Over view of Short Term Financing. Short term financing is basically to provide capital insufficiency businesses funds for a short term period of a year or less. These funds are usually for businesses to run their daily operations including payment of wages to employees, inventory ordering and supplies. Corporations with seasonal peaks and troughs and those engaged in international trade are profound users of short term borrowing finance. Lenders support businesses that have strong management, steady growth potential and reliable projected cash flow. However lenders normally charge a higher base rate of interest for operating loans reflecting this relatively weaker security position. There are many methods for which a firm can seek short terms financing some of these include:
# Overdrafts
# Short-term loans
# Bills of exchange
# Promissory notes/commercial paper
# Inventory loan
# Letters of credit
# Short term Eurocurrency advances
# Factoring
#commercial papers
#Trade credit
SHORT TERM LOANS IN MALAYSIA
Introduction
Short term business loans are programs that are extended to business owners for usually, less than 120 days. This loan could be the answer to a small cash flow problem that can be adjusted within a few months. Retail stores often experience seasonal slumps, and financial assistance can help retailers through the slow sales months, waiting for the hot retail time of year to pick up again. There could also be a special buying opportunity for inventory discounts or special services to help a company expand. These situations and more are perfect for considering additional funding. As with any lending package, there are risks involved, so before getting a short term business loan, the individual or owner should thoroughly investigate the financial situation, and know the risks involved.
Entrepreneurs or owners will need to present a specific plan to the lending agency that they are working with. Having a specific number prepared with payment initiatives will be helpful in qualifying for a short term business loan. This is not the same thing as a line of credit, because it has a beginning and ending dates set. So, having the specific purpose and time frame of the project or need will be crucial in obtaining short term business loans for a company. To find out more about a plan and putting this information together, the individual can search the Internet where there are many articles and strategies published free of charge.
It is important for the owner to understand that funding can be available through secured and unsecured assistance. Secured short term business loans are available when the applicant offers collateral. This can sometimes be the inventory that is purchased, or in some cases, owners have used their personal home equities for security. With an unsecured short term business loan, banks and lending institutions grant funding based on a businesses credit standing and profit histories. Lending officers and committees will evaluate the plan and carefully review the company in question's financial records.
There are risks involved with any type of financial assistance package. The owner should carefully consider getting short term business loans, and research all financial options before deciding on any particular program. It is important to comparison shop lending institutions before choosing one to work with, unless there is already an established relationship with a lender. The Internet can provide information on lenders and different terms that are generally accepted with a short term business loan.
In Malaysia we have financial institutions offering loans for any corporate firms that meet the requirements, these are in many cases are commercial banks and Islamic banks. The difference between the two is that Islamic banks follow Islamic code of law called Sharia law while commercial banks set their own policies on how they are run in daily basis. Enterprises have been ear-marked as one of Malaysia's key drivers for economic growth. These businesses are increasingly expanding beyond local shores. As they expand, they face a myriad of challenges and one of these challenges is access to financial solutions that meet all their needs. As such, selecting the right bank is vital. Businesses want to build a long-term relationship with a bank that understands their business and its financial needs. Corporations also want a bank with a solid reputation, high responsiveness to customer's needs, ability to explain and implement banking solutions for their customers, and flexible towards customizing those solutions.
Short Term Loans offered by Malaysian Commercial banks
Short term loans offered in Malaysia by different commercial banks and other financial institutions have proved to share the same regulations and characteristics, with that said, we discuss them in a general manner without studying the banks separately:
Short term loans provided to corporations by commercial banks in Malaysia offer their short term loans at a Base Lending Rate that lies between 5% and 7%, this rate may slightly differ from bank to bank or any other financial institution. Corporations can borrow loans of up to RM10 million. Malaysia financial institutions usually require repayment within 5 years. They provide interim working capital for a business temporarily in need of cash. The loans are typically repaid in monthly or quarterly installments. On some occasions financial institutions may agree to a lump sum repayment when inventory or accounts receivable are converted into cash
Corporations in Malaysia prefer short term loans because they are easily available and usually have a lower cost.
