How To Finance Your Business Or SME In Malaysia

Starting a business can cost hundreds to millions of ringgit. What if you need capital to finance larger business projects or to get through tough times in day-to-day operations? Here are six options in Malaysia.

1. Personal loan

A personal loan might not be the first thing that comes to your mind when you think of “business finance,” but it can be a great way to get smaller amounts of finance quickly. This makes it ideal for micro businesses that don’t need a lot of capital, like a home bakery or food truck business.

To qualify for a personal loan, you will need a decent credit score and a history of stable income. These loans are generally easier to obtain than a business loan, which may require your business to be in business for a few years. Some loans also allow funds to be disbursed within one business day, which is useful for covering emergencies.

On the downside, personal loans have a lower funding limit of between RM50,000 and RM200,000, although your limit may depend on your income. They also generally have higher interest rates than business loans. Also, if you run a business or are self-employed, it may be more difficult to qualify for a personal loan.

CashFirst Alliance Bank personal loan

2. Business loan

Business loans are more difficult to obtain than personal loans. You may need a minimum number of years of operation. You may also need to provide collateral to be eligible for higher funding amounts. Also, there are restrictions on the funds you receive – for example, you may not be able to use them to buy stocks or real estate investments.

On the bright side, business loans can help you secure large amounts of financing – anywhere between RM 10,000 and millions of ringgit, although this depends on your business operations and whether you have collateral to pledge. They also charge interest rates of around 5% to 7% per year, which is usually lower than personal loans, which can be as high as 18% per year.

3. Grants and programs

Government or corporate programs can offer generous low-interest (or interest-free) funding, grants, or mentoring and networking opportunities.

However, each funding program has a set of eligibility conditions. Some programs are only available for specific businesses (eg, those looking to increase their digital capabilities) or demographics (eg if you are a female entrepreneur or a candidate for Bumiputera). Additionally, some grants may be competitive, requiring multiple rounds of evaluations before your application is accepted.

For a list of government and business grants and programs, you can visit SME Corp. Malaysia, MaGIC and MDEC.

4. Crowdfunding

Crowdfunding refers to raising funds through a large pool of individual investors. There are a few types of crowdfunding, including:

  • Crowdfunding based on rewards. You’ll see this model on international sites like Kickstarter and Indiegogo. Users promise money to other individuals or businesses in exchange for non-cash reward tiers.
  • Crowdfunding based on donations. Sites like GoFundMe allow users to support local charities or entrepreneurs without expecting anything in return.
  • Crowdfunding in shares. Individuals invest in businesses in exchange for a share of ownership or profit. Crowdo-funding sites in Malaysia include Crowdo, pitchIN, and Leet Capital.

Fundraising through crowdfunding can potentially be easier than through bank loans and grants, as the eligibility requirements may not be so strict. Platforms based on rewards or donations may not even require any operational history from the company.

But it can also have little payoff – some platforms won’t disburse any funds if you don’t hit the target fundraising, even if you’ve spent time, money, and effort building your campaign.

5. P2P loan

Debt-based crowdfunding, better known as peer-to-peer (P2P) lending, allows investors to pool money to lend to businesses.

P2P loans can be an alternative financing option if you are not eligible for a bank loan as they have lower financial and operational eligibility requirements. They can also offer quick financing – if you borrow smaller amounts (eg less than RM100,000) your application can be processed within days.

But be prepared for higher interest rates. P2P platforms tend to charge higher interest rates (up to around 18% per year) than banks (around 5% to 7% per year), as investors expect higher returns by exchange of higher risk taking. This is in addition to the fees charged by the P2P platforms themselves, which can be a percentage off your loan.

6. Venture capital and angel investors

Venture capitalists are companies or individuals who finance companies with high growth potential. Their capital is pooled with other individuals or companies. On the other hand, an angel investor is a wealthy person who invests their own money in start-up companies.

Venture capital and angel investors can be extremely beneficial for start-ups. They can provide large sums of funding and mentoring or networking opportunities. They may also not require any repayment if your business goes bankrupt.

However, these opportunities tend to be competitive. You will need to prove that your business or business idea has good long-term growth potential. If you are successful in securing funding, venture capitalists or angel investors will ask in exchange for equity or convertible debt (debt converted to equity at a later date). They may also want to be involved in the way you run your business, so that you can give up some control over your business.

The MaGIC platform has a list of venture capital funds and angel investor platforms in Malaysia.

Consider your financing needs

Your choice of financing can come down to your financing needs, what you are eligible for, and the potential downsides you are willing to take in exchange for financing. But with so many financing options, it has never been easier for aspiring entrepreneurs to make their business idea a reality.

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Jothi Venkat

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