analysis

Creating those alternatives to bank lending

What UAE’s small businesses and start-ups need now are more of such access

By Vinayak Mahtani, Special to Gulf News
13:06 May 8, 2018

Whether you need working capital, plan to expand into a new market or ramp up production, getting access to finance can give your company the boost it needs to grow.

However, over 40 per cent of companies in the world say they would have to put their expansion plans on hold if they cannot attain funding. Research shows that most small and medium enterprises and start-ups turn to traditional sources of funding — bank loans — when they need a cash injection. For them, securing the right funds from the right sources is critical, but it seems getting credit from banks is only getting tougher.

The current economic climate for start-ups and SMEs in the UAE is an extremely complicated one. With a fall in demand, mainly due to consumer confidence, it seems the market size has shrunk. Post-recession, small business owners have skipped town, leaving unsettled loans worth hundreds of millions.

As a result, banks in the UAE are cutting credit lines after a spate of defaults, posing a threat to one of the economy’s main drivers. To add to this, the US economy is growing, forcing the Federal Reserve to increase the base interest rates.

This has had a knock-on effect, making borrowing for UAE banks more expensive, and as a result forcing them to push up interest rates for smaller businesses. In addition, it has been noted that SMEs with loans of lower denominations are being hit with interest rates that are higher than those offered on a regular basis.

The UAE Central Bank announced that it would raise interest rates by 25 basis points, paving the way for higher borrowing costs. Overall the annual gross new lending to SMEs this year was much higher than the previous year, with the largest increases to be found in the retail, food and beverages and real estate sectors. While banks have tightened the lending, several individual investors have stepped in to help fund borrowers that can’t find capital at the bank. Recently, Entrepreneurs Organisation (EO) hosted an initiative called Falcons Nest, where three EO accelerators pitched to three EO members and one external private equity investor. While the forum served as a strategic platform for EO accelerators to secure funding, it also prepared and trained accelerators on how to stand up and tell their businesses story in front of investors and strangers and helped them dive deep into their business with the questions that have been asked by the members.

The even followed a “Shark Tank” style format, and the three fledglings — a payroll business, B2B fashion platform and a fruit delivery business — successfully pitched and received interest from the members, in addition to securing finance.

The main difference between bank lending and the opportunity EO created with Falcons Nest is security backed debt vs equity. Banks tend not to lend to SMEs without collateral. This can be in the form of property, insurance, personal guarantees.

Whereas Falcons Nest provided an opportunity for the business to sell some of its shares as an investment, which as capital does not need to be paid back. It mandates the company to share part of its profits with its new business partners. Such alternative platforms as Falcons Nest tend to be more transparent and offers an opportunity for small businesses to try something new — to try something that is in sync with the times, their needs and aspirations.

Vinayak Mahtani is a board member at Entrepreneurs Organisation.