Tuesday, August 2, 2011

Why Credit Facility? – GEC Business Review

by John Wong

Credit facility is a type of loan made in a business and/or corporate finance context. In general, there are specific types of credit facilities such as revolving credit, term loans, committed facilities, letters of credit and most retail credit accounts. 

A credit facility generally permits the borrower to substitute collateral for the loans at the lender's discretion without having to redo the loan contract. Thus, a business that uses an asset for collateral, may sell that asset do to business need and substitute another hard asset as collateral.

Credit facilities can be quite large and may encompass multiple terms, repayment schedules, and interest rates and/or a credit facility can provide a single large pool of capital with one set of terms. A business should consider which provides the proper tools for managing the business' credit. The maximum flexibility is most important, or is having known parameters for careful planning and budgeting more important.

1. Credit Facility – Letter of Credit (LC)
A Letter of Credit (LC) is known as a Documentary Credit and it constitutes an irrevocable and definite undertaking of the issuing bank to honour a complying presentation. It can be issued on Sight or Usance basis, depending on instructions given by the LC applicant.

An LC is basically a documentary instrument provided by banks in order to facilitate trade transactions. The LC Issuing Bank issues a written undertaking at the request and in accordance with the instructions of the buyer (applicant). The Issuing Bank or Confirming Bank (if any) assures payment to the seller (beneficiary) as long as they present documents which comply with the terms and conditions of the issued LC. Payment is assured based on documents alone and not on goods or services to which it may refer.

The main governing set of rules for an LC is the latest version of UCP and URR rules.

LC Issuance Commission
0.1% per month or part thereof (As per ABM ruling)

LC Amendment Commission
If related to extension or increase in amount, 0.1% per month or part thereof
If not related to extension or increase in amount, a flat fee is charged.

Conditions
The Borrower is required to submit a list of local suppliers to the bank for approval. The approved suppliers’ list may be reviewed by the bank and subject to change from time and time.

2. Credit Facility – Bankers Acceptance (BA)
Bankers Acceptance (BA) is a usance bill of exchange drawn by the customer and accepted by the Bank to finance business-related purchases or sales of goods to another person who may be a resident (any party within Malaysia) or non-resident (any party outside Malaysia), evidenced by proper and adequate documentation. BA facilities are used only for genuine working capital requirements and must not be used to finance purchase of fixed assets or services.

Activities like the purchase of computer software licenses, trade-related logistic services and the purchase of electricity from independent power-producer may be considered for financing based on BNM’s prior approval.

Minimum period of financing is 21 days and the maximum period must not exceed the approved financing tenure subject to a maximum period of 365 days.

The minimum financing amount is set at RM50,000 and should be in multiples of RM1,000.

Salient Fees and Charges
BA Cost of Fund + Customer’s Spread

Terms & Conditions
i) The Borrower is required to submit a list of its local buyers/suppliers to the bank for approval. The approved buyers’/suppliers’ list may be reviewed by the bank and subject to change from time to time.
ii) Utilization of the BA line for any one of the buyer should not exceed 30% of the BA line.
iii) Operations of the BA is subject to the Bank Negara Malaysia’s prevailing guidelines.

Additional/Default Interest
If the Borrower shall default in the payment of any monies whether principal or interest or any sum whatsoever payable to the Bank or in the event of demand or recall of the Facility, the Borrower shall pay interest in the currency in which such amounts then denominated on any overdue amount or any other sums due and payable to the Bank, from the time of default up to the time of actual payment (as well after as before demand, judgment or order) at the 3.5% plus BLR per annum.

3. Credit Facility – Trust Receipt (TR)
Trust Receipt (TR) is a method of financing whereby the Bank retains the legal title to the goods but relinquishes physical possession to the buyer / importer of the goods who acts as trustee or agent of the bank. The buyer / importer will dispose of the goods and repay the Bank (amount owing plus interest) out of the proceeds of the sales on or before maturity of the TR.

TR is strictly for financing of working capital requirement and must not be used to finance purchase of fixed assets i.e. plant and machinery.

There is no minimum period of financing and the maximum period must not exceed the approved financing tenure generally subject to a maximum period of 90 days. TR financing is in Ringgit Malaysia and the eligible margin of financing is 100% value of the invoice or part thereof.

