SME Lending and Business Analysis

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Questions and Answers

Which type of analysis focuses on examining a business's financial statements to assess its performance?

Financial Analysis (correct)

Business Plan Analysis

Credit Request Analysis

General Accounting Principles

What is typically included in a Business Plan Analysis during SME lending evaluation?

Analysis of community impact

Assessment of credit risk

Quantitative data about the industry

Long-term financial projections (correct)

Which of the following is NOT a type of Business Credit Product?

Commercial Mortgages

Equipment Loans

Lines of Credit

Personal Loans (correct)

Which aspect is part of the qualitative analysis of financial statements?

Management competence and strategy Signup and view all the answers

What is fundamental to understanding Financial Statements in SME Lending?

General Accounting Principles Signup and view all the answers

Which method is typically used to analyze quantitative aspects of financial statements?

Trend Analysis Signup and view all the answers

Which section of SME lending evaluation focuses specifically on assessing the financial request made by the borrower?

Credit Request Analysis Signup and view all the answers

What role do General Accounting Principles play in SME lending?

They provide a standardized approach to financial reporting. Signup and view all the answers

What distinguishes a sole proprietorship from other business structures in terms of legal identity?

The owner is personally liable for all business debts. Signup and view all the answers

Which characteristic is NOT true for a sole proprietorship?

There is a need for a personal guarantee for loans. Signup and view all the answers

What is the procedure to legally operate a sole proprietorship in Malaysia?

Register with the Companies Commission of Malaysia. Signup and view all the answers

In a sole proprietorship, what happens to the business's profits and losses?

They belong to the owner alone. Signup and view all the answers

What factor influences the financing requirements for a business?

The competitive position of the business. Signup and view all the answers

Which statement about creditors and sole proprietorships is correct?

Creditors can claim personal assets of the owner. Signup and view all the answers

How often must a sole proprietorship renew its Certificate of Registration in Malaysia?

Every year. Signup and view all the answers

What legal requirement is NOT necessary for a sole proprietorship in terms of financial documentation?

Annual audit. Signup and view all the answers

What is a requirement for a guarantee in the context of lending to a sole proprietorship?

It must be obtained from a third party. Signup and view all the answers

Which document can support the credit evaluation of a sole proprietorship?

Personal income tax return of the sole proprietor Signup and view all the answers

What type of business is likely to have more current assets than fixed assets?

Trading and distribution Signup and view all the answers

What is a characteristic of a partnership under the Partnership Act 1961?

Profits and losses are shared equally among the partners. Signup and view all the answers

Which of the following industries generally requires higher capital investment in long-term fixed assets?

Manufacturing Signup and view all the answers

Why is shareholders' equity financing considered the most expensive form of capital?

It requires investors to participate in unlimited growth. Signup and view all the answers

What is the maximum number of partners allowed in a non-professional partnership under the Partnership Act?

20 partners Signup and view all the answers

What is a primary benefit of housing cooperatives compared to major financial institutions?

They offer reasonable financing options with softer repayment terms. Signup and view all the answers

What does joint liability in a partnership imply?

All partners are equally responsible for any unpaid debts incurred by the firm. Signup and view all the answers

Which authority does NOT supervise cooperative societies in Malaysia?

Ministry of Education Signup and view all the answers

What is the primary role of trade creditors in business financing?

They extend credit terms for short-term financing. Signup and view all the answers

What happens if a partnership exceeds the maximum number of partners allowed?

It is required to be incorporated as a Limited Liability Company. Signup and view all the answers

What does tenor matching refer to in business financing?

Matching the duration of assets with the duration of their financing. Signup and view all the answers

Which statement about Clubs and Societies is true?

They are required to be registered with the Registrar of Societies. Signup and view all the answers

Under the Partnership Act 1961, who has the ability to bind the partnership?

Any partner acts as an implied agent of the partnership. Signup and view all the answers

What must all borrowings made by Clubs and Societies be supported by?

A committee resolution that outlines the borrowing powers. Signup and view all the answers

Which source of financing typically has a lower risk tolerance compared to shareholders?

Banks Signup and view all the answers

Which statement about partnerships is typically true?

Profits and losses may be shared in any agreed proportion unless stated otherwise. Signup and view all the answers

In the case of debt recovery from Clubs or Societies, who can legal proceedings be initiated against?

Committee or principal office bearers Signup and view all the answers

Which of the following is NOT considered a current asset?

Buildings Signup and view all the answers

What implicit cost is associated with supplier credit terms?

Potential for late payment penalties Signup and view all the answers

Where must the land and buildings acquired by Clubs and Societies be registered?

In the name of the committee members such as the president or treasurer Signup and view all the answers

Which of the following correctly describes the liability of club members?

Liability is limited to the amount of their subscriptions. Signup and view all the answers

Which entity is NOT eligible to make loans to its members in a housing cooperative?

A club with no legal status Signup and view all the answers

What type of financing is typically required for long-term assets or capital investment?

Long-term funds such as equity financing and long-term bank loans Signup and view all the answers

In which scenario might a lender require shareholders to commit additional capital before providing a loan?

When business risk is perceived to be high Signup and view all the answers

Which type of financing is structured to address mismatches between progress receipts and payments in construction?

Bridging finance Signup and view all the answers

What is a primary challenge faced by lenders in a competitive banking environment?

Interest margin compression Signup and view all the answers

Which factor influences the pricing of loans and credit facilities to borrowers?

