The SME sector constitutes 95% of the total companies operating in the Emirate of Dubai. Despite their importance to the growth of economies, SMEs face a number of hurdles when seeking finance. Mr. Craig Moore in his article shares the alternative finance solutions that runs the business efficiently.
It is estimated that more than 95% of businesses across the world are small and medium-sized enterprises (SMEs), accounting for approximately 60% of private sector employment and, on average 52% of private sector value added.
Despite their importance to the growth of economies, SMEs face a number of hurdles when seeking finance. Banks, the traditional provider of loans, are increasingly focused on financing larger companies, meaning that there is a lack of affordable funding options for the SME market. The International Finance Corporation (IFC) estimates that the current SME funding gap in global emerging markets is more than $2 trillion (approximately $260 billion in MENA).
This considerable funding gap between the demand and supply of capital is driving a critical need for alternative finance solutions to fuel growth in this underserved sector of the economy. Two alternative finance solutions that are rapidly gaining popularity due to their attractive cost, accessibility, and flexibility, are peer-to-peer (P2P) finance and equity crowdfunding. While they are both built on the power of the crowd, it is important to understand that there are fundamental differences, which suit different types of companies.
Usually any start-up business needs some time to start generating enough income to cover its own expenses and to start making a profit, so typically the business will require finance to cover the daily operation expenses, salaries and bills. Established businesses, on the other hand, require funding for growth, expansion and development of new products or markets. Getting access to finance could help these businesses take the next big step into becoming a larger and more profitable company. The reasons for finance differ between start-ups and established businesses but the need for funding is always there as it is essential for business survival, without proper finance in place businesses will deem to perish.
To determine which is the most suitable type of alternative finance for your business, you need to be very clear about which stage your business is at, the amount of funding required, what the capital will be used for, how long you need the finance for and how soon the funding is needed. Understanding these areas in relation to your finance requirements will ensure you get the right type of funding.
Equity crowdfunding involves selling part of your business shares to investors via a crowdfunding website where your finance request is covered by a number of people who invest small amounts of money in your business, product or idea. The benefit of this is that experienced investors can bring new skills and opportunities to the business. The downside is that you will end up owning a smaller share of your business and in some cases you may have to consult your investors before making certain management decisions. This type of finance is generally more suitable for start-ups as investors share the business risk and you won’t have to pay any interest or repay the funding.
Peer to peer finance (P2P) is also based on crowdfunding principles as it uses the Internet as a platform to reach hundreds or even thousands of potential investors who invest small amounts of money to finance businesses in return for monthly installments of capital plus interest/profit. P2P uses innovative platform technology which allows it to reduce operating costs and streamline processes to minimise the cost and complexity versus conventional finance routes. P2P provides businesses with access to finance in weeks rather than months at rates lower than conventional lenders and on more flexible terms, that’s why it is the right choice for established creditworthy SMEs looking to finance working capital or expansion. P2P originated around $9 billion of loans globally last year, which is expected to grow to $1 trillion in the next ten years.
P2P is already a very successful practice in the UK and US, where Lending Club, the largest player in the industry, exceeded expectations when it raised more than $865 million in its recent IPO. Lending Club, as well as other P2P providers, has grown rapidly by offering loans and savings products at terms more attractive than traditional banks. Meanwhile, in the UK, the British Business Bank, part of the UK Government, has invested over £200 million in P2P platforms to support further financing to small businesses in the UK.
The introduction of P2P to the MENA region is long overdue and comes at a time when SMEs are facing significant hurdles to access capital, and investors are struggling to find a decent return on their portfolios.
In November 2014, The UAE witnessed the launch of the first P2P finance company in Middle East. Beehive is set to revolutionize the SME finance industry using P2P platform technology. Beehive’s online marketplace directly connects established businesses with smart investors which provides SMEs with access to faster, more flexible and lower cost finance starting from AED 100,000 for up to 3 years, with no early repayment penalties. Investors can set up an account with only AED 1,000, and start investing from as little as AED 100 into each listed business to diversify their risk while earning an average of 13% APR gross as of April 2015.