The sources of financing available for entrepreneurs in Malaysia

There are numerous costs involved in starting a business and one of the entrepreneurs early challenges is in raising capital. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance cant be raised, it is unlikely that the business will get off the ground. If you plan on becoming a successful entrepreneur, youll need to be smart in raising the money and investing it wisely in your business. For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, that you understand the various sources of finance open to a business and are able to assess how appropriate these sources are in relation to the needs of the business. There are several ways of raising capital, the most common being own savings. But before you go around sourcing for funds, youll first need to ascertain how much you need, when you need it and what you are going to do with it. Listed below are several methods of sourcing for capital in Malaysia:

Seed Capital Generator

It is based on contributing a moderate investment, and using the investments of other entrepreneurs to fund their business venture. This system is not based on any banking guidelines or credit ranking, and no credit checks are needed to build all the financing needed for a new business venture. The goal of this system is to allow the new business person the chance to try their venture using very little capital of their own, and because the system is a Seed Capital Generator, and not a loan, it never has to be repaid. Seed Capital Generators are tools used to build seed capital, and the return is based on the amount of effort invested in the system.

SME CORP

SMEs play an important role in contributing towards the economic growth and annual revenue of the country. However, many of the potential SMEs could not grow and develop further in their business due to limitation of financial resources. In order to assist these SMEs effectively, the government through its agencies has taken the initiatives to provide various financial supports to the SMEs. At the same time, it also shortens the time processing for each application. Apart from the government ministries and agencies, other financial institutions also take part in offering the financial aids in the form of soft loans and guarantee schemes to the SMEs. These financial assistances can help the SMEs to solve their financial issues during their business expansion and development.

Bank Negara

Bank Negara has established an SME Special Unit with the objective of providing viable SMIs with continued access to financing. Through this Unit, Malaysias national bank serves as the main provider of funds to the SMIs, while other financial institutions and various Governmentestablished speciality funds provide alternative sources. The SME Special Unit aims to assist SMI entrepreneurs by providing information on the various sources of financing available, and thereafter facilitating their loan application process. The Unit also attends to the difficulties faced by SMI entrepreneurs in securing financing, and provides advisory services on other financial requirements.

MAVCAP

Also known as a source of financing for Malaysian businesses. MAVCAP was created to invest in the development of local technopreneur (Technology entrepreneurship) scene in Malaysia in 2001. MAVCAP is what local entrepreneurs would describe as the closest entity mirroring the functions of a Venture Capitalit firm who will help financially challenged start-ups through capital investment, while monitoring their progress. They are known for having quite strict evaluation processes when it comes to funding start-ups, and usually start-ups who have been in business for several years and have a clear growth plan ahead would be considered, as commented by your resident entrepreneur members.

Malaysia Franchise Association

If you are looking at expanding your business with its proven concepts throughout Malaysia, Malaysia Franchise Association is your place to be, especially since the organisation provides all the help you need from sourcing for potential franchisees to seeking financial assistance to getting the proper training to set up your franchise network. Ideally also, you can be on the lookout for successful franchises in which you can roll out from their list of franchisors. We were told by our entrepreneur members that the maintain the website quite well and they frequently organise trade-shows in your states to get more traction towards growing the franchising business in Malaysia.

Matching Grant for Business Start-Ups

This scheme is offered by the Small and Medium Industries Development Corporation (SMIDEC) and provides assistance for business start-ups in the manufacturing and service

industries (excluding insurance and financial services). Assistance is given in the form of a matching grant where 50% of the approved project cost is borne by the Government and the remainder by the applicant. For enterprises in the manufacturing sector, incorporated under the Registration of Business Ordinance 1956, assistance is given up to 80% of the approved cost. The maximum grant allocated per application is RM100,000.

Cradle Investment Programme (CIP)

If youre creative, innovative and aspire to be a technopreneur, you can get a head start for your idea with the CIP. The CIP is Malaysias first development and pre-seed funding programme for technology ideas. It enables budding innovators and aspiring innovative entrepreneurs to make the jump from just having an innovative technology idea to becoming a successful start-up. The CIP offers conditional grants of up to RM50,000 per tranche per idea (up to a maximum of three conditional tranches) for innovative technology ideas with good commercialization potential, submitted by aspiring groups of technopreneurs. The CIP is managed by Cradle Fund Sdn Bhd, which is wholly-funded by the Ministry of Finance.