Borrower's credit risk profile Signup and view all the answers

What type of income is essential for lenders to compensate for reductions in interest income?

Risk-free ancillary income Signup and view all the answers

What is commonly provided to meet short-term operational asset needs?

Supplier's credit Signup and view all the answers

How are borrowers with lower credit ratings likely affected in terms of loan pricing?

They incur higher loan pricing Signup and view all the answers

Study Notes

Module Authors

Jasman Tuyon, PhD
Rapheedah Musneh, PhD
Siti Julea Supar
Nurziya Muzzawer
Faculty of Business and Management
Universiti Teknologi MARA, Sabah Branch, Kota Kinabalu Campus

Chapter Outline

Small and Medium Enterprises (SME) Lending
- Introduction to SME Lending
- Types of Business Credit Borrowers
- Types of Business Credit Products and Pricing Strategy
Evaluation of SME Lending Applications
- Business Analysis
  - Credit Request Analysis
  - Business Plan Analysis
- Financial Analysis
  - General Accounting Principles and Policies
  - Understanding Financial Statements
  - Quantitative Analysis of Financial Statements
  - Qualitative Aspects of Financial Statement

Learning Objectives

Recognize various legal entities' characteristics and borrowing capacity
Identify various business financing needs of borrowers
Understand various credit facilities characteristics and pricing
Perform credit request analysis
Perform business analysis in connection with the 5Cs and the credit report
Perform financial analysis in connection with the 5Cs and the credit report

3.1 Small and Medium Enterprises (SME) Lending

3.1.1 Introduction to SME Lending
3.1.2 Types of Business Credit Borrowers
- Sole Proprietorship
- Partnership
- Limited Liability Partnership (LLP)
- Limited Liability Companies
- Cooperative Societies
- Clubs and Societies
- Government Organizations
3.1.3 Types of Business Credit Products and Pricing Strategy
- Current Assets Financing
- Capital Investment Cycle Financing
- Fixed Assets Financing
- Construction & Property Based Financing
- Transactional Financing
- Seasonal Financing

3.2 Evaluation of SME Lending Applications

3.2.1 Business Analysis
- 3.2.1.1 Credit Request Analysis
- 3.2.1.2 Business Plan Analysis
3.2.2 Financial Analysis
- 3.2.2.1 General Accounting Principles and Policies
- 3.2.2.2 Understanding Financial Statements
- 3.2.2.3 Quantitative Analysis of Financial Statements
- 3.2.2.4 Qualitative Aspects of Financial Statement

Business Borrower

(a) SOLE PROPRIETORSHIP
- Simple form of business set up
- Owner is personally liable for business debts
- No legal distinction between business and owner
- Need to register with CCM (Companies Commission of Malaysia)
- Certificate of registration renewed annually
- Characteristics include: owned by a single owner, business and owner are the same legal entity, small capital, limited expansion capacity, business and owner liabilities are the same, no regulatory requirement for audit and filing of account at CCM
(b) PARTNERSHIP
- Association of two or more persons
- Profits and losses shared equally
- Unlimited liability unless otherwise agreed
- No regulatory requirement for audit or filing of financial statements
- Partnership agreement/Deed outlines details of capital, profits, and salaries/funds. (Absence of the agreement will result in the use of the Partnership Act 1961)
(c) LIMITED LIABILITY PARTNERSHIP (LLP)
- Hybrid of partnership and company
- Limited liability protection for partners
- Unlimited capacity to hold property
- Incoming/outgoing partners do not dissolve the LLP
- No need for audit or filing requirement
(d) LIMITED LIABILITY COMPANY (LLC)
- Separate legal entity from its owners (shareholders)
- Shareholders have limited liability
- Can sue or be sued, enter contracts, terminate contracts
- Shares can be transferred publicly
- Limited liability company is a separate legal entity from its owners. Shareholders can raise capital through cash calls, share swaps, bonus issues, and convertible bonds.
Other Borrower (i) Cooperative Societies
Other Borrower (ii) Clubs and Societies
Other Borrower(iii) Government Organization
3.1.3 Types of Business Credit Products and Pricing Strategies
- Working Capital Financing
  - Identification of Net Working Capital Needs
    - Calculation of Projected Stock, Debtors, Creditors
  - Types of Facilities for Working Capital Financing
    - Overdraft
    - Trade Facilities
    - Non-cash Facilities
  - Key Credit Considerations for Working Capital Financing -Generating sufficient revenue to cover operating expenses
Capital Expenditure Financing
- Identification of Capital Expenditure Financing Needs
- Types of Facilities for Capital Expenditure Financing
  - Term Loans
  - Hire Purchases
  - Leasing
Construction and Property-Based Financing
- Identification of Bridging Financing Needs
- Type of Facilities for Bridging Financing
  - Revolving Construction Loan
  - Non-revolving Construction Loan
  - Non-Financing Facilities
- Key Credit Considerations for Bridging Financing
- Developer Financing
- Main Contractor Financing
- Subcontractor Financing
Transactional Financing
- Sourcing and supplying to buyers
- Manufacturing customized products
- Engineering/ construction contracts
Seasonal Financing
- Temporary working capital
- Meets increased transactional requirements during the peak sales periods

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Description

This quiz covers key concepts related to SME lending and business analysis, including financial statement evaluation, business credit products, and the legal structure of sole proprietorships. Test your knowledge on quantitative and qualitative analysis methods and the importance of general accounting principles in lending scenarios.