Financing Your Business

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FINANCING a business involves choosing from a vast array of alternatives. It involves choices of financing through debt or equity; if taking loans, whether it should be secured or unsecured; and also depending on the stage of operations, whether you are at start-up, already launched, profitable, looking for exit/succession funding.

Self Commitment, the main point of consideration

The most basic rule in financing a business is to commit yourself and your savings or other resources to the business. This will ensure your whole hearted commitment to its success. This is also a strong sign of good faith and commitment for other potential lenders/investors as, if you are not seen to be willing to risk your own funds why should anyone else!
Further, for a start-up business, there may not be a wide variety of sources of funds as it is still untested. Hence, you will have to come up with the capital, from personal savings or through selling off surplus assets you may have.

Financing with Debt

Financing a business with debt involves securing a loan. This can be in the form of either unsecured or secured debt. Unsecured debt refers to a loan taken without having to put up any specific form of security or collateral. This involves mainly borrowing from family or friends, a credit card, line of credit and other similar means. Secured debt, on the other hand, refers to loans where you are required to put up some form of collateral in exchange for the loan, for example, mortgage on the house or refinancing your car, among others. For secured debts, you need to be able to assure the lender about your ability to meet your payments either through your business or other means. To secure such debt is some cases you will need to present a solid business plan, evidence of your experience and of your ability to repay.

Personal Loans
In financing a business with personal loans you borrow the money personally to invest it in your business. This is typically used at start-up or early stages where the business has not established enough history or performance to be able to secure a loan on its own merit.

Mortgage Loan
Another source for financing a business is a home mortgage loan. Some banks allow you to mortgage or refinance your house. This may be a risky move as if you are unable to make the scheduled payments, you risk losing your home. It is therefore crucial that you are confident on your continued ability to make all payments scheduled.

Insurance Loan
Another source of loan could be from your insurance policy. If you have been paying for a life insurance policy that builds up a cash value you are entitled to take up a loan on the cash value amount. Many insurance companies will loan you money with the cash value as security. This is a rather expensive method of financing a business and also means reduced benefits if you are unable to clear the loan and interests accrued.

Credit Cards
Credit cards can also be a source for financing a business when you are first getting started. However, this is another expensive method as the rates charged can be high and it could also affect your credit rating, required for other sources of financing.

Government Small Business Loans
There are a variety of government small business loans and programs that can be used in financing a business, including those specifically for Bumiputeras and female entrepreneurs. Most of these loans are administered by commercial banks and other lenders while some are directly administered by the department/agency involved. Funding from these sources may be relatively easier to secure as the government department/agency guarantees your loan, if you are approved.

Equity Financing

Equity Financing is borrowing where the investor/financier becomes a part-owner of the business in the process. This could be through venture capital or issuing shares.

Another option is Venture Capital
Venture capitalists do not want to remain in your business forever. Generally, they want to see an exit strategy that will see them out in about 5 years, with a high return on their investment as their reward.
In terms of areas of interest, venture capitalists are interested in both high technology and various other industries. Normally they fund businesses which have already been launched and have probably reached profitability.

The angel investor, on the other hand, is a special type of venture capitalist. Usually an individual with substantial funds, the ‘angel’ provides capital to start-up companies and takes a personal stake in the venture. Depending on the individual ‘angel’, their requests for any form of control or a quick return on investment will differ. However, similar to regular venture capitalists, they seek high returns on their investment for the risks they take on.

Malaysia Technology Development Corporation (MTDC) has over the years evolved to become an integrated venture capital solutions provider. MTDC had also established six private equity funds including Malaysian Technology Venture One Sdn Bhd (RM35 million), Malaysian Technology Venture Two Sdn Bhd (RM53 million), Malaysian Technology Venture Two (Agriculture) (RM17 million), Malaysian Technology Venture Three Sdn Bhd (RM75 million), Sumber Modal Satu Berhad (RM10 million) and East Malaysia Growth Corporation Sdn Bhd (RM12 million). MTDC has also been given the responsibility to manage the fund created by the government for the purpose of investment in non-ICT projects.

Bank Loans in Malaysia

Banks lend money to existing businesses but for a start-up, it may be very difficult to get a bank loan as they do not have a track record. Banks require a sound business plan and must be convinced of the viability of your business before they agree to lend you money. Banks also normally need collateral as security.

SME Bank
To support greater entrepreneurship in Malaysia, the bank’s SME Start-Up is designed for all new businesses across SME classifications and industries, including ICT and agro-based activities and is specially targeted towards businesses with market-viable products or services ready for domestic and/or international commercialisation.