Other forms of Short Term Loans in the Malaysian Corporate Sector
Below we discuss some of the common short term financing instruments available for corporations in Malaysia.
Corporate Promissory Notes: A legal IOU (I owe you) that spells out the terms of the loan agreement, usually the loan amount, the term of the loan and the interest rate, it often requires that the loan is paid in full interest at the end of the loan period. Corporate Promissory Notes (CPN's) are usually issued by Major Corporations, usually public listed and underwritten by a Bank or Underwriter. This can be any foreign bank or Bank Negara Malaysia. It is currently difficult for any corporation to issue corporate promissory note in Malaysia unless backed by a major world.
Line of Credit: The borrowing limit that a bank sets for a firm after reviewing the cash budget. The firm can borrow up to that amount without asking since it is pre-approved. It is usually an informal agreement and may change overtime. Malaysian corporations heavily rely on the line of credit since it is very convenient and they use it to cover peak demand times and growth spurts.
Bankers' Acceptances:
In Malaysia it is also known as the Malaysian Ringgit banks acceptance .Non financial corporation produces this instrument in the name of some bank. It is a document that indicates that who will pay the face amount of the instrument in the future. Foreign trade is often financed through bankers' acceptance. Corporations also use them when they need to finance their inventory or to purchase goods on credit. Bankers' acceptances have maturity period ranging from one to six months.The benefits of this short term financial instrument is that it is easy to apply,has increased flexibility and offers and improved cash flow.
It is governed by Bank Negara Malaysia's Guidelines on Banker's Acceptances.
Factoring:
Factoring is essentially the sales of receivables. It provides cash flow solution for further business opportunities as it unlocks Corporations receivables and turns it to cash the fastest way hence its popularity on Malaysian corporations, in Malaysia we have companies that help facilitate this form of short term fiancing, one major company is Orix leasing Malaysia berhard.The benefits of factoring in Malaysia corporations is that it provide instant cash flow and increase more capital to generate more business. It also helps Malaysian corporations by reducing their over-reliance on overdraft facility provided by financial institutions like Maybank, CIMB and others.
Overdrafts:
Businesses need working capital for the day-to-day running of the business. Generally, the most convenient / flexible form of financing would be an Overdraft (OD) facility. OD protection advances money to cover an attempt to withdraw money from an account that does not have sufficient funds. When used to cover checks, overdraft protection prevents the check from bouncing; when used to cover other transactions, it allows the customer to borrow money through a withdrawal from the current account. It has no fixed repayment schedule, offers flexibility to draw on funds as and when required by corporations. Interest rates for this facility in Malaysia are pegged to the Bank's Base Lending Rate (BLR) for this facility. In Malaysian financial institutions, only the following are allowed to use this financial instrument:
1) Malaysian-owned company (minimum ownership of 51%)
2) Sole Proprietorship
3) Partnership
4) Private Limited Companies
TRADE CREDIT
Trade credit is the process of buying equipment and supplies for the business start-up from suppliers or vendors, letting them finance the purchases. It basically means buying on credit, that is, "buy now, pay later", and is often called an open account because the account can be kept open and purchases can be made on credit as long as regular payments are made.
For example, the business could go to an office supply company and set up an account and buy office furniture, computers, and office supplies from this company. The vendor would require us to fill out a credit application and use the vendor's own credit card or financing company to check our credit and offer our financing terms.
Trade credit is a vital component of corporate finance in many countries including Malaysia with its corporate sector having a lot of its total assets in trade payables.
