Common Types Of Banking Facilities

There are 2 types of banking facilities:

1. Fixed Loan
2. Short Term Financing

Fixed Loan

Normally extended to finance acquisitions of fixed assets and usually the financing tenure is above 5 years repayment term. Within the 5 years period, the banks are expected to earn some profits from the dealings. Anything shorter than 5 years would not benefit the banks' businesses. That is why the banks impose capping period of 5 or 6 years to restrict any premature settlement. Should the borrower insist, a penalty charge of 2.5% to 3.0% against the original loan amount is chargeable.

Short Term Financing

Normally extended to finance business working capital requirement and cash flow financing and the facilities are for a period of 12 months and subject to review by banks at its absolute discretion as and when to review the facilities depending on the performances or conducts of the facilities by the borrowers. Remember, bankers are scared of bad borrowers.

2 Types of financing purposes:

• Working Capital Financing - to finance day to day business expenditures, purchases, overheads etc.
• Cash-Flow Financing - normally to finance a project or contract, Bridging Loans i.e. prior to receipt of payments from contract awarding parties.

Type of Credit Facilities Under Short Term Financing Common)

1. Overdraft (OD) - is an excess in current account allowable by banks up-to a certain limit/amount and definite date or expiry.
2. Letter of Credit (LC) - sort of undertaking letter from bank to pay the LC's beneficiary on behalf of its borrower i.e. the client's to LC's beneficiary (sellers) subject to fulfilment of all terms and conditions stated in the LC. LC itself does not provide money to beneficiary. The facility was introduced merely because both buyer and seller don't trust each other. Usually LC is not for purchasing of fixed assets such as machines etc. It merely for stock purchases unless the nature of business of its borrower is trading in machines etc. LC also is not for paying services of a third party. 2 types of LC i.e. Usance LC and Sight LC.
3. Trust Receipt (TR) - is a credit facilities that provide financing (cash) to pay the LC upon receipt of documents from LC's beneficiary and all terms and conditions spelt in the LC are complied with. TR also are used to finance import collection bills and under "Open Account Basis". Collection bills means payments are made to sellers through sellers' banks without issuance of LC. While "Open Account" means payments are made directly to sellers without opening an LC. Collection bills and "open Account" were introduced merely because buyer and seller trust each other and had established business relationship for some times. The facility comes with its repayment term normally between 30 to 120 days. It can be extended until 180 days depending on nature of business and the borrower's cash conversion cycle (CCC). Bankers prefer a maximum tenor of 120 days only. Premature settlement is allowed. No minimum amount.
   
4. Bankers Acceptance (BA) - 2 types of BA i.e. Purchase BA and Sale BA. Purchase BA mean money are given to finance the purchases based on Delivery Order, invoices etc while sales are used to discount the Borrower's claims/invoices to its clients. It comes with financing tenor just like TR but premature settlement is not allowed as BA is one of Money Market instrument and shall be traded by a third party. I am not going to give the reason why no premature settlement is allowed for BA. It will be in my next topic. Minimum amount to use BA is RM50,000 but can be in multiples invoices. This facility is very famous among the businessmen and "Ah Long" as this is the easiest way to get money from banks which much cheaper interest rate. Compared to TR with interest rate is against the Base Lending Rate, BA is against the prevailing money market rate which is usually 2 or 3 times cheaper than TR's rate. Bankers only deals with documents and not goods/products. Ah Long comes into the picture because invoices or DO are easily be created among themselves and no actual goods are transferred. Therefore, most conservative banks restrict giving BA to small companies, sole-proprietorship firms and partnership firms to avoid manipulation.
5. Bank Guarantee BG) - is an undertaking by a bank on behalf of its borrower to a third party. Famous BG are Performance Bond, Tender Bond, Advance Payment Bond and Security Deposit for TNB, TM, Customs etc. It does not provide cash. It comes with liabilities period normally up-to 1 year or 5 years for government as beneficiaries.
6. Standby LC (SBLC) - it just like a BG but can be used internationally as a security for credit facilities.
7. Besides the above facilities, there are many others such as ECR, FBN, FBP, TOD, Block Discounting, End Financing etc etc etc. However, they are not as famous as the above mentioned credit facilities except the called revolving credit which is usually given to corporate clients.
   

For information, Hire Purchase, Leasing credit and charge cards are not parts of credit facilities hence do not attract stamping of legal documents at ad-valor em.