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If you ask entrepreneurs in the UAE what they need most to expand their business, most will probably say finance. Finding financing in the early stages of development is critical to taking your company to the next level. It helps business owners avoid cash flow problems and expansion hurdles.
There are a variety of financing options in the UAE, including bonds, as sukuk (Sukuk), loans, syndicated loans and murabaha (Islamic loans), but understanding the differences between them can be confusing, especially for entrepreneurs who don’t have an in-depth understanding of business financing. This, coupled with the reluctance of banks to lend to startups and SMEs following a rise in non-performing loans, makes obtaining financing one of the most challenging aspects of starting and growing a business in the UAE.
So what’s the best move?
Know your UAE finance options
To help you evaluate the different forms of business financing in the UAE, I’ve put together some of the more interesting options for entrepreneurs looking to take their startup or SME to the next level.
A note about bankruptcy and checks
Before we move forward with financing options for your UAE business, it’s worth talking about the risks and consequences. The UAE is a civil law jurisdiction and until recently, the consequences of bankruptcy and non-payment for personal or business reasons have been severe, often resulting in court involvement and jail time.
Two recent changes have alleviated this situation to some extent. In 2016, Federal Law No. 9, the Bankruptcy Code, was introduced. The provisions of the law provide greater clarity on bankruptcy procedures and provide incentives for companies to be proactive when bankruptcy occurs. On an individual level, progressive changes to insolvency procedures were announced in the UAE at the end of 2017, with checks for non-payment to be punished by fines rather than jail terms.
While these themes are beneficial to UAE citizens and the entrepreneurial environment, entrepreneurs in particular should respect this risk when seeking financing.
Bank loan: Some will tell you that getting a bank loan in the UAE is next to impossible for startups and extremely difficult for SMEs. However, it should not be discounted.loan yes Available, but be sure to have a near-perfect credit score. Conditions are strict, interest rates are not high, and you may need to provide some form of collateral, but some entrepreneurs prefer the stability that a bank loan provides.
Non-bank loans: The difficulty of obtaining bank loans and the need to obtain working capital have led some entrepreneurs to investigate non-bank lenders. These lenders can provide companies with the five to six years of capital they need to grow. They also provide an alternative for companies such as technology startups that cannot meet banks’ demand for assets as security for loans.
Private funding: For entrepreneurs, asking friends and family for money is an obvious but risky choice. If the business fails, it can damage a good relationship. However, issuing shares in the business is a possibility.
Crowdfunding: In the UAE, platforms such as Aflamnah and Eureeca enable new startups to attract private investment, but you need to be able to promote your idea widely on social media to generate interest. The risk with crowdfunding is that if you go with an equity model, you may end up with a lot of investors who have equity in your account, which can quickly put your business in trouble.
Venture Capital and Angel Investment: The rapid growth of the UAE’s entrepreneurial economy, especially technology startups, has attracted the interest of venture capitalists from around the world. The most active investor, Wamda Capital, has reportedly funded only 20 companies. Venture capital is money provided by investors to new startups and small businesses that they believe have good long-term growth potential. It usually comes from high net worth individuals (HNWIs), known as angel investors, but can also be obtained from investment banks and other financial institutions.
In order to obtain venture capital, you must submit a strong business plan. If interested, the company or investor will conduct due diligence, which involves a thorough investigation of the company, including its business model, products or services, and management. If satisfied, the venture capitalist will pledge the capital investment in exchange for equity in the company. They often require convertible “preferred shares” in return for their investment. This type of stock entitles the holder to a fixed dividend, the payment of which takes precedence over common stock dividends.
Seed funding: Perhaps a better initial option for new startups is seed funding. It’s similar to venture capital, but without any of the problems. Seed investment typically comes from angel investors or personal contacts and involves a cash-for-equity (or future equity) exchange, but you don’t need to repay the investment or make any kind of personal guarantee. It is often used as an early-stage financing option before entering venture capital.
Bond: Bonds are a form of term borrowing that have traditionally appealed to more mature companies, but that is changing. They provide a way for companies to borrow money from investors in exchange for periodic interest. Bonds have a predetermined maturity date at which time the bond will be called and the investor will be repaid. “Creditworthiness” is a key factor, and borrowers must consider currency, issuance period and market conditions.
Recently, there has been growing interest in green bonds, which are used to finance projects that benefit the environment. The green economy is one of the fastest-growing sectors in the UAE, and the government aims to achieve a 44% renewable energy target by 2050. Therefore, green bonds may be an attractive option for entrepreneurs seeking to demonstrate low-carbon commitment. future.
Asset financing: Startups and SMEs that require short-term cash loans or working capital to purchase items such as plant, equipment or vehicles should consider asset finance. This is a form of financing used for the purchase of tangible and personal property. It helps in purchasing equipment required for the day-to-day operations of the business.
In the past, asset financing was often considered a last resort. It has since become increasingly popular, especially among new startups and SMEs that lack the track record or credit rating to access alternative sources of financing. Financing assets are the primary security provided to lenders, and the income generated by the assets is used to repay debt and pay interest.
Shariah Compliant Financing: Islamic products are popular among borrowers in the UAE, especially rent A financing structure that enables a borrower to leverage existing assets, such as real estate, to obtain working capital while continuing to use and acquire its assets. Upon termination of the lease, ownership of the leased asset will transfer to the customer.
Another option is Sharia compliant murabaha. This is a form of direct financing in which a bank purchases an asset directly from a third party and immediately resells the same asset to the borrowing entity for a profit, guaranteeing repayment in the form of a pledge. However, this structure is not popular for medium to long-term financing as the profit margin may not be benchmarked to LIBOR or Emirates and must be a fixed rate.
If you prefer bonds, sukuk is a type of Sukuk that is structured in a way to provide returns to investors without violating Islamic law (Islamic law is prohibited) riba or interest). sukuk Represents an undivided share of ownership of a tangible asset associated with a specific project or special investment activity. Islamic syndicated loans are also worth considering. In this case, a group of Sharia-compliant financial institutions band together to provide funds to customers.
governmental support: Financial support, including interest-free loans, is available from the UAE government’s Khalifa Enterprise Development Fund, which is designed to support and develop small and medium-sized investments in the UAE. However, the support available does depend on the nature of the business. The official portal of the UAE government states that the Khalifa Fund provides financing solutions for “a variety of feasible projects that serve the interests of the national economy in different sectors and project categories, such as agriculture, fisheries, agriculture and even household enterprises.”
Dubai SMEs: As an agency of the Dubai Department of Economic Development, Dubai SME also provides financing options and support services, including advisory and incubation services for new startups and SMEs. Another option for new start-ups is to seek financial assistance through the Intelaq programme, under which Emiratis living in Dubai can receive support at all stages of starting a business.
Next steps to ensure financial security in the UAE
Before you dive into the complex and varied world of business finance, it is highly recommended that you seek the support of experts in startup and SME finance. With competition among lenders increasing, 2018 seems like a good time to shop around for high-value financing deals. Some expert guidance from experienced local advisors will help ensure you and your business get the best deal.
related: Own a UAE company and operate it in your home country
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