How to secure the right short term loan/financing options for your startup

Rohan Green Finance, Funding, Startups Leave a Comment

The classic financing problem for startups

Entrepreneurs are often well versed with an archetypal cash flow problem but not really understand their loan options. They deliver their goods/service and then may be made to wait 90 days prior to receiving payment – particularly in the B2B market. In the meantime, they must pay ongoing operational costs. As a result, these startups may require temporary finance until their invoices are paid. 

financing loans for startups

The key factors to consider are below:

Time

It is important to consider both the time which the various options take to approve loan financing and the duration of the repayment period. For shorter repayment periods invoice financing may be appropriate. For longer repayment periods, consider Venture Debt.

Size of facility

Startup’s looking for relatively small amounts of funding are generally more aligned with P2P/ invoice financing. Venture Debt is generally more appropriate for startups looking for larger amounts of loans.

Public scrutiny

Some forms of financing are perceived differently by the public. For example, startups in certain sensitive areas may wish to avoid P2P loan financing.

Loan Collateral

It is relative common for lenders to require an asset to be pledged as security which would be foreclosed in the event of default. According to Bank Negara, the biggest challenge for these firms who are looking to obtain finance is a lack of collateral which accounts for 55.2% of the obstacles.

Solutions – organised by category

Venture debt

Medium term loan

Innoven
Supports Venture Capital backed companies in order to facilitate growth
The typical funding range is $500,000 to $10,000,000 (USD) for an average of 36 months – there is potential for larger principals
Repayment is typically 10% per annum on remaining principal,
They look for companies which have raised existing funding, profitability is evaluated on a case by case basis
Startups retain their discretion while allocating funds

Longer term loan

Malaysia Debt Ventures (MDV)
Provides funding in the gap after receiving Series A funding and before securing Series B without having to give up equity
The typical funding range is Rm 1,000,000 to Rm 5,000,000then is set on a case by case basis
No collateral required – rather than repay cash could convert to equity
Offers a flexible payment structure – there is a 12 months grace period where only the interest must The, not the principal
Repayment is typically staggered starting low then getting higher
Recently launched a RM1b fund which could benefit 300 companies at an interest rate of 8%, focused on technologically based companies

Key Differences between the two:

Innoven is for shorter financing durations with no grace period. They do not convert their loans to equity but do have the option to buy shares – up to  20% of loan amount.
Innoven see themselves as a bridge solution rather than financing startups who are running low on funding. Rather they are target proactive startups who are planning ahead and would like additional funds for expansion without having to compromise equity
Innoven cannot provide to Malaysian companies, instead they offer SGD and USD.
MDV often has a longer funding period than Innoven,
MDV allows for repayments to be staggered in order to increase as the startup grows.

Invoice financing / Factoring

Factoring is when a business sells its accounts receivable (i.e. invoices) to a third party (called a factor) at a discount. The third party then collects payment on those invoices from the business’s customers. This process is often done when a business needs to meet immediate cash needs.

HongLeong Bank
Allows for the financing of sales, purchases and operational expenses
Minimum period 14 days, maximum period 365 days
Minimum financing amount is RM10,000

RHB – Supplier Financing – limited information online
Targeted RM 200m allocation in 2017
Does not require collateral from suppliers

Dedicating factoring houses include

Ikhtiar Factoring – Does not require collateral from suppliers
Bibby Factoring Services – Group operates in Europe, North America and Asia
Kenanga – Offers Islamic Factoring

P2P loan financing

This form of lendings allows startups to access funds from both individuals as well as traditional institutional investors. There are currently six providers of P2P loan financing in Malaysia. We have included one which utilises a government registered escrow account below.

Funding Societies
Funding can range from Rm 50,000 to Rm 500,000
Can be very fast (⅔ days)
No collateral required
Usually higher interest rates then account for this risks involved
Received $25m Series B funding led by SoftBank, other investors include Sequoia
Also offers invoice financing

Suitable for large startups

CapitalBay – multibank solution
Supplier’s invoices are paid by financial institutions. The financial institutions will be repaid by the clients of the suppliers.
Business model allows creditworthiness to be assessed on the clients of the suppliers rather than the suppliers itself
Rate is 2.30 – 3.50% of invoice value for 60 days financing
Does not require collateral from suppliers
Received RM 2 mil from KK Fund (a Singaporean based VC)
Over 1000 suppliers involved
Leadership team from Oxford/LSE

Traditional Bank loans – typically high barriers to entry

Typically only fund profit making businesses
There may be a minimum funding term of 3 years
Collateral is often required

Equity Financing

As this area differs significantly from the rest of the content here, we will not go into detail in this article. For more information on Equity Financing please follow the following links:

https://www.nexea.co/equity-crowd-funding-ecf-malaysia-alternative-investment/

https://www.nexea.co/complete-list-top-startup-accelerators-malaysia/

https://www.nexea.co/list-venture-capital-vc-malaysia/

https://www.nexea.co/angel-investors-malaysia/

Startup Grants

For more information on Startup grants please click on the following link.

Startup Grants in Malaysia

Rohan Green

NEXEA Alumni at NEXEA
I am an Economics (MA Hons) student at the University of Edinburgh. I had a very good experience with NEXEA as part of the Investment Analyst internship in summer 2018.