Sufficient capital is necessary for any startup or more well-established business looking to expand. One way that can help turn aspiring entrepreneurs into real business owners is to apply for business loans. In Malaysia there are various types of loans available from various financial institutions, including bank loans, Islamic loans, and government loans. In this article, we will take a look at the various types of loans for the business, how to make an application for a loan, as well as the advantages and risks.
Types of Business Loans in Malaysia
In Malaysia, there are various types of loans that entrepreneurs can choose from, depending on their business needs.
Small Business Loans
One type of loan that can be sought by business owners starting out is the small business loan. There are schemes like the Small Business Financing Scheme that were set up to give financing of up to RM100,000 for small and micro businesses. Normally these loans are offered at lower interest rates than conventional loans and they usually have flexible repayment periods.
Other programs assisting entrepreneurs looking to enter franchise businesses through special financing include Franchise Financing Scheme.
Islamic business loans
For entrepreneurs desiring to secure loans via Sharia principles, Islamic business loans stand as the requisite option. Opposed to traditional loans grounded in interest, Islamic loans employ concepts like Murabahah (cost plus profit) and Tawarruq (purchase and sale of assets), permitting entrepreneurs to secure funds while adhering to Sharia principles. An instance of this type of loan includes the Small Islamic Financing Scheme which extends fixed profit rates to facilitate payment.
How to Apply Business Loan
Applying for a business loan entails several steps. Below are the steps that a business owner must take when applying for a loan.
Documents to prepare for application
Nominate any of the following documents to apply for a loan starting a business or apply for a small business loan. Among the necessary documents include:
- Business registration
- Current financial report
- Bank account statement from the last several months
Also, applicants may need to provide additional documents like a business license or audit report if the bank or lending agency requires them.
Business Loan Terms
The terms on a business loan vary based on what the loan is for, but they usually include some of the following:
- The business must be at least two years old
- Good credit record
- Valid and complete business documents
How to Determine Interest or Profit Rates
The interest or profit rates in loans depend on a few things, mainly the type of loan you select, but also how risky the business you are looking to borrow against is. For example, a bank loan for a business will have larger interest fees attached to it than an Islamic loan does.
Some loans give you a lower interest rate when you buy insurance or takaful coverage along with the loan so be sure to check the offer to get the best rate.
Financing Programs for Young Entrepreneurs
Young entrepreneurs aged below 40 also have other options for financing their business through different programs like the PUTRA Financing Scheme to help start a business. PUTRA Financing Scheme provides loans up to RM10,000 for young entrepreneurs who are interested in starting their business.
How to Increase Your Chances of Getting a Business Loan Approved
Approval is often the hardest hurdle to overcome when seeking a business loan. Here’s how to boost your chances of a successful application:
- Make sure you have complete documentation. Being thorough and submitting complete documents is the first step to getting an approval, so make sure all current financial reports and business documentation is included.
- Maintain a good credit record: Having a clean credit record can increase your chances of getting approved.
- Improve business profile: Entrepreneurs considered high potential business owners will have more chances of getting approved. Have a clear business plan and some evidence of previous success.
Business Loan Risks and Benefits
Business loans tend to come with risks and rewards, so keep the following in mind:
Risks
- Loan Default: Not meeting monthly payments could land the entrepreneur in trouble or labeled as a bad borrower.
- Increased Financial Burden: Paying off a sizable business loan can create additional long-term financial strain if the business does not expand as projected.
- Impact on Credit: Not repaying a loan on time can harm the business’s credit score, making it more difficult to obtain further loans.
However, business loans also provide the much-needed benefits such as:
- Flexibility in how funds are used: People can use the loan as they wish, including purchasing equipment, expanding markets, or increasing production capacity.
- Would help in expansion: Business will grow with loans and take on a greater project/expanding services, etc.
- Interest rates to be competitive: With loans that are competitive, like that of Amanahkredit.
Role of Government Agencies in Business Financing
Many businesses depend on government agencies for financing, especially in the micro and small business sectors. Government loans for business offered by MARA and SME Bank give entrepreneurs easier access to financing to establish their businesses. They can obtain loans at a lower interest rate.
One prominent agency is Amanah Ikhtiar Malaysia (AIM), which provides micro-financing up to RM50,000 for small and medium entrepreneurs. Entrepreneurs can also apply through TEKUN Nasional, which offers micro-financing to the B40 group and women.
Conclusion
Applying for a business loan is an important step for business growth and development. Knowing about the different types of loans, and the application process, as well as the risks involved, lenders can help with putting in the application. Financing programs are offered by Amanahkredit for entrepreneurs, such as micro-loans with easy terms and low interest rates.
With proper planning, you can obtain the right financing to grow your business and achieve your entrepreneurial goals.
FAQ
What is the difference between conventional loans and Islamic loans?
Conventional loans are based on interest while Islamic loans are based on laws according to Sharia (e.g. Murabahah and Tawarruq) not according to interest which makes Islamic loans more friendly to those seeking financing in accordance with Sharia.
What is the interest rate for business loans?
The interest or profit rate for business loans depends on the type of loan and bank, and typically ranges from 9% per year profit for small business loans, to a lower fixed profit rate for Islamic loans.
How can I improve my chances of business loan approval?
Complete all documents, maintain a healthy credit record, and provide a business plan. If you buy insurance or takaful coverage, you may be able to secure a lower interest rate.