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 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.

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.