Salient Fees and Charges
BLR + Customer’s Spread

Additional/Default Interest
If the Borrower shall default in the payment of any monies whether principal or interest or any sum whatsoever payable to the Bank or in the event of demand or recall of the Facility, the Borrower shall pay interest in the currency in which such amounts then denominated on any overdue amount or any other sums due and payable to the Bank, from the time of default up to the time of actual payment (as well after as before demand, judgment or order) at the 1.5% plus the prescribed rate per annum.

4. Credit Facility – Invoice Financing (IVF)
Invoice Financing (IVF) is the financing of customer’s trade related foreign and local sales (on credit) or foreign and local purchases (cash/sight terms or remaining usance for credit purchases). IVF facilities are to be used only for genuine working capital purposes and must not be used to finance customer’s purchase of fixed assets.

Additional activities which may be considered for IVF Financing, subject to management discretion are the purchase of computer software licenses, financing of trade-related logistic services such as warehousing forwarding and shipping and the purchase of electricity from independent power producer.

Salient Fees and Charges
IVF ECOF + Customer’s Spread

Terms & Conditions
i) The Borrower is required to submit a list of its local suppliers/buyers to the Bank for approval. The approved suppliers/buyers’ list may be reviewed by the Bank and subject to change from time to time.
ii) Utilization of the IVF line for any one of the buyers should not exceed 30% of the IVF line.
iii) Operations of the IVF are subject to the Bank’s internal guidelines.

5. Credit Facility – Bank Guarantee (BG)

Bank Guarantee (BG) is a document whereby the Bank as guarantor undertakes to pay an agreed sum if the customer fails or defaults in fulfilling his obligations under the terms and conditions of the guarantee. There are Financial and Non-Financial BGs.

Financial Guarantees are defined as guarantees issued by the Bank for its customers, favouring a third party under which the Bank agrees to pay the third party if the customer is unable to pay the amount due to the third party.

Non-Financial Guarantees are broadly classified as performance bond guarantees. Such guarantees are those issued by the Bank for its customers favouring a third party, under which the Bank agrees to indemnify the third party should the customer fail to perform in accordance with the terms of the specific contract entered into.

BGs should generally have an expiry date and claims period. All BGs issued must be specific as to the amount and period of liability including claims period.

Salient Fees and Charges
Commission ranging from 0.1% to 0.175% per month or part thereof or as per rate specified in the Letter of Offer

6. Credit Facility – Shipping Guarantee

A Shipping Guarantee (SG) is an indemnity document issued by the Bank addressed to the shipping company on the instruction of the importer to take delivery of goods from the shipping company or its agent in the absence of the original bill of lading.

In the absence of the original bill of lading, the shipping company will release goods against the guarantee given by the bank, i.e. the SG. The bank undertakes to indemnify the shipping company or its agent against all consequences and/or liabilities relating to the delivery of the merchandise under this guarantee.

SGs are valid indefinitely, i.e. no expiry date and amount. They are valid until such time as the original bill of lading is presented by shipping company for redemption.

The Endorsement of Airway Bill/Parcel Post Receipt is done for goods which are dispatched by air or parcel post.

The customer may receive a copy of the Air Waybill or Parcel Post Receipt prior to the arrival of the documents. Under such circumstances, an authorization on the Air Waybill/Parcel Post Receipt will be done in order to enable the customer to take delivery of the goods.

Salient Fees and Charges
0.1% flat on invoice value – Min RM50



GĒ CȎNSULT offers total credit facility services to assist your company through the complexity of local/international trade, kindly call +603 4031 1890 and/or email info@geconsultgroup.com for more info.

The Information given below is merely general information of the various types of credit facilities. Terms and conditions may vary on case to case basis.

4 comments:

  1. Thanks for sharing this, please write more on financial-related matters.

    ReplyDelete
  2. James ChuaAugust 02, 2011

    Can you provide more info?

    ReplyDelete
  3. GE Consult TeamAugust 03, 2011

    Hello James, can you send relevant info to us, we'll advise then. Thanks ;-)

    ReplyDelete

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