apply for additional facility based on the F/Y 2008 increased turnover.

However, after examining the last 12 months bank statements, I noticed that the average monthly deposit is only RM800k+, meaning the turnover for F/Y 2009 is anticipated to come down to its previous years' average of RM10 mil. On further questioning on the F/Y 2008 result, the client admitted that there was 2 ad-hoc transactions during the financial year which had pushed up the turnover and such transactions are not foreseen to be recurring in future, meaning these were just one-time transactions.

In this scenario, bank will only evaluate the working capital requirement of the company base on the projected turnover of F/Y 2009 and not F/Y 2008.

What is available for a contracting base company ?

A contracting base company normally has the following characteristics :

1. No regular customers base
2. No long term contractual relationship a customer
3. No consistency in reported turnover (huge fluctuation)

Due to the above nature of the business, banks are quite reluctant to provide working capital financing (on permanent basis) to a contracting base company regardless of its background and history.

For this category of companies, a more common financing package is contract/project financing if a borrower meets the following criteria :

1. the awarding party must be a reputable and established organization or government agencies
2. the awarding party must agree to assign payment direct to lending bank
3. the nature of contract must be relevant to the principal business of borrower
4. the bank must be convinced that the borrower is able to complete the contract within the contract time frame (a bank would not agree to finance a RM100 mil. project if the borrower's turnover is say, RM10 mil. a year)
   

Of course, there is still another option, but this is going to be very tedious and lengthy process which I normally discourage, ie. CGC DAGS which I have touched on this scheme earlier.

I will discuss in further details on the project financing in separate chapter.

How to cancel a debenture charged to bank ?

There are several ways a debenture can be cancelled.

1. To settle the outstanding loan in full and cancel the facility.
2. Submit a formal request to bank to cancel the debenture by offering additional security. Sometime bank may consider removing the debenture without asking for additional security if the borrower has long borrowing relationship with the bank and has maintained a good repayment record throughout the period.
3. Apply a fresh bank facility from another bank to redeem the existing loan from the debenture holder. For eg. a borrower can apply a RM2.0 mil facility from Bank B to redeem the existing RM1.0 mil. facility from Bank A.
   
   
   

Case study 1 - Update your audit account

Bank normally has a guideline on the period from the date of last audit to the date of submission where the financial result of this period is unaudited.

Lets take a look at the following scenario of my client :

Latest available audited account - 31 May 2007
Submission date - 16 Oct 2009

The unaudited period from Jun 07 to Oct 09 is 29 months which is far above the guideline of 18 months. Hence banks are not able to accept the application. However, certain bank can accept 24 months.

The company can still submit its application provided the 31 May 2008 audit can be audited before end of Nov 09 so that the unaudited period is 17 months (Jun 08 to Nov 09).

I advised this client not to submit any application until he has completed his 31 May 2009 audit.

What is CGC loan ?

CGC loan is a common topic among SME/SMI enterpreneurs. What exactly is CGC loan? In actual fact, CGC do not provide loan to borrowers. CGC only provide guarantee to banks for bank facility granted to borrowers.

Generally CGC loans can be categorized into following groups :

1. DAGS (direct access guarantee scheme) - subject to guarantee fee about 3% p.a. on loan amount (refer to start-up company for further detail)

2. Non-DAGS (any other schemes do not fall under DAGS)

Borrowers are required to submit application to banks and banks will seek CGC's approval after approving an application. Among the more popular schemes under this group include :

• SAGS - no guarantee fee imposed
• Credit Enhancer - subject to guarantee fee about 3% on guarantee amount
• Flexi Guarantee Scheme - subject to guarantee fee about 1.5% on guarantee amount

For loans approved under this group, it is the bank's discretion to park the loan under one of above schemes. It is also the bank's discretion to impose security requirement and interest rate.

Different scheme may have different approving criteria. Sometime a loan rejected under one scheme can be approved under different schemes. For eg. Credit Enhancer scheme has some restrictions on certain industries but not SAGS.