MDeC Pre-Seed Fund

This fund is introduced by the Multimedia Development Corporation (MDeC) to develop ICT business plans into commercial projects. The programme offers up to RM150,000 of conditional funding for local individual technopreneurs (not existing companies) to turn their business plans into viable projects. This is a development programme that is not a pure grant and recipients will also benefit from mentoring services and the use of shared lab facilities at MSC Malaysia Status Incubators provided through MDeCs Technopreneur Development Programme.

e-Perolehan

The Online Procurement System for Local Businesses to Connect with Government.The call for a more transparent online procurement can never be clearer with the e-Perolehan system, where businesses and entrepreneurs in Malaysia can now sell their products and services through an online procurement system to governmental agencies. By registering your company with ePerolehan, you would gain access towards participating in tenders, procurement exercises and bids issued by the government.

There are few alternative financial sources also available as listed below:

Retained profit

This source of finance is only available for a business which has been trading for more than one year.It is when the profits made are ploughed back into the business. When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that are kept and not spent retained profits.One of the advantages of using retained profit to finance growth is that you do not have to pay any interest on the money you borrow or repay the money in the future. Another advantage is it help you avoid taking on more investors. In some cases, companies will simply issue more stock and use the money to pay for the expansion. However, when you do this, the new investors will have a claim on retained earnings in the future. This dilutes the amount of retained earnings that are available for investors and ultimately makes ownership less profitable overall.

Sale of Asset

This money comes in from selling off fixed assets, such as: a piece of machinery that is no longer needed.Businesses do not always have surplus fixed assets which they can sell off.There is also a limit to the number of fixed assets a firm can sell off.This is a medium-term source of finance. The advantages are saves space as old assets are no longer there an it makes better use of the business capital.The disadvantages are some businesses are unlikely to have surplus assets to sell besides can be a slow method of raising finance.Its time consuming and the business might not find a buyer (especially if the assets are old).

Personal Savings

The rst place to look for money is your own savings or equity. Personal resources can include prot-sharing or early retirement funds, real estate equity loans, or cash value insurance policies. Life insurance policies - A standard feature of many life insurance policies is the owners ability to borrow against the cash value of the policy. This does not include term insurance because it has no cash value. The money can be used for business needs. It takes about two years for a policy to accumulate sufcient cash value for borrowing. You may borrow most of the cash value of the policy. The loan will reduce the face value of the policy and, in the case of death, the loan has to be repaid before the beneciaries of the policy receive any payment. Retirement funds-If you have an Individual Retirement Account or 401k retirement plan, you might withdraw funds to invest in a new business or provide capital for an existing company. For example, you might use funds from your IRA to purchase inventory or expand your office space. Check with a financial institution to initiate access to your retirement plan.

Bank Loan

Bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets and are generally at a lower rate of interest that a bank overdraft. However, they dont provide much flexibility The advantage to borrowing the money is that it enables you to keep your cash on hand to use as operating capital or for personal survival during a down period in your business. Additionally, if business goes bad, you may be able to protect your most important personal assets by declaring bankruptcy. The disadvantages are that you'll have to pay interest on the loan. Furthermore, your payments will be due on time regardless of whether business is bad or good.

Bank Overdraft

An overdraft is really a loan facility the bank lets the business owe it money when the bank balance goes below zero, in return for charging a high rate of interest. As a result, an overdraft is a flexible source of finance, in the sense that it is only used when needed. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time).The advantage of using overdraft is Its flexibility .We can change the amount borrowed within limits and the interest is only paid on amounts borrowed.The disadvantage of overdraft are cannot be used for large borrowing, rates of interest higher than loans and bank can change limit at any time or ask for money to be paid back sooner than expected.

Venture Capital

Generally, venture capital investors provide funds to early-stage startup companies. These investors are interested in industries with high-growth potential, such as information technology. Normally, venture capital investors provide funds to a company in exchange for company shares. These investors require a business plan that demonstrates the probability of success. Its specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over RM500,000+).They prefer to invest in businesses which have established themselves. Another term you may here is private equity this is just another term for venture capital.A start-up is much more likely to receive investment from a business angel than a venture capitalist.

