Financing & Funding – Facing SME Challenges

Sandi Saksena sheds light on some of the challenges faced by SMEs and entrepreneurs in the UAE and how you can be prepared for them.


Read any business page of UAE publications, and you will find endless articles like:

“Banks in the UAE are working together to try to stem the number of small business owners fleeing the country with unpaid debt, a trend that has already reached around AED5 billion ($1.4 billion).”

“We want to take coordinated action on risk management,” “The idea is to allow the customer to pay for his debt and stay in town if they have a good intention. If they don’t have a good intention, then it is no good (the bank) spending time (with them), it doesn’t help.” UAE Banks Federation chairman Abdul Aziz Al Ghurair.

The biggest challenge for the development of SMEs in UAE is the availability of finance. According to the research of Abu Dhabi Council for Economic Development, 67% of entrepreneurs state that the basic deterrent in setting up their business was the lack of availability of loans and credit from the banks they approached. Banks are reluctant to provide funds to new businesses as there’s a high risk of failing, and there is no revenue generation to service any debt.

Lenders have started conducting more exhaustive checks on owners in their home countries, identifying defaults and legal cases involving the business owners. It can be done online as well as by agencies. These checks on the borrower’s true personal net worth (owners tend to inflate their net worth in statements) is a recent step, in the past, these verifications by lenders/ banks were not possible.

Access to finance is typically identified as a critical constraint. While financing is almost always a challenge for SMEs, the difficulties are often intensified by the expatriate status including lack of collateral, property rights, regulations, laws, and customs. Other hurdles to entry and business growth include access to education, training, cultural barriers and infrastructure-related challenges.

Realistically, if you are approached by a nascent SME with a well-written business plan and no track record, would you really lend that SME money? Would you do additional due diligence on the business model and on the genuineness of the counterparties that the borrowers deal with? Would you not look at business continuity plans (if any), checks and balances and financial discipline?

Several businesses have difficulty borrowing or securing loans and getting paid by their clients; yes it’s a vicious cycle which has the domino effect. As the economy of the country improves, we start making expansion plans by hiring, moving to better offices and taking on more expenses. SMEs call it investing for the future. Somewhere along the line caution is abandoned and replaced by excels sheets that show projected growing profits based on contracts and assignments. At best, these are hypothetical as no real money has been received and/or paid out.

The hurdles of securing funding and/or financing are:

  • Limited or no credit history
  • Incomplete or missing financial statements
  • Limited savings
  • Lower and more uncertain profitability
  • Lack of collateral

These are major challenges. To secure credit, you, the SME will be asked to provide collateral which banks or lenders are not familiar with and show the prior repayment track record of individual borrowers where there is no credit history. In the UAE, as an expatriate, SMEs frequently lack adequate or sufficient collateral owing to legal barriers such as inheriting property or owning property.  Other nuances include sector-specific factors wherein there are no physical assets to collateralize as many are services oriented businesses such as Training, Health and Nutrition and Human Development, which by nature are intangible. Lack of savings is another issue because SMEs tend to invest and allocate all their savings to start and run the business to nurture it until it begins to generate income. In addition, you may have no previous business history which suggests no track record of competence.

So what do you need to do besides focusing on accessing the money, enthusiasm, self-confidence, and attitudes? You need to educate yourselves to understand what the lending options are and what to do to build a credible and viable loan application. Learn what type of funding is best for your particular industry factoring in the age of your business, the appropriate amount you require and most importantly, the way this debt will be serviced.

Due Diligence, Risk Management, Audited Financial Reports, Proper Legal Structure and Documentation are just the tip of the iceberg of standard requirements that any potential investor or lender will look at. Rest assured they would refer your proposal to a person who deals with such matters on a daily basis to verify and determine whether you are suitable or not. (See Box)

Jack of all trades, master of none!
Another factor which acts as an obstacle to the growth of the SMEs is the lack of management skills of the entrepreneurs. As the businesses grow, specialized skill sets are required to manage the operations to retain/manage the employees and the financial health of the business. Entrepreneurs usually do not have the requisite management capacity to tackle various issues and to adapt using innovative strategies to grow the business further and increase performance.

So it is important to know what investors and lenders look at when assessing you and your business and how you should build your financial profile which you present to them; put the best foot forward when applying for funding.

You also need to start thinking about other ways you can open up entrepreneurs to access capital and work to execute these actions.

As crowdfunding has become such a successful source of financing for small business owners, it is important to introduce and promote this platform as an alternative lending source here in the UAE. Having said that, SMEs still need to work on the core requirements and criteria to qualify for the crowdfunding platforms.

The onus is on the SME to meet the requirements, so look at this very basic list and use it as a start to assess your business.


About the author

SPI Group

An integrated platform created to serve entrepreneurs and service providers. SPI engages with over 100,000 Entrepreneurs & Senior decision makers through a unique combination of cutting edge business magazines, high profile B2B summits and conferences, strategic alliances with Govt, business associations and government bodies. SPI also leverages the power of digital marketing and social media.

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