Last updated on 28th March 2022.
Loan Financing For Startups
Entrepreneurs are often well versed with an archetypal cash flow problem but do 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.
What are Startup Loans
Startup loans are more likely to be a term loan or, in rare situations, a line of credit.
A term loan is a lump payment that you repay over a certain time period. You will pay interest on the borrowed funds at a set or variable rate. If you can provide security, you will most likely be provided with a reduced interest rate. A line of credit is a predetermined amount of money that you can use when you need it. It functions similarly to a credit card but has a reduced interest rate. These are more typically awarded to existing enterprises that have a track record of profitability.
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
The key factors to consider are below:
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
Startups 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.
Some forms of financing are perceived differently by the public. For example, startups in certain sensitive areas may wish to avoid P2P loan financing.
It is relatively 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
Medium term startup loan
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 that 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
Repayment is typically staggered starting low than getting higher
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 the loan amount.
Innoven see themselves as a bridge solution rather than financing startups that 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.
Allows for the financing of sales, purchases and operational expenses
Minimum period 14 days, maximum period 365 days
The 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
P2P Startup loan financing
This form of lending 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 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 the risks involved
Received $25m Series B funding led by SoftBank, other investors including 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:
|Sector||Micro SMEs||Small SMEs||Medium SMEs|
|Manufacturing||Sales turnover < RM300,000
Full-time employees < 5
|Sales turnover < RM15 million
Full-time employees < 75
|Sales turnover < RM50 million
Full-time employees < 200
|Services & Others||Sales 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.
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:
For more information on Startup grants please click on the following link.