There have been several studies focusing on the Relationship between trade credits. Trade credit was a substitute for bank loans during financial crisis. Recently, financial authorities have issued a series of policy packages to stimulate trade credit transactions since trade credit can be used as collateral to facilitate the flow of credit to firms. For example, Bank Negara has begun outright purchases of securitized trade credit as a part of its market operations. Researchers have put forth a variety of hypotheses on how trade credit is Determined, and how trade credit is related to other financial instruments. We can separate these hypotheses into two categories. In the first category are those hypotheses that focus on the differences between financial institutions, which supply loans, and non-financial institutions, which provide trade credit. These institutional differences are important as the ability to acquire borrowers' credit risk information, to efficiently liquidate collateral and to forcefully negotiate for smooth repayment differs substantially across financial and non-financial firms. In the second category are those hypotheses concerned with instrumental differences. Differences in transaction costs, interest rates and moral hazard all play a vital role in determining the relationship between trade credit and loans.
Previous studies have looked at both sets of hypotheses. For example, Petersen and Rajan (1997in us) implement comprehensive tests based on detailed small business finance. The results of these studies, however, cannot identify which of these two Categories of hypotheses are actually being tested. When these researchers observe that trade credit and bank loans behave differently, they have not been able to determine Whether it is because non-financial enterprises have more reliable credit information than banks, or whether trade credit is fundamentally different than loans.
Financial and non-financial institutions have different lending behavior by focusing on a single financial instrument, such as loans. Different credit instruments respond differently to exogenous shocks by the lending activity of institutions that deal with a variety of financial Instruments, including trade credit and loans.
In this regard, giant trading companies can be used as powerful instruments. Their size is immense, with several of these firms recording annual Sales of billions of ringgit. In addition, they provide a variety of financial commitments to their customers in the form of loans and other investments.
Because trading companies each issue their own trade rates but with respect to BLR uncoordinated by bank Negara we can use BLR rates as base. And commission for each month for 2009 to 2010 in respect of LC (LETTER OF CREDIT) is 1% - 0.127%
Rates last refreshed on 25th March 2010.
Rates unchanged since 25th March 2010.
No.
Banking Institution
With Effect From
BLR (% p.a.)
1
Affin Bank Berhad
09/03/2010
5.75
2
Alliance Bank Malaysia Berhad
12/03/2010
5.80
3
AmBank (M) Berhad
10/03/2010
5.80
4
Bangkok Bank Berhad
11/03/2010
5.80
5
Bank of America Malaysia Berhad
15/03/2010
5.80
6
Bank of China (Malaysia) Berhad
11/03/2010
5.80
7
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad
10/03/2010
5.50
8
CIMB Bank Berhad
09/03/2010
5.80
9
Citibank Berhad
11/03/2010
5.80
10
Deutsche Bank (Malaysia) Berhad
11/03/2010
5.80
11
EON Bank Berhad
11/03/2010
5.80
12
Hong Leong Bank Berhad
10/03/2010
5.80
13
HSBC Bank Malaysia Berhad
09/03/2010
5.80
14
J.P. Morgan Chase Bank Berhad
15/03/2010
5.65
15
Malayan Banking Berhad
09/03/2010
5.80
16
OCBC Bank (Malaysia) Berhad
11/03/2010
5.80
17
Public Bank Berhad
09/03/2010
5.80
18
RHB Bank Berhad
09/03/2010
5.80
19
Standard Chartered Bank Malaysia Berhad
10/03/2010
5.80
20
The Bank of Nova Scotia Berhad
12/03/2010
5.80
21
The Royal Bank of Scotland Berhad
11/03/2010
5.50
22
United Overseas Bank (Malaysia) Berhad
11/03/2010
5.80
TRADE CREDIT CHARACTRISTIC
No interest charge is made by the lender.
It is relatively easy to obtain by businesses with a good credit rating; and being tied to the purchases of a business, the level of financing automatically grows as the business expands.
The normal terms of trade credit are net 30 days, or in other words, the invoice must be paid in full within 30 days. This qualifies it as a short term financing instrument for the corporate sector in Malaysia and other countries.
Sometimes a discount is offered to people for early payment.
One method of extending trade credit is known as stretching. This is the practice of postponing payments to creditors beyond the originally agreed period of time. This may be accepted by the supplier especially if the business is the regular customer.
