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How Likely can I get Venture Capital Financing?

QUESTION

I have an Manufacturing Business for the last 2 years and have confirmed several new orders. However, my bank loan applications always been turned down and I need the money to carry out the orders. How likely can I get Venture Capital Financing?  Edward Seah

ANSWER

Dear Edward,

Your problem is a common in today’s challenging economy. Many business men such as you are in the same boat as financing has become a problematic affair. I am going to answer your question in 2 parts to give you a better understanding of your predicament and then we will look into possible solutions:

BANKING FACILITY

Though I have not perused your company documents, I assume the primary reasons as to why your company has not been approved for any facilities from the banks is due to the fact that the company operations is just 2 years as stated above.

Banks in Malaysia  need a track record of at least 3 years to consider business facilities, meaning there needs to be at least 2 years audited accounts and at least 1 year management accounts. However if you have 3 years audited accounts the scoring of your loan would definitely be higher.

Another aspect is that the banks would see the conduct of your account in terms of the business as well as the directors. If either of the directors has bad credit records i.e. late payments towards existing loans shown on the CCRIS then the banks would also not be process the said loan.

Therefore these are some of the factors that we need to consider whilst applying for any Bank loans. I am also assuming that at this juncture as your company is still on the initial stages of production there is no collateral to put up for the said loan, another reason why the loan rejections.

VENTURE CAPITAL FINANCING

To be honest there is a possibility for your company to obtain Venture Capital Financing. It would be based on the current valuation of your company and the current order ratio as well as margin of profit for the orders currently being negotiated

However my friend, the arrangement would be very different from what you would be getting from the banks as here the Venture Capital Firms are taking the risks by investing into your company and henceforth would be hedging their risks in the following ways:

  • MAJORITY OWNERSHIP – As a Venture Capital Firm the company would transfer and hold anywhere between 51 – 70% of the company as long as they are investing in your company.
  • JOINT SIGNATORY ON ALL BANK ACCOUNTS – As Joint Venture Partners all Bank Accounts under the company would be held under a Joint Signatory System whereby both parties have to agree on any and all out going cheques.
  • RETURNS ON INVESTMENT – Though there are several ways of calculating the ROI, most Venture Capitalist would look into a Fixed Returns of Investment on their said Investment. This would be based on the actual profit margin. Some may opt for profits to be divided by the actual share ratio of the company or some may decide on fixed returns between 12-30% per annum on their Investment.
  • OPERATIONAL PRUDENCE – As a system of Operational Prudence, though the promoter would be able to run day to day operations the way they have been running, the Venture Capitalist would usually appoint a director and an accountant to monitor all sales and operations of the company in order to ensure that the operations are carried in a proposer order ad that no funds are mismanaged.
  • EXIT STRATEGY – Here the Venture Capitalist would determine the duration of the investment and propose an Exit strategy with the promoter. The promoter may agree to use the said investment for a certain period of years and then buy the shares back from the Venture Capitalist at a predetermined price or use other strategies to redeem their shares held by the Venture Capitalist.

These are some of the aspects of dealing with Venture Capital Firms! Some of my clients have remarked that the guidelines are too tight..However, Edward I am going to tell you what I tell them. The Business and the idea is yours no doubt but unfortunately without the right financing neither the orders nor the company is going to be sustained so making 30-40% of something is always better than making 100% of NOTHING!!! Of course that is just my humble opinion….

OTHER SOLUTIONS

Another solution for your situation is that you may be able to consider Project Financing as an alternative as most businessmen especially in Malaysia are only aware of Term Loans and Overdrafts; however there are other Financial Institutors that offer other forms of financing that would accommodate you new orders.

These types of financing are based on trade options that would be based on the type of product(s) your clients, the confirmed type of payments and duration of contract. Also some of these financing methods would look into areas such as paying your suppliers in order for you to get the raw materials required for the manufacturing process I order for you to be able to manufacture your finished products.

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