Startup Loans

Loan Financing 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. 

Considerations Before Taking Startup Loans

Since you’ll have to dip into your hard-earned savings, be sure to:

  • Create a separate business account for easier money management
  • Consider your money as financing or equity to your business 
  • Keep detailed accounts of your expenditure 
  • Not use your retirement or emergency funds
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.

Is taking a Startup loan a good thing?

It is not always a good idea to take business loans, especially for Startups. The interest rates will normally be very high, which could sink the business quickly. If your cash flow is properly managed, applying for a business loan is practical for these reasons:

  • To expand operations
  • To purchase equipment
  • To purchase inventory
  • To increase working capital

In short, it is better if the returns from business activities far outgrow the interest rates you need to cover, and with minimal risk.

Solutions - organised by category

Venture debt

Medium term startup 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 startup 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 Startup Loans

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 Startup 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

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

According to SME Corp, a business is deemed as an SME if it meets the following criteria:

SectorMicro SMEsSmall SMEsMedium SMEs
ManufacturingSales turnover < RM300,000
Full time employees < 5
Sales turnover < RM15 million
Full time employees < 75
Sales turnover < RM50 million
Full time employees < 200
Services & OthersSales turnover < RM300,000
Full time employees < 5
Sales turnover < RM3 million
Full time employees < 30
Sales turnover < RM20 million
Full time employees < 75

A company that wants to operate and trade in Malaysia must be locally incorporated, with its shareholders must be majority-owned by the national citizen(s) (>51%).

You will also need a guarantor (that is a person) so that the banks can get back their money in case the Startup fails to pay it back.

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.

https://www.nexea.co/list-of-startup-grants-malaysia/

References

https://www.cimb.com.my/en/business/business-insights/scale-up/need-money-for-a-start-up-here-how-you-can-finance-your-business.html

https://www.entrepreneur.com/article/217376

https://ringgitplus.com/en/business-loan/

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Written by Rohan Green

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.

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One comment on “Startup Loans”

  1. Thank you for your information about the funding. Keep sharing more information about the funding and investors.

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