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Introduction:

Statistics released by the International Finance Corporation and World Bank Group in January 2007, show that on an average 80 per cent of the total regional business and employment market is made up of SMEs, and this figure is as high as 86 per cent for the UAE.

Small and medium enterprises (SME’s), from a 2 person operation to a 50 strong business, are duly considered the backbone of a country’s economy. In the Middle East alone SME’s make up a sizeable portion of all the businesses incorporated on an almost daily basis. Yet across the board most financial institutions and banks have only recently created specific banking products targeted to the SME sector.

Most entrepreneurs face a catch-22 situation of having to be credit worth to get funding from financial institutions, on the flip side SME’s have to be in business for 1 year or upward to be credit worthy. Even if financing is available, the products available are ‘collateral based lending’ usually offered by traditional banks and finance companies, made up of a combination of Asset-based finance, Contribution based finance, Financial statement lending, Credit scoring and Relationship lending.

Fully secured lending is still the most prevalent form of financing available for SMEs. Most banks still believe that SME financing is riskier than financing medium to large corporate
businesses. The main reason behind this thinking is the higher rate of defaults amongst SME. For this very reason, banks are more inclined to fund SME’s with a track record of at least three years. Traditionally and it has been proved that if a start up can survive it’s first three years then chances of that business being a success increases tremendously.

In some instances Viability based finance is offered in the form of venture capital, but again the business has to project sizeable returns over a relatively short span for 3 years to 5 years. But it is not all doom and gloom for entrepreneurs as this phenomenon is common in most emerging economies.

Bridging the SME Finance Gap:

As stated earlier most SMEs find themselves in the proverbial ‘chicken and egg’ situation most SME’s do not have sufficient collateral required for collateral based lending, and cannot show high returns to justify the risks taken by venture capitalists. In addition, the Middle East markets have little or unreliable information, limiting the effectiveness of financial statement lending and credit scoring.

However, there have been significant changes in the attitudes of banks towards entrepreneurs and SME’s in the Middle East and the UAE in particular. At present there are few avenues of borrowings, on an unsecured basis,
available to SME. Most of the financial institutions offer fully secured. However, some banks have started lending on an unsecured basis. Such type of lending, lower loan values and, may not be suitable for medium size companies.

There are facilities available for loans against collateral and some loans on an unsecured basis. Banks also see this segment as a potential for cross sell opportunities. There are ample opportunities available to sell personal Wealth Management and other related products to the business-owners from this segment.

Additionally, financial institutions are broadening the viability based approach. This approach focuses on the type of business and offers more than just monetary support. With the added emphasis on business development there is a clear reduction in risk and the opportunity for the financial institutions to benefit from the increase in returns.

It must be stated that the rate of return or value of returns will not be attractive to venture capitalists (VC), this mode of financing is better than collateral based lending. However, this mode of financing does reduce the risk profile of the business and that is always attractive to Venture Capitalists.

Financial Options Available:

In any economy SMEs play an important role in providing the necessary impetus for overall growth. SMEs act as the lubrication for well run machinery in expanding economies. They provide the continuous churn required to enhance and grow any economy. The economic expansion of the UAE has also led the banks to offer efficient, cost effective and comprehensive solutions for SME financing.

Every bank has its own lending criteria. However, at the minimum level every bank looks for three years of audited accounts from the SME. Based on the products available with a particular bank, additional requirements, like gearing ratios, profitability, management stature etc, are then taken into consideration.

For SMEs that meet the criteria set out by the banks and financial institution there are a range of banking products and services on offer. Based on numerous factors the principal of which is time; banks are providing products and services that help SMEs become more efficient and effective.

To help SME’s manage their business cash flow better, some banking products and financial services offered are; Current Accounts, Fixed Deposit, International Trade Account, FX & Treasury and Cash Management Facilities. Additional products that help keep costs low and generate significant savings are free electronic funds transfer (EFT), free cheque collections, free demand drafts and free inter-branch banking.

SMEs can also benefit from some of the add-ons offered with these products including sweep in facility linked to fixed deposits, local cheque book, personalised payable at par cheque book, monthly statements by courier and e-mail, phone banking, third party transfers through Internet banking – usually at no additional cost.

An entrepreneur or business owner needs to realise and ensure that the services and products offered by a bank or financial institution help in meeting every challenge from day to day administrative details to business expansion. In addition, these packages should help a SME save on huge transaction and transfer fees on their bank accounts.

