If you’ve reached the stage where you need a little (or big) capital injection to take your budding business to the next level, you’d imagine that banks and investors would be falling over themselves to get a slice of your company’s pie. But the truth is that the continued low price of oil is having a major impact on available liquidity, specifically within this region. There is some hope on the horizon, with 20% of Expo 2020’s budget (approx AED 5 billion) being allocated purely for SME’s and you can put your company forward for tendering at the link here.
But the truth is that when your find your business in need of some funds, it can be difficult to figure out where to go. Below we’ve gathered some of the key places where startups and SMEs can get some much-needed cash.
The lack of liquidity has seen banks very reluctant to take any risk. What this means for startups and SMEs is double digit interest rates and collateral (such as your business’s equipment), to offset the loan. Due to the difficulty of obtaining a loan for your business at all (only four out of five banks actually offer small business loans), many entrepreneurs take out a personal loan instead. Warning bells and red flags should be the first things to pop in your head if this is suggested to you. With a personal loan, you are personally responsible for the loan, even if your business goes under. Banks usually ask for a blank cheque (even though they’re not actually supposed to) or an undated cheque in the full loan amount as collateral. If you fall behind in payments, the bank has the option of cashing that cheque, and if it bounces, well I think we all know the consequences for a bounced cheque here are not at all good.
Loans from friends & families – Angel Investors
Let’s be honest, this is not really something most of us will feel comfortable doing. If your business faces hard times that make repayment difficult, there is the potential to damage long-standing relationships. But it might be something worth considering if you’re unable to secure financing through more traditional means. You never know, it could be something your loved ones are happy to offer. There are a few steps you can take to make the process less painful for you and more appealing for you generous benefactors.
Keep it strictly business – Work out the exact figure you need to develop your business. Document how you came to this figure. Present it to your potential lender and agree on the exact terms of your agreement (the figure, the length of the loan, any interest to add, repayment terms, etc).
Terms of the loan/investment – Is the loan secured (backed by collateral like your car or other property) or unsecured? Is the loan an investment, and if so, what percentage of your company is your lender receiving? What roles and responsibilities, if any, do they have as a result of this investment? Be very clear what the process is should you be unable to make repayments.
Make it legal – Both parties must agree and fully understand the terms of the agreement. Make sure the contract is checked over by an impartial expert such as an accountant or a legal consultant. Every detail mentioned above should be included in writing and signed by both parties.
Crowdfunding or peer-to-peer lending is a great way for startups and SMEs to access affordable funding. Websites like eureeca.com generate lots of small donations from its users in exchange for free products or small shares of the business. UAE-based Beehive and other peer-to-peer companies connect credit worthy businesses with investors looking to help small companies grow. The process is far more straightforward then a traditional loan with less paperwork and no banking middle men. The savings are passed onto investors who benefit with attractive returns and the SMEs and startups benefit from a competitive rate on a loan in return.
Whatever you decide to do, make yourself a strong cuppa and carefully review every tiny detail before finalizing any financing arrangement. We don’t want to sound too big, bad, and scary, but wouldn’t it be awful if you didn’t get to enjoy all your hard work because your financing terms got in the way? If you take the time to educate yourself, you can make financing work for you and help your business reach the next stage of its potential.