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Summary: It is important for a business owner to consider when and how to raise capital, and with the final draft of the bankruptcy law finalised, their options will potentially increase

SME lending in the UAE accounts for only about four per cent of total bank lending. This is significantly lower in countries such as Saudi Arabia, Kuwait and Oman, at two per cent, while Bahrain and Qatar are at one and 0.5 per cent, respectively. Owing to this, the venture capital industry is fast emerging as one of the key sources of funding for SMEs in the GCC region, according to a recent report by Al Masah Capital, and is encouraging for the SME sector, which has had limited funding options.

Banks in the UAE offer high-interest cash loans, which are repayable on a monthly basis, which works out to more than 18 per cent a year on a straight line, according to Vishal Mahtani, CEO, Price Global Group, who said that unless a company has a forecast of over five per cent returns a month, it may not be the best option to look at.

"Unlike the days where SMEs had to be dependent on friends, family or close associates to raise funds as the banks would rarely lend to them, times have now changed. Funding options now range from new age concepts like crowd funding to angel investors, venture capital, grants, peer-to- peer lending, non-banking financing institutions and the traditional HNIs," said Hassan Safi, Founding Partner, METIS Management Consultancy.

The most suitable fundraising option for a business will depend on what the business does and what stage of its growth it is at. According to Chantalle Dumonceaux, Co-Founder, angel investment platform WOMENA, early and late stage investors have different processes, criteria, and motivations, as do small business lenders and equity investors.

She added that an SME owner should consider bootstrapping if they have a business that can grow on its own cash flow slowly, supports the needs of the founder and their family, and isn't scalable--both venture capital firms and angel investors will look for exponential growth, where there is a large market for the product offering. When approaching venture capital firms or angel investors, the business will need to demonstrate consumers want what the business is offering, barriers to entry prevent competitors from accessing the market, and that outside capital will allow rapid growth.

"Look to bank lenders and private equity if you have an established company with revenues and your company isn't necessarily scalable, but has demonstrated its place in the market and it's growth potential," said Dumonceaux.

Just because a business owner is at a stage where they can approach investors for capital, doesn't always mean that they should. They need to be aware of the right time to consider fundraising and Dumonceaux said there is not a one-size-fits-all answer. She added that business owners should ask themselves if their company can grow organically without outside funding, if the benefits of raising outside capital outweigh the drawbacks, if they are selling something that investors will want, or whether they need to develop the product or get more customers before they'll look at it.

"If you've established that you do need the capital, that the benefits outweigh the drawbacks and investors want what you're selling, then I would say the time is as right as it will ever be! Fundraising almost always takes longer than the entrepreneur expects it to so raise more than you need," she said.

Usually, a business reaches a plateau in its growth cycle, as the company runs out of cash, said Mahtani and at this point, management looks for new ways to expand market share, but this involves additional support for marketing, staffing and expansion of existing facilities. This is the point at which a business should look for funding.

Safi added that one thing to remember is that there is high competition for fund raising as there are thousands of SMEs trying to raise funds and fighting for a limited available pool of money. In the pursuit of running a business, sometimes SMEs drift from the core fund raising strategy, so it is advisable that they set their fund raising strategy at the onset of the business and build it in the overall business plan.


Debt financing involves borrowing money to be repaid with interest, while equity means raising money by selling shares of the company, said Mahtani.

"You have to decide whether you want to pay back a loan, or give away a bit of your company. The advantage of going via the debt route is that the lender does not have a claim to equity in the business, and your ownership is not diluted. The advantage of equity is that you do not need to pay back a loan with interest," he said.

More specifically, the drawback of debt is having to repay the loan and the interest in a disciplined and timely manner. Any lapses in this could result in the lender or bank taking over the collateral offered against the loans given. Hence, instead of being able to use all the profits of the business for future growth, the SME will have to plan to repay the loan on time, said Safi.

"The downside of equity is you give up part of your business ownership, which may also dilute your authority in the business. If your business takes off well, you will be bound to share a portion of the profits with the equity investor. Over time, distribution of profits through dividends to the other shareholders could exceed the amount of money that you would have repaid on a loan," Safi said.

For early-stage venture deals, Dumonceaux suggested the use of convertible notes, which is debt that converts into equity upon a specified event and/or a specified date.

"They've been in use for a long time so the legal documents are fairly standard, greatly cutting your legal costs. It also cuts negotiation time by leaving the terms to be decided in the follow-on financing." She said.

Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. For start-ups that do not have access to capital markets, venture capital could work out best in a situation where the business owner has almost no money and only an idea, is unsure of how the project will go, and wishes to get funds for the business idea, said Mahtani.

Safi added that in the case of start- ups where cash inflow is irregular, venture capital funding is helpful as any money that comes in can be directly reinvested into the business without worrying about bank loan repayment or interest dues.

"From an SME owner's perspective it significantly reduces personal risk.

Unlike with a bank loan, an entrepreneur would be required to offer collateral of personal assets guarantees and this could be detrimental in case the business does not kick off as planned. Another major advantages of venture capital investors is that they have a very strong network in the industry and this will support your business growth and also give you guidance to build your business strategy," said Safi.


The final draft of the bankruptcy law that decriminalised bounced cheques has recently been approved and is expected to be implemented as early as the end of the year, which will have an impact on bank lending to SMEs.

"The UAE bankruptcy law has just recently been approved by the UAE Cabinet and will likely come into effect sometime next year. From an investor standpoint, we believe this law will help boost the UAE economy and will improve the overall business confidence and enhance the attractiveness of UAE," said Safi.

He added that it is believed the law will force banks to enhance their due diligence process while dealing with SMEs, though it is still too early to comment on the specifics of the law and how it will alter the banks willingness to lend to the SME sector.

Dumonceaux added that the criminalisation of bounced cheques burdened business owners, investors, government administrators, and banks by forcing banks to be risk averse and have smaller portfolios, and only lending when they were certain the borrower would never bounce a cheque. It prohibited borrower companies from taking risks that allow for fast growth and diversification, assuming they borrowed at all, given the difficulties.

"This is a welcome change and a big step in the right direction towards the UAE continuing to grow as a global business and innovation hub. Assuming the change is implemented well, I expect banks to lend more liberally, companies to borrow more liberally, take bold risks, and the economy to grow and diversify faster," said Dumonceaux.


* Evaluate your funding options by looking at your company from a detached perspective.

* Do your homework about anyone you plan to approach. There are great and not-so-great investors and oftentimes there is no way to know which is which except by word-of-mouth.

* Carefully prepare and practice your pitch and presentation. Cater each pitch to your audience.

* Make yourself visible in the ecosystem before you plan to apply. Trusted pre-existing relationships make a big difference to your chances of closing funding.

* Find a champion. Once you have a respected lead investor, others follow relatively quickly. The buzz your lead investor creates around your deal by speaking on your behalf will do more to close it than you would be able to if you were having twenty meetings per week.

Source: Chantalle Dumonceaux, Co-Founder, WOMENA


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Date:Oct 31, 2016
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