How To Get Your Business Loan/Financing Approved

Key takeaways:

• Understanding cash flow and why it's vital for your business
• How SMEs can avoid cash flow shortfall
• Types of cash flow financing
• Solutions to SME cash flow issues

As an SME owner, you may be focused on keeping your business in the black and maintaining profits at the end of each fiscal year. While high profits make great headlines, profit figures can be manipulated with non-cash items such as depreciation and amortisation to offset large capital expenditures, such as company cars, warehouses, and machinery.

Meanwhile, cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received from your customers or via investments represents inflows, while money paid out to vendors for stock, or for utility bills and rent, represents outflows.

An arguably more important financial statement than your profit and loss (P&L) statement is your cash flow statement, which provides aggregate data on all cash inflows that your business receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.

Why cash flow is important for SMEs

Cash is king, and positive cash flows signal that a business is healthy and generates value for its shareholders. A common term bankers, investors, and even potential business partners look for when choosing to invest in a company is free cash flow (FCF), which refers to the cash generated from normal business operations, minus any money spent on capital expenditures (often new projects or investments to help a business grow).

Simply put, if your business has positive cash flow, you can easily settle debts, reinvest in the business, pay expenses, and even have a buffer in the case of challenging economic conditions such as a once-in-a-century pandemic. During the COVID-19 pandemic years, banks did not suddenly stop lending to businesses outright, even though few companies were profitable.

Instead, bankers lent to companies with historically healthy cash flow statements, as they were more likely to weather the stormy economic conditions. This is particularly important for SMEs, which already face considerable issues getting financing without collateral.

How to avoid cash flow shortfall

SMEs often find themselves short on cash flow due to their position at the end of the supply chain. For instance, SMEs still need to pay rent and wages monthly, while still awaiting unpaid invoices that have 30 to 60-day terms. So how do you avoid a cash flow shortfall? The key is to plan ahead as far as possible.

With cash flow projections, SME owners can quickly forecast how much shortfall or surplus cash they can expect in an upcoming quarter or year, and adjust their expenditures or investments before the situation snowballs.

Every SME has different fortunes based on how their sector is doing and good and bad seasons. For example, retail and F&B SMEs pull in a lot of sales (cash inflows) during peak festival times such as Hari Raya Aidilfitri, Chinese New Year, or Christmas. By planning ahead, SMEs can ensure they don't overspend on outflows such as wages, transport costs, inventory or raw materials during weak seasons, while keeping cash to support expansion or marketing efforts during peak times. You should also keep in mind the tax season and have cash ready to fulfil your tax obligations.

Another tip is to stretch as much as possible payment terms with accounts payable (such as paying down your hire purchase loan or rent on the day due or requesting 60-day terms from your suppliers) while shortening accounts receivable (such as setting shorter payment periods for your invoices and chasing slow-paying clients).

Types of cash flow financing

But even with the best-laid plans, the most well-managed SMEs can still run into a cash flow shortfall once in a while due to unforeseen circumstances (see: global pandemic and lockdowns) and require short-term financing to make up the gap.

Cash flow financing is a loan made to a company that is backed by a company's expected cash flows. These loans are suitable for: businesses that don't have a lot of assets that can be collateralised but instead generate cash from sales (i.e. service sectors).

The simplest way to make up for any cash shortfall is to tap into your business bank account's line of credit or overdraft facility. Higher interest options include invoice or factor financing (where your invoices are collateral) such as peer-to-peer (P2P) lending sites that charge interest of up to 18% per annum.

For SME owners that do not have enough track record to get a bank loan, often a quick but high-interest solution is to tap into their personal credit cards or take out personal loans as a line of credit for their businesses.

If your business derives a lot of cash from credit card sales, you may be able to get a merchant cash advance, which will be repaid via daily deductions from your daily sales (not too different from a salary advance). This is only good for short-term (few months) cash flow, otherwise it will further imperil your future cash flows.

ADSME: Quick and simple solutions for cash flow issues

How to make up your short-term cash flow shortfall without getting into long-term debt or putting yourself into a deeper hole down the line? Luckily, Alliance Bank Malaysia has tailor-made cash flow financing products specifically for small businesses.

Under the Alliance Digital SME (ADSME), so-called because of a fully-online application process with zero branch visits required, SMEs can apply for two collateral-free loan options: Alliance Digital SME Express Financing and Alliance Digital SME Cash Flow Financing.

Alliance Digital SME Cash Flow Financing offers collateral-free financing of up to RM1 million for businesses with at least three years in operations and RM500,000 in annual sales. Meanwhile, Alliance Digital SME Express Financing is for newer SMEs of at least a year old and annual revenue of at least RM50,000. Alliance Bank is offering collateral-free express financing of up to RM300,000 with interest rates as low as 4.88% per annum (for a limited time only). Per its name, you can get your loan approved in as quickly as 24 hours.

Both Digital SME products incorporate a fully-transparent application process with a built-in loan calculator that can estimate your monthly payments, based on your preferred loan amount, repayment period, and expected interest rate. That way, you know exactly what you are getting into, and can plan your cash flow months in advance.