The SME Start-Up is unique in that it offers financing and/or business development support when you are ready to commercialise your product or service. This means that when you have a prototype and you require financing and/or business development support to move into production and/or marketing they would be willing to finance you. They may be able to help you even if you do not have sufficient collateral or the mandatory track record.

Apart from SME Bank, corporations such as the Malaysian Industrial Development Finance Berhad (MIDF) also offer loans to start-up SMEs. Check with the relevant government agencies and commercial banks to find out more about the loans available to new businesses.

Government Funds, Schemes and Grants

• Graduate Entrepreneurs Fund (Tabung Usahawan Siswazah (TUS))
Administered by SME Bank, this special scheme encourages university graduates to become entrepreneurs in specific sectors.

• Small Entrepreneurs Guarantee Scheme
A scheme administered by Credit Guarantee Corporation Malaysia Berhad (CGC)to assist small entrepreneurs with viable business ventures by providing guarantee cover for credit facility obtained from commercial banks. Maximum financing is up to RM50,000.

• Seed Capital Scheme (Batik & Craft)
A program to promote the Malaysian textile and craft industry by providing financing to Bumiputera batik and craft operators. Administered by the SME Bank it offers credit facilities from RM20,000 to RM250,000.

• Matching Grant for Business Start-Ups
This scheme is offered by the Small and Medium Industries Corp(SME Corp) and provides assistance for business start-ups in the manufacturing and service industries. For 2010 the Grants provided to SMEs are redesigned to better serve the industry.

• Cradle Investment Programme (CIP)
The CIP Investment Programme is for technology ideas that have commercial potential. As one of Malaysia’s leading early stage funding programmes, CIP provides more than just funds. They provide assistance and guidance from ideas to commercialisation by matching you with some of Malaysia’s leading industry experts and practitioners. They also provide networking opportunities to pitch your ideas to corporate companies. Offering pre-seed and seed funds, CIP is the only end-to-end funding programme that provides funding from idea conceptualization to commercialisation.

• CIP Catalyst
CIP Catalyst, the newly revamped pre-seed fund from Cradle Investment Programme (CIP), is a RM 100 million fund managed by Cradle Fund Sdn Bhd under the auspices of the Ministry of Finance (MOF).
Aspiring technopreneurs can get funding to help get their technology-oriented ideas off the ground. The CIP Catalyst conditional grant is awarded to teams of innovative individuals who may receive up to a maximum of RM50,000 per tranche for their ideas. Subject to terms and conditions, you may also apply and receive the CIP Catalyst conditional grants up to a maximum of three (3) tranches.
CIP Catalyst’s investment focus is in diverse areas of ICT, non-ICT and high growth technology industries.

• U-CIP Catalyst
U-CIP Catalyst focuses on ideas that come from the academic or research arena. So if you are a researcher, lecturer or student with a great technology-related idea, the newly revamped University Cradle Investment Programme Catalyst (U-CIP Catalyst) can help you get started on your journey as an entrepreneur. U-CIP Catalyst helps researchers and inventors from academic institutions develop their technology-oriented ideas and R&D efforts into real commercial products, ready for the marketplace.

U-CIP Catalyst addresses the special challenges and needs that you will have as a researcher, innovator or student coming from an academic background. As a U-CIP Catalyst recipient, you can receive conditional grants of up to a maximum of three (3) conditional tranches, of up to RM50,000 per tranche, for your technology-related ideas, subject to terms and conditions.

• CIP 500
CIP 500 is the first pure technology seed or commercialisation fund offered by Cradle to help budding Malaysian companies with technology-based ideas attain commercialisation.
It is a conditional grant which offers funding of up to a maximum of RM500,000 per deal. Each company will qualify for a maximum of two (2) consecutive approvals, each approval is worth up to a maximum funding of RM500,000. IP 500 funds both ICT and non-ICT innovations.

• MDeC Pre-Seed Fund
MSC Malaysia’s Technopreneur Pre-Seed Fund Programme envisions the creation of local Technopreneurs and K-SMEs in ICT. The target beneficiaries are local Technopreneurs and only individuals are eligible to apply. The programme offers up to RM150k of conditional funding to develop viable business plans into commercially focused ICT projects, with prototype and detailed business plans, suitable for venture funding & commercialisation.Recipients will also benefit from development, mentoring services and will have access to shared lab facilities at MSC Malaysia Status Incubators through MDeC’s Technopreneur Development programme.

The information provided here is not exhaustive as there are a wide variety of funding opportunities available for SMEs, both from government ministries and agencies as well as the private sector. Making a choice on just which is best for you can be difficult but with proper planning you will find one just right for you.