What is the implication of charging debenture ?

In early chapter, although I have advised borrowers not to charge debenture to bank, a borrower sometime has no choice especially when the borrower is a start-up company or unable to present a strong financial statements.

Most of the time, borrowers accepted the terms without knowing the implication of charging its debenture to banks.

What exactly the implication of charging debenture to banks ?

1. After charging debenture to a bank for some bank facility, other bank who wish to grant additional facility to the company may need to obtain consent from the debenture holder before the new facility is released. Whether the debenture holder agreeable to grant consent will depend on the policy of the bank. Debenture holder can either refuse to grant consent or take long time to process the request before consent is given.
   
2. In worst scenario, other banks may even refuse to grant additional facility to the company.

Should you charge your debenture to banks ?

Sometime borrowers are requested to charge its debenture to bank as an additional security. This is very common when the approved loan amount is not fully secured. For eg. an approved loan of RM 1.0 mil. secured against a fixed deposit of only RM200,000.

What is debenture in layman's term ? For a loan secured against a property or fixed deposit, the lending bank will create a charge on the property or fixed deposit receipt, whereas a debenture is a charge created over the fixed and floating assets of the company, meaning on fixed asset and current assets (stock, debtors and desposits). The debenture holder has the priority in liquidating the company's assets to recover the loan in default.

It is NOT advisable to charge your debenture to any bank. A borrower can offer more collateral in order to waive the debenture charge. After charging your debenture, the only way to remove the debenture is to full settle the outstanding loan.

Only a Sdn Bhd can charge its debenture to bank. A debenture cannot be created on a sole-proprietor or partnership company.

Can I withdraw as a guarantor ?

Bank may only consider releasing a guarantor provided a replacement is made. This is very common when a partner or shareholder disposed off his entire shares to a 3rd party. The banks will only consider the new replacement provided the party who purchase the shares has better social position and stronger financial standing than the exiting guarantor. In real life, this is not an easy task and time consuming.

One of my client has a bad experience with a bank when he found a buyer for his shares in the company and has written to bank to seek consent for replacement before they transact. He has also provided the I/C and financial statements of the buyer for bank's evaluation. He was then informed by the officer that the bank is unable to process the request as they have not sign the shares transfer form. My client then executed all the forms (Form 32A & resignation as director) without the money changing hand. Today he is in a dilemma as the bank is holding on to his application.

Who need to provide personal guarantee ?

The following parties are normally required to provide their personal guarantee for bank facility granted to a Sdn Bhd :

1. Directors

ALL directors are normally required to provide personal guarantee for facility granted to a company. However bank may consider to exclude certain directors from providing their personal guarantee if they are not involve in the daily operation of the company AND their combined shareholding is not substantial, for eg. not more than 15%. Under this circumstances, there must be at least 2 guarantors in place. If a company has 2 shareholders cum directors, both directors are required to provide personal guarantee regardless of their shareholding.

2. Shareholders

For a shareholder not holding a directorship position, he will also be required to provide personal guarantee if he holds substantial amount of shares in the company. He may be excluded if he only hold, say, 5% shares.

3. Key-persons

There are instances where the key persons do not surface as a shareholder nor a director, but they are actually running the daily operation of the company. Bank will normally request them to provide their personal guarantee for their active participation in the business.

4. Spouse

It is very common for a bank to request for personal guarantee from the husband if the sole-proprietor is a woman. Borrower should try to convince banks that the husband has nothing to do with the business and exclude him to be a guarantor.

5. Third party

Sometimes an applicant knowing the weak financial position of his company may voluntarily offer a 3rd party with reputable background and sound financial standing as a guarantor.

What is available for a start-up company ?

Generally there are not much choice for a start-up company, including companies incorporated with less than 3 years operation. This group of companies can consider one of the following options :


1. CGC DAGS (direct access guarantee scheme)
Applicants need to submit their application directly to CGC instead of going to banks. After granting approval, CGC will appoint a participating bank to disburse the loan. The bank will carry out another round of evaluation before issuing the Letter of Offer.