Advisor Checklist:

A bank or financial institution should be treated as a partner whose aim is to help you; the entrepreneur or small business owner, make the most of your time, money and resources so as to maximize returns. With more than 52 banks in the UAE alone, and more cropping up every month, choosing a bank, that fits your unique can be a daunting task. With most banks offering similar services, its hard to choose the right one. However, here are few things to watch out for:

1.) Location

Close is not necessarily better. Consider whether or not you are willing to pay higher fees for better location, or if lower fees may be worth a little travel. Besides the location, check with the ATM locations. Other factors such as opening hours; telephone and online banking facilities; interest rates and savings options; borrowing facilities; merchant services and introductory offers also should play an important factor while deciding on your bank.

2.) Global or local

MNC banks are great with a wider range of services, but then as an SMB you could be one more company, amongst millions of customers. If your business is largely restricted to the UAE, then do consider a local bank.

3.) Minimum Account Balances

Many banks require balances of in order to get free checking or savings accounts. Consider the amount of interest you might earn on that same amount if placed in a savings account or a CD. also compare the monthly general maintenance fees charged by banks on checking and savings accounts. If you routinely keep enough money in your checking account to meet the minimum balance, gaining interest on that money is a bonus.

However, if you don’t to meet the minimum balance requirements, an interest bearing checking account usually will have a higher monthly fee than a one that does not earn interest. Many banks are now charging high fees for copies of canceled checks,account research and copies of bank statements.

Overdraft protection is a service that can be very helpful to avoid returned check fees. Be sure to carefully review the terms of the agreement before you sign. Some banks are actually offering short term loans as overdraft protection, which requires a credit check and they charge you interest on the money loaned to you by the bank to cover what would otherwise be a bounced check and they might still charge you a fee for the service.

4.) Fine Print

Read the fine print about how the bank calculates fees if you fall beneath this minimum balance. One way is to charge a fee if the average daily balance over one month is lower than the minimum another does it immediately upon the balance falling.

Charges Per Transaction –

Along with the monthly fees that many banks charge, some also charge fees per transaction, such as writing a check, moving money from one account to the other, checking balances at your an ATM, or withdrawing money through an ATM. These fees and really add up. Be sure to ask for and thoroughly review a list of all fees charged by the bank.

5.) Electronic Banking (Internet/phone/mobile)

A fast growing area of most banks is online banking services through which all banking transactions can be done from a your pc with Internet access. Ask if the bank charges a monthly access fee for these services. If you to use online banking services to pay your bills, the bank may charge a monthly fee for this service, although more banks are now offering this for free.

6.) Ask for customer references and a relationship manager

Most banks will ensure that your account is dealt with a dedicated relationship manager. Ensure that you keep lines of communication with you relationship manager open and continuously follow-up and maintain a relationship – it is a two-way street. If you call up only when you ned something it might not be as effective as having an on-going relationship.

7.) Test run

Sit with your accountant to run through 12 months of possible transactions, to help you stimulate your typical month of banking transactions. This will help you plan accordingly.

8.) Weigh alternatives such as Islamic Banking

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values).

Other Cash options:

A new model of finance is Bartercard (www.bartercard.com), a unique service network that is not funded on a cash basis but by goods and services exchanged or bartered with other Bartercard members. Unlike traditional credit, debit cards or cheques, a Bartercard transaction requires member businesses to exchange goods and services with each other for ‘Trade Dollars’.

These Trade Dollars are credited to the member’s Bartercard account when goods or services are exchanged. Members can then utilize their Bartercard Trade Dollars to purchase goods and services from any other Bartercard member. Members save valuable cash flow and boost their profitability by taking advantage of the Bartercard network.

Bartercard is committed to helping SMEs grow and achieve financial success by facilitating a trade exchange network that offers dynamic and effective ways of conducting business. Although the concept of barter is thousands of years old, bartering through Bartercard is the most innovative way of combining modern technology, a community of businesses, and indirect and direct marketing channels to improve customer base, sales, profit and cash flow.

Going forward:

The SME market is growing exponentially. New businesses are opening everyday. Banks are also realizing the importance and growth potential of this market segment. Therefore, you will see a lot more focus from the Banks to develop their own products and services aimed at this segment.

Overcoming the biggest hurdle, that of, offering unsecured credit facilities to the SME sector due to lack of financial information available. In the absence of the corporate credit bureau,
banks cannot make an informed decision about the financial health of a company. So financial institutions are adopting a program lending approach towards structuring credit facilities for SMEs.

Banks are already making headway with products and services focused in this segment with a number of new products slated for launch over the year. SME’s who are established for over three to five years would make a substantial base for banks to offer credit facilities. Product offering based on a lending module where companies fitting the parameters would automatically qualify for some unsecured credit facilities could be a reality for some SME.