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.