Borrowers are normally required to pledge a fixed deposit as collateral equivalent to 20% to 30% of the approved loan amount. For a Sdn Bhd, CGC will requires the borrower to charge the debenture to CGC as additional collateral. All loans disbursed under this scheme is subject to an interest rate of BLR+1% p.a., plus a guarantee fee of about 3% p.a. on loan amount.

The whole application process is considered lengthy. CGC normally will take 2 to 3 months to approve an application and the appointed bank will take another 1 to 2 months to issue the L/O, plus another 1 to 2 months to complete the legal documentation.

After the lawyer had advised the bank to release the approved facility, CGC will normally make another visit to the borrower's premises before the final consent is given to bank for the release. There were incidents where CGC decided to withdraw the approved loan after this visit although borrower had already paid for all the legal fee and stamp duty.

Although this loan does not look attractive, this is the only choice for a start-up company.

2. Factoring facility
This facility is considered ideal for a start-up company who managed to secure supply contracts from a government agency or an established and reputable organization (buyer).

Due to the short history of the borrower, banks can only finance up to 80% of the invoice value after the goods are delivered and accepted by the customers. Meaning, borrowers still need the support of the suppliers to deliver the goods to the buyers on credit. Suppliers will get their payment after bank released the 80% advance to the borrower with the invoice and D.O. chop & signed by the buyers.

Normally no collateral is required for this facility. A one time processing fee of about 1.25% is imposed on the gross invoice value regardless of the financing period. An interest of about 0.875% p.m. will be charged base on actual amount advanced to borrower on daily rest basis.

Under the factoring arrangement, buyers are normally required to sign an undertaking letter to pay the invoice amount directly to the financing bank and the bank will deduct the 80% advance plus interest from the proceeds before releasing the balance sum to the borrowers. If a borrower makes a margin of 20% from the contract, he will pay off his suppliers from the 80% advance and will only collects his profit after the buyer pays the bank.

With the above structure, a factoring house is not exposed to performance risk on the part of the borrowers, but only exposed to very low collection risk on the part of the buyers. The chances of the buyers not paying is very low as they have acknowledged receipt of the goods in good condition.

Generally I call this type of financing as "post-delivery financing".

A factoring house also provide "pre-delivery financing" to finance the procurement of goods or materials from suppliers provided the borrower is able to convince the banks that he is able to complete or fulfill the contract supported with its past track records and sound financial standing.

Why my application is not successful ?

There are many reasons that contribute to an unsuccessful loan application which I generally group them in following 5 main categories :

Category 1 : Applicants do not meet the min. criteria set by banks
Different bank has different set of min. requirements to be fulfilled before accepting an application, among them include, min. 3 years of business in operation supported with up to date audited (certified) financial statement, the date of application must not be more than 18 months from last audited (certified) financial statement, the industry must not fall under banks' negative list (construction, computer, textile/garment, F&B, automobile), and no adverse financial records on the company or its directors, partners or proprietor (CTOS & CCRIS must be negative). Some banks only accept applications from a "Sdn Bhd".

Applicants must fulfill ALL the above requirements before considering submitting its application.

Category 2 : Applicants unable to provide sufficient documents / information
Most applicants normally has difficulty in providing the latest management account requested by banks, especially the SMEs. Some companies do not employ full time accounting staff to generate monthly account and only rely on their external accountant to prepare full year account for tax submission purpose.

Sometime banks also ask for the tenancy agreement to be provided where in actual fact the business owner rented the premises from relative or friend without signing an agreement. Normally banks do not require such agreement but from my experience the agreement is compulsory for submission to CGC. I do have a client who did signed a tenancy agreement with the landlord but the agreement was not renewed after expiry and my client continues to bank in the same rent for years without any problem. To comply with CGC's requirement, this client contacted the landlord (which they did not meet for years) to sign a fresh agreement. This had alerted the landlord that he forgot to revise the monthly rent for years and decided to ask for a rent increase which my client is forced to accept.