SOME OF THE USUAL PRACTICES IN MALAYSIA
Trade credit facilities
Purpose
Buyer Credit Facility
Provide opportunities to the Malaysian exporters and contractors in request for overseas jobs. The loan is complete directly to a foreign buyer or a lending establishment to the import of Malaysian goods and services. Loan disbursements are made straight to the Malaysian exporter.
Overseas Project Financing Facility
Chains Malaysian investors task projects abroad such as manufacturing and other improvement project. Offered to Malaysian companies or controlled merged companies incorporated overseas for the buy of Malaysian goods. Loan disbursements are usually made to the Malaysian exporters/contractors.
Guarantee Facility
The warranty services are available to assist the issuance of bond or guarantee such as advance payment bond and routine bond for abroad contract undertaken by Malaysian contractor.
Supplier Credit Facility
Malaysian manufacturers, exporters and suppliers of Malaysian ended goods be able to take benefit of this service to increase their exports into global market through pre & after delivery supplier credit service.
Export of Services Facility
Malaysian companies to export their skilled services abroad which may be in the structure of consultancy, in area like IT, manufacture, telecommunications, management or other technical services.
Export Credit Refinancing (ECR)
ECR system endorse the exports of Malaysian manufactured products, farming products and main commodities by offering reasonable interest rate to Malaysian exporters via commercial banks participate in the plan. There are two types of services available to direct and indirect exporters under the scheme namely:
1. Pre-delivery ECR
Loan later to manufacturer/farming goods producer to ease the production of qualified products or loan advanced to trading company for purchase order of LOCAL middle/final products, for export prior to shipment. The most margin of financing is up to 95% of value of export order of ECR LOCAL Letter of Credit / ECR Domestic Purchase order / local purchase order.
2. Post- delivery ECR
Loan proceeds for a period after delivery to finance the export of qualified products for credit terms. The most margin of financing is up to 100% of export bill worth.
complete Policies (shipment/ agreements/ Services render)
Provides shelter for exporters against any losses arise from non-payment in respect of merchandise/services export on credit terms of not more than 180 days.
Bank Letter of Credit Policy (BLCP)
Covering Malaysian banks that negotiate or discount without recourse Irrevocable Letter of Credit issue by abroad banks in respect of Malaysian exports.
precise Policy
to cover export of resources or semi-capital goods and/or services with lengthy built-up and/or payment periods and high contract values. The minimum credit time is one year up to ten years.
Buyer Credit Guarantee
Guarantee of repayment of fixed or afloat rate loans lent to overseas buyer for Malaysian goods. The minimum credit term is 1 year up to 10 years.
abroad Investment Insurance
to cover non-commercial risk of loss to the investment or business establish abroad by Malaysian enterprise such as transfer limitation, expropriation, war & civil turbulence and breach of contract .
Export finance plan for usual and Islamic Financing for SMEs
Multi Currency Trade Financing system
• EXIM Multi Currency Trade Financing (MCTF) to be issue to participate banks that offer pre-delivery and post delivery financing to SMEs covering the abroad LC issuing banks. Under the MCTF system, banks will not need any collateral from the SMEs. Indirect Exporter Financing system
• not direct Export Financing (IEF) be issued to participating banks that finances the receivables of the Indirect Exporter for goods and/or services delivered and/or render on credit terms to the Direct exporters. Under the IEF plan, the financing to the Indirect Exporter is on incomplete recourse base.
COMMERCIAL PAPER
Type of short-term negotiable tool, usually an unsecured promissory note that calls for the payment of money at a particular date. Because it is not backed by collateral, commercial paper is usually issued by major firms whose credit-rating is so good that their notes are immediately accepted for trading. The notes are sold at a discount and mature from three to six months. Commercial paper is important to the issuing firm because it supplements bank loans and is usually payable at a lower rate of interest than the prime discount rate. firmly speaking, it include only those instruments that are used in commerce in place of money, as well-known from paper used in investment, personal, estate, speculative, and public transactions. commercial paper may also include drafts, bills of exchange and checks, acceptances, bills of lading, warehouse receipts, orders for delivery of goods, and express orders. Commercial paper is available in a variety of denominations and usually ranges in maturity lasting up to 270 days.