Personal Credit Card

Although it is best to separate personal and business transactions, you might consider using your personal credit card to start up a company. Keep records of business-related charges to your credit card. This funding might build equity in the company. However, you might elect instead to reimburse yourself from future revenue.This is a surprisingly popular way of financing a startup. In fact, the use of credit cards is the most common source of finance amongst small businesses. It works like this. Each month, the entrepreneur pays for various business-related expenses on a credit card. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. The effect is that the business gets access to a free credit period of aroudn30-45 days. Financing from credit cards, often has the benefit of easy and early access to cash if your credit history is good. It has several dangers and

drawbacks, however. Credit card financing is usually limited in the amount available to borrowers based on the borrower's demonstrated ability to earn and repay the loan. Because this is the only collateral, credit card rates are high and subject to huge rate penalties for delayed or missed payments on any outstanding bills. For example, a delayed payment on a utility bill might send your credit card rate soaring, affecting all other aspects of your credit and financial status.

Borrowing From Family & Friends

Obtaining startup money from friends and family is another option for the entrepreneur, and a popular one if the new business is not cash intensive. Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business. This can be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan. However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties. Although borrowing from your family and close friends is considered informal, it is advisable to draw up a formal agreement on the terms and conditions of the loan, such as interest rate, tenure of loan and repayment schedule, to avoid any unnecessary disputes in the future. The main advantage of raising money from family and friends is the relaxed lending guidelines. Most family members will not ask for a credit report or bother to check references. The main disadvantage is in the timing. Unless your family and friends have extremely deep pockets, it could take months, or even years, to raise enough money to adequately capitalize your business. Bootstrapping

The most convenient method of raising funds is through your own means, which is also known as bootstrapping. Bootstrapping is the term used when an entrepreneur finances the startup

operation with his own personal funds until such time the business can establish a large enough customer base, and generate enough income and cash flow to support itself fully. Sources of funds include your savings, investments such as shares, unit trusts and property, your life insurance, etc. Apart from this, you can also obtain funds via personal loans, overdrafts and credit cards. Beware of credit cards though, as the interest rates are very high.An advantage of bootstrapping a company is that the business can grow debt free. This allows the owner to squeeze more profit from business revenue, which makes the company much more valuable in the long run.The main disadvantage to bootstrap financing is that it takes much longer to generate the startup and operating capital. Longer hours spent working two jobs often leads to the owner burning out and the business failing.

Debentures

Debentures are loans that are usually secured and are said to have either fixed or floating charges with them.A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. Then, just like a mortgage for a private house, the debenture holder has a legal interest in that asset and the company cannot dispose of it unless the debenture holder agrees. If the debenture is for land and/or buildings it can be called a mortgage debenture.Debenture holders have the right to receive their interest payments before any dividend is payable to shareholders and, most importantly, even if a company makes a loss, it still has to pay its interest charges.If the business fails, the debenture holders will be preferential creditors and will be entitled to the repayment of some or all of their money before the shareholders receive anything.

Lease

A lease is a method of obtaining the use of assets for the business without using debt or equity nancing. It is a legal agreement between two parties that species the terms and conditions for the rental use of a tangible resource such as a building and equipment. Lease payments are often due annually. The agreement is usually between the company and a leasing or nancing organization and not directly between the company and the organization providing the assets. When the lease ends, the asset is returned to the owner, the lease is renewed, or the asset is purchased. A lease may have an advantage because it does not tie up funds from purchasing an asset. It is often compared to purchasing an asset with debt nancing where the debt repayment is spread over a period of years. However, lease payments often come at the beginning of the year where debt payments come at the end of the year. So, the business may have more time to generate funds for debt payments, although a down payment is usually required at the beginning of the loan period.

Mortgage

This is a loan secured on property.Repaid in instalments over a period of time typically 25 years.The business will own the property once the final payment has been made.This is a longterm source of finance.The advantages of using mortgage are business has the use of the property,payments are spread over a period of time which is good for budgeting and once all repayments are made the business will own the asset. Disadvantages are this is an expensive method compared to buying with cash and if business does not keep up with repayments the property could be repossessed.

Conclusion

With all these sources of finance available, it is important to make the right choice. To make the right choice, a number of factors will need to be considered. To simplify the process, these factors can be summed up in five questions: What source is available,(depending on the size of the company) what is it for short term or long term, how much money is needed, what are the risks involved and what is the cost of the finance.

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