Some banks would ask for a financial projection from applicant which is quite a difficult task for them as most of them do not employ a qualified accountant.

If an applicant who faces any of the above predicaments and do not ask for help, he probably will withdraw his documents from banks and continue his business without bank financing for life.

Category 3 : Unsatisfactory financial record
Besides making sufficient profit to sustain the business which can be clearly seen from the Profit & Loss Account, an applicant is also expected to maintain a healthy Balance Sheet. In layman terms, a Balance Sheet is deemed unhealthy if any of the following appear in Balance Sheet :

a ) negative shareholders' fund, although company is reporting profit in recent years
b ) negative retained profit, although company is reporting profit in recent years
c ) high gearing ratio / low current ratio
d ) high existing bank borrowing utilization (not in proportion to turnover)
e ) amount owing by directors
f ) long debtors collection period / stock holding period (say, > 6 months)
g ) high trade creditors balance

Category 4 : Unsatisfactory prospect of the business
An applicant must be able to convince bankers on the prospect of the business with supporting contracts in hand or other form of evidences that the existing business would not be significantly/adversely affected in the event of unforeseen change of business environment. An applicant would have a better position if he is in a recession-proof business (which is very subjective to determine).

Category 5 : You already have sufficient working capital

Banks will normally determine the working capital requirement of the applicant before processing the application. If a bank feels that the applicant already has sufficient bank facility to support the business, it would not consider providing additional facility. In determining the working capital requirement of a business, a bank will take into consideration of the following factors : projected turnover for next 12 months, stock holding period, credit terms granted to customers and credit terms granted by suppliers. A trading company who imports from overseas tends to require higher working capital to sustain its business.

Among other grounds that will cause an application to be rejected include, adverse market check result on the character of the directors, partners or proprietor, key persons are not the registered owner of the business, submission of suspicious financial statements (especially when bank statement transactions do not match the reported turnover), reducing reported turnover, applicant unable to produce original documents for verification purpose, or applicant has only one customer (or supplier).

What loan packages are available now ? (@ Oct 09)

There are many loan packages offered by local banks and financial assistance schemes guaranteed by BNM. I am going to touch on the following 2 schemes promoted by BNM due to their attractive terms :

1. SAGS - this scheme is guaranteed by CGC and each borrower is entitled to a maximum combined limit of RM 500,000 granted by multiple banks with interest rate determined by lending bank and no guarantee fee is imposed. Although BNM do not requires borrower to come out with any collateral to secure this loan, some banks are actually requesting 20% fixed deposit from borrowers as additional comfort as CGC only provides 80% guarantee cover. Loan structure offered under scheme include term loan, overdraft and trade line. However, not all banks are offering such structure to borrowers. For example, OCBC & StanChart are offering only term loan under the scheme (without collateral), whereas other banks are offering tradeline and overdraft depending on borrowers' requirement (with and without collateral).
   


2. WCGS - this scheme is guaranteed by SJPP (a special vehicle incorporated to administer the fund) and each borrower is entitled to a maximum limit of RM10 mil. BNM has fixed the interest rate for this scheme at BLR+1%, plus 0.5% guarantee fee on guarantee amount. However, banks are not eager to lend out this sum although SJPP provides 80% guarantee cover. Again, although BNM does not requires borrowers to come out with any collateral, certain banks are actually requesting collateral from borrowers for same reason above. Loan structure is general similar to SAGS above. Due to overwhelming response, BNM had increased the loan size from RM5 bil. to RM7 bil. and this loan is going fast.

The tenure for both schemes above is 5 years. Term loan borrowers repay the term loan amount over 3 to 5 years and tradeline/overdraft borrowers are subject to limit reduction on quarterly or half-yearly basis or to provide sinking fund as collateral up to the loan limit.