Companies issue commercial paper when they need to borrow money. Normally, commercial papers are short-term loans that a company gets to make sure it has enough cash. Now days these are very regular arrangements in Malaysia since the interest rates a company pays on commercial paper is likely to be less than straight bank loans.
NOTE
The difference between asset-backed securities and asset-backed commercial paper is mainly one of the term of the paper - commercial paper by definition is short-term funding, and is therefore mostly used for short-term assets such as trade receivables.
Asset backed commercial paper (ABCP) is a device used by banks to get operational assets such as trade receivables fund by issuance of securities. Usually, banks devise ABCP conduits as a device to put their existing asset credits off their balance sheets and yet offer liquidity support to their clients.
RATE CALCULATION
Rate Calculations
To calculate CP interest rate indexes, the BANK NEGARA uses data for assured trades to estimate a relation between interest rates on the traded securities and their maturities. The trades in these calculations represent sales of Commercial Papers by dealers or direct issuers to investors and are weighted according to the face value of the Commercial Papers so that larger trades have a greater effect on the resulting index. With the relation between interest rates and maturities established, The reported interest rates represent the estimated interest rates for the specified maturities because of the relation between interest rates and maturities established. These interest rates are a statistical aggregation of numerous data reflecting many trades for different issuers, maturities, and so forth. The reported interest rates reflect activity in certain segments of the market, but they may not equal interest rates for any specific trade. This calculation is designed to minimize the difference between the interest rates at which actual trades occur and the estimated interest rates.
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2010
2.00
2.00
2.22
2.25
2009
3.01
2.39
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2.00
2008
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.44
3.25
2007
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2010
1.30
1.20
2009
3.90
3.70
3.50
3.00
2.40
-1.40
-2.40
-2.40
-2.00
-1.50
-0.10
1.10
2008
2.30
2.70
2.80
3.00
3.80
7.70
8.50
8.50
8.20
7.60
5.70
4.40
2007
3.20
3.10
1.50
1.50
1.40
1.40
1.60
1.90
1.80
1.90
2.30
2.40
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
2010
12.9
11.7
24.6
2009
8.1
12.1
12.6
7.4
10.0
9.1
7.8
9.6
9.3
11.5
8.9
12.1
118.4
2008
9.7
9.1
8.0
12.3
15.5
12.9
14.4
12.6
14.7
9.6
11.5
11.5
141.9
2007
7.6
6.8
6.4
5.8
8.1
8.8
7.9
9.3
11.6
9.4
10.5
10.0
102.3
Yield to maturities
010 Jan. / Jan. 2.2550 2.7930 3.2750 3.5190 3.7640 4.2820 4.5510
Feb. / Feb. 2.5930 3.0180 3.3340 3.6530 3.8360 4.2570 4.5440
Islamic Banking Overview
Islamic banking is a system of banking or banking activity that has the same purpose as conventional banking except that it operates according to Islamic law (Sharia) principles and is guided through the development of Islamic economics. The basic principles of Islamic banking is the sharing of profit and loss and also that it prohibits the payment or acceptance of interest fees for the lending and accepting of money. It is also against investing in businesses that go against Islamic law, for example, businesses that sell alcohol or pork or produce media such as gossip columns, pornography.
Islamic banks make their profit though a number of different methods, by buying and selling of approved goods and services, as well as trading. In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, the bank might buy the item itself and then re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. There are no penalties for late payments and there are no interest charges on the mortgage, and in order to protect itself from default, the bank will register the property under its name until full payment is made. Islamic banks also handle loans for vehicles in a similar manner. When giving out loans to companies, Islamic banks take a slightly different approach but one which is still consistent with Sharia. The bank will lend their money to the company by issuing floating rate interest loans. These loans are pegged to the company's individual rate of return, and therefore, the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded.
