It is a well-established fact that finance is the most fundamental factor in which a successful business thrives. This makes financial decisions both vital and precarious which your business could highly benefit from. Apart from deciding the source of financing, it is as important to consider the amount of business loan required. The financial analyst should assess the requirement of the business considering all the factors like;
- Time period – short-term or long term
- Source – equity or loan
- Amount- small business loans or a huge sum
- Time frame – immediate requirement or for the near future.
Many SMEs in Malaysia opted for business loans as an appropriate means of financing. Banks like Maybank, BSN, RHB Bank, Alliance Bank and UOB are some of the banks offering financing services at reasonable rates to entrepreneurs.
While applying, the entrepreneur must remember that the loan must not be more than what the business requires at any point in time. Once the amount is received the entrepreneur must aim at the optimum utilisation of funds. Any amount kept idle would only add a financial burden on the business. The loan procedure is time-consuming enough. Therefore when the lender disburses the fund, the business must start utilising the fund without delay.
What can a business loan be used for?
Productive business venture
Business owners mostly probably require additional funds for a high-yielding business venture. Therefore, the loan amount should be invested for the given venture as soon as possible. The probable yield of the said venture must be more than the interest amount at all costs. In a nutshell, the business must have a clear understanding of what it is to gain from its new project by using the loan. Return on investment must be justifiable.
Upgradation is a wide term in business parlance. It includes the up-gradation of technology, software, techniques and much more. New capital may mean new equipment to spur production, larger inventory to multiply sales, improve technology to streamline production etc. The business should consider capital expenditure on upgraded plants and equipment which would yield long-term benefits. The software must be updated so as to cater to all the upcoming business requirements.
Long term investment
- New equipment and locations: better equipment and a good location is always good area for investment
- Accounting software: the business should invest in accounting software that provides an organised presentation of financials and caters to all its business needs
- Training: Human resource is the core resource of an organisation. The capital could be used to provide training to staff and enhance their potential.
- Innovation: the business must be sensitive towards the changing need of the customer and consider upgrading their product
- Website designing: a little investment reaps huge benefits when applied in the right direction. Social media platforms provide a huge customer base and should present the business attractively.
- Marketing: a good marketing and branding strategy can uplift the face of the business in no time at all. A slump or decline in demand may just require a fresh advertisement.
Short-term working capital requirements:
- Increase in inventory: the business must be able to meet the needs of its customers. It must ensure ample inventory to increase sales.
- Procurement of raw materials etc for production.
- To bridge the gap in cash flow by financing receivables.
Once the funds are in hand, the business owner should plan the repayment. One should adhere to the repayment schedule to avoid penalties and secure future loan approvals. Any default in repayment will result in a bad credit score. A bad credit score may jeopardise the future availability of credit when required. Therefore interest payment must be the “Category A” task for the enterprise. The chief financial officer must consider a prepayment of a loan if the same is available so as to lessen the financial burden on the company.
Tranching of funds
Tranching means earmarking funds for a specific use. A tranch is one of a series of funds allotted for a specific purpose. The business shall avoid taking the whole amount in one go, it shall rather borrow funds for each tranche separately. This will also ensure proper management of funds and make future requests more palatable. Tranching also adds flexibility to the business. If one of the tranches does not work, the business may consider changing its plans, on the other hand, if the business is able to meet its goals with only half the investment, it may not opt for more borrowings. It will surely help in minimising risk.
Refinancing your business loan into a low-cost borrowing
Business loan refinancing refers to the process of procuring a new loan to pay off one or more outstanding loans. A short-term higher interest loan could be refinanced into a longer-term, lower-rate loan when the revenue increases and the business is in a better position to pay off the debts. Refinancing might result in lower interest payments thus lesser financial burden on the enterprise. Besides, refinancing is worthwhile when the business is a responsible borrower and aims at clearing its dues at the earliest. However, keep in mind that a business loan at a low-interest rate should be the main focus. Instead, focus on obtaining adaptable terms and conditions that meet the demands of your business.
Understand the features of a Business Loan and use it timely
Before completely grasping how to successfully use a loan for your business, you should first identify if your loan falls under a ‘want’ or ‘need’. Business loans come with a fixed interest rate. They add up to the financial burden of the business quickly. A bad choice of loan can mean a financial crisis for a business while a well-planned borrowing will ensure the availability of funds for the overall growth and development of the business. Not every business in Malaysia has a risk appetite for borrowing funds. However, if your business has decided to grow with a business loan, keep calm and do thorough research regarding the type of loan, amount of loan and the policies of your lending partners. The least you want to do is face legal consequences for misunderstood terms and agreements and waste your precious time and resources.
The Malaysian economy has witnessed steady growth in recent years, availability of business loans and optimum utilisation of the same is one of the factors responsible for this commendable development.
Apart from obtaining business loans through traditional financing institutions, you can also consider applying for alternative financing through Funding Societies Malaysia, a digital financing platform where it crowdfunds from public investors.
Need funds for your business? Click here to register and check your eligibility for digital financing.