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Alternative financing: a boon for small business owners who often struggle to borrow



A bank in Dubai. Image used for illustration purposes.
Image Credit: Ahmed Ramzan / Gulf News Archive

Dubai: Ask most business owners where they would go for a loan, and the answer is usually their bank. But what about when banks can’t – or won’t – lend to small business owners who have limited financial history or business experience?

The disruption and consequent financial ramifications, first from the financial crisis and now more dramatically from COVID-19, have led to crucial changes in the banking and borrowing appetite among small business owners.

What did this mean for those looking to borrow money for their business? Loans were more difficult to obtain, collateral requirements became stricter, and other terms and conditions became more restrictive.

Now that the pandemic-induced implications are easing and the economy is rebounding to pre-pandemic levels, so are banking restrictions and the borrowing appetite of UAE business owners. .

However, as mentioned above, what about when banks can’t lend you? In an ideal world, you could turn to your banker or business credit card to borrow money whenever you need it for your business. But not everyone has a long enough credit history or a high enough credit rating.

Loan default

If traditional sources don’t work for you, it may be worth considering alternative financing.

If traditional sources don’t work for you, it may be worth considering alternative financing. Interest rates and fees can be considerably higher than those on a traditional bank loan or a good business credit card deal, but they can come in handy when cash is tight.

Additionally, small business owners generally have difficulty obtaining bank loans due to their size and lack of financial history. Here’s a quick bed sheet to help you determine which type is right for you:

Take stock of industry-specific options

If you work in a field such as e-commerce, look for loan programs that are suitable for your industry or the platforms on which you sell your products or services.

Often these programs are tailored to the cash flow whims of particular industries. If you are not aware of loan programs specific to your industry, ask your accountant or financial planner for advice.

Consider “factoring” financing

In factoring, a type of financing often used by small businesses that sell merchandise through large retailers, you sell your accounts receivable to a business called a “factor” at a reduced price.

What are receivables?

Accounts receivable, also known as accounts receivable, are debts owed to a business by its customers for goods or services that have been delivered or used but not yet paid for.


Image Credit: Maxpic

In a common type of factoring, the factor buys your invoices and purchases the right to collect amounts owed by your customers.

After your customers have paid their invoices, you get the face value of the invoice, with a small discount subtracted, often in the range of 2-6%. The factor will give you 70 to 90 percent of the invoice value up front, and the rest when the customer pays it.

One of the reasons some small business owners like this type of financing is that the “factor” bases the decision to purchase invoices on their customer’s credit, not the business owner’s.

For example, if you make a household gadget that a large retailer stocked on their shelves, the factoring company would decide whether or not to buy the invoice based on the retailer’s credit, not yours. It could be a plus if your credit profile isn’t strong.

A key characteristic of alternative financing: securitization

Another dominant feature of the alternative finance market in the United Arab Emirates is securitization. Securitization, although a common feature of alternative finance in the US market, is increasingly common in the United Arab Emirates.

What is securitization? Securitization offers a controlled opportunity to invite people to invest in a structure. Securitization in the UAE typically involves the transfer of an asset into a Special Purpose Vehicle (SPV), which then raises the desired capital by issuing securities, such as stocks and bonds.

These securitization SPVs can be structured to be Shariah compliant or not. So basically a securitization is a legal structure that allows business owners to turn their assets into working capital.

A growing concern for small business owners is the management of their balance sheets and a key feature of securitization is removing the relevant securitized asset from the company’s balance sheet and allocating the receivables as income (also known as the real sale name).

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Image used for illustration purposes only.
Image Credit: Gulf News Archives

When a transfer takes place on the basis of an actual sale, the assets to be transferred should be confined (ensuring that funds allocated for a particular use will not be spent on anything else) in a special purpose vehicle established only in the purpose of holding the assets.

Such a ring-fencing of assets aims to ensure that the bankruptcy of the originator of the assets does not have an impact on the transferred asset.

In addition, the structuring of non-recourse securitization (explained below) is beneficial for small business owners to ensure that they (as the originator) have no obligation to repurchase the transferred assets during the transfer. ‘execution.

It is also beneficial for small business owners to ensure that they (as the originator) have no obligation to restrict the investor’s recourse to only those assets that the SPE owns and on which the investor has taken a guarantee.

What is non-recourse financing?

Non-recourse financing is a type of business loan that allows the lender to repay only from the profits of the project financed by the loan and not from any other assets of the borrower. In the event of default, the lender cannot seize any assets of the borrower beyond the collateral.

As the UAE market sees an increase in traditional securitization as an alternative source of finance, a wave of Islamic finance securitization has also accelerated in the GCC due to the market’s sophistication in understanding and structuring of Islamic securitization.

The securitization of Islamic finance seeks to be based on the principles of a traditional securitization structure but has been developed in such a way as to guarantee compliance with the main principles of Islamic finance.

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Image used for illustration purposes only.
Image Credit: Gulf News Archives

How Does a Small Business Owner Borrow on Their Receivables?

Another type of financing that can be useful is borrowing against your receivables, especially if you run a professional services firm.

Since the end of last year, UAE businesses, especially small and medium enterprises, have been able to obtain bank loans using their movable assets as collateral to help them meet their cash flow needs in a difficult context due to the pandemic.

This allowed the use of your “tangible and intangible” movable assets such as equipment and tools, receivables, cash flow, crops and the like as collateral against obtaining loans.

You don’t need a credit check or personal guarantee, approvals can take place in a matter of hours, and you can get the loan ready as early as the next business day once approved.

The challenge with this type of financing is that the money you owe is automatically deducted from your business bank account. If money is slowly flowing into the business, you might find yourself in a time when you will have very little cash on hand until you pay off the loan.

If you are considering going this route and are not sure you have enough cash to run the business during the payback period, do a cash flow projection with your accountant to make sure.

Schools, insurers, developers and landlords recognize the benefits of debt financing and it is becoming common in the UAE for these institutions to use debts such as tuition, rent, proceeds from sale and proceeds. insurance as collateral to obtain short-term financing.

This is an emerging trend in the UAE and an example of how debt financing is tailored to the cash flow needs of businesses.

To lend

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Key points to remember

• Try an alternative loan

A working capital line of credit from another lender is another option that might help you in a pinch. Small business owners can often apply for a line of credit for as low as Dh100,000 and are typically offered six-month and 36-month repayment terms.

Each month, you will pay a fee of 1.5-10%, depending on how your business is performing. For example, if you borrowed 10,000 Dh for six months with a monthly fee of 4%, you would pay 1,667 Dh each month to repay the loan, plus 400 Dh per month in fees.

Peer-to-peer lending (aka P2P lending) is also an option. You can borrow money from investors, which can be institutional funds or individuals, instead of going to a bank.

Vendors include UAE-based Beehive, Eureeca, Ziina, and Humming Crowd Realty (HBR). Usually with peer-to-peer lenders, your interest rate will be based on your credit profile, so the stronger your credit the better your options.

• Get an advance

In recent years, more and more businesses have offered small businesses and individuals cash advances that they expect to receive in any given month from certain business sources.

They can be useful when you’re in a bind, but make sure you understand what you’re actually paying for the money, as some providers charge quite a bit for this type of financing.

Once you are no longer strapped for cash, focus on doing what you can to increase your income and profits.

Your business will be much healthier if you can fund most of your growth with cash flow. And the stronger it is, the easier it will be to find financing at favorable rates in the future.



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