When it comes to investing, fixed-income, interest-bearing bonds are not allowed in Islamic banks. However, financial assets that comply with the Islamic law can traded in the secondary markets. When trading, it is essential that risk be involved, so Islamic banks will only trade in Sharia-compliant investments, with the money deposited by customers, sharing the risks and the profits between them. Only financial transactions with a minor risk are allowed in Islamic banking, but to date, there are still complications of having to decide what is and is not considered a minor risk.
Islamic Banking in Malaysia
The first Islamic bank in Malaysia was established in 1983, and is known as Bank Islam Malaysia Berhad(BIMB), and in 1993, commercial banks, merchants, as well as finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme, but these institutions are required to separate the funds and activities of Islamic banking transactions so as to ensure that Islamic banking funds strictly adhered to Sharia law. Later, in June 2005, a new "Islamic Malaysia Index" was setup, and this had a collection of 45 stocks representing Malaysian companies that comply with Sharia law.
Since its conception, Islamic banking in Malaysia has been adopted by a number of banking institutions in Malaysia. Below is a list of the seventeen licensed Islamic banks in Malaysia, according to the Bank Negara Malaysia:
1) Affin Islamic Bank Berhad
2) Al Rajhi Banking & Investment Corporation(Malaysia) Berhad
3) Alliance Islamic Bank Berhad
4) AmIslamic Bank Berhad
5) Asian Finance Bank Berhad
6) Bank Islam Malaysia Berhad
7) Bank Muamalat Malaysia Berhad
8) CIMB Islamic Bank Berhad
9) EONCAP Islamic Bank Berhad
10) Hong Leong Islamic Bank Berhad
11) HSBC Amanah Malaysia Berhad
12) Kuwait Finance House (Malaysia) Berhad
13) Maybank Islamic Berhad
14) OCBC Al-Amin Bank Berhad
15) Public Islamic Bank Berhad
16) RHB Islamic Bank Berhad
17) Standard Chartered Saadiq Berhad
Short term funding for corporations by Islamic banks in Malaysia
Islamic banking institutions is Malaysia offer a wide variety of funding services to individuals and companies around Malaysia as long as they meet the requirements of the banking institution, the main one being that they comply with Sharia law. Below are the short-term corporate financing schemes offered by the Islamic banks in Malaysia:
Short Term Revolving Credit(STRC-i)
It is a Shariah-compliant Short Term Revolving Credit facility which is granted to corporate and middle market customers. It can be offered under either of two Islamic contracts:
•Bai' Al Inah- the underlying asset is already owned by the bank and sold to corporation
•Murabahah- the underlying asset is bought by the bank and sold to corporation at cost plus profit
The tenor for this facility can be 1 month, 2 months, 3 months, 6 months, 9 months and 12 months; and the effective rate of this financing is pegged to the cost of the funds.
VRF Cash line-i
Issued to corporations for their working capital requirements and purchase of new assets. Available in the short-run as well as medium run. The short run tenure is 3, 6, 9, 12 months.
Debt Market Securities
Banks offer Islamic Debt fund raising services by tapping the various sources of funds locally as well as internationally. In the short term, they specialize in arranging, structuring, managing and underwriting Islamic securities which cover issuance of short term debt instruments such as commercial papers.
Commercial Papers(ICP)
These are short term debt instruments issued by corporations to fund their working and capital requirements in the short term, as long as they comply with the Sharia concept.
Accepted Bills-i
AB-i can be used to finance imports and local purchases under the concept of buying at cost and selling at profit. The bank appoints the corporation as the purchasing agent for the bank. The corporation then purchases the goods on behalf of the bank which would then pay the seller and resell the goods to the corporation at cost plus profit. The term for this agreement is 365 days.
Project Financing-i
This facility is meant to fund projects to be undertaken by either corporations or small businesses. It is available for private limited companies as well as public limited companies.
Transactional lending
Short term bridging loans so that corporations can meet their deadlines. The bank acts as the interim financier, it gives the corporation time to focus on sourcing for longer term financial packages.
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