Depending on why you require funds, there are various financing options available for SMEs in the UAE. Let’s understand financing options such as working capital loans, term loans and overdraft facilities that can fulfil the financing needs of an SME but differ in aspects like tenure and ultimate use.
Working capital loan
Working capital is a measure of the company’s liquidity and represents its ability to pay off creditors. In simple words, it is the cash available for the day to day operations of the company. There may be times when a company might not have sufficient funds at its disposal to meet these operational expenses. At this juncture a company can apply for a working capital loan in order to ensure smooth business operations.
For instance, if a company’s monthly expense is AED 1000 but its revenue is AED 800, then it can take a working capital loan of AED 200 to meet the expenses until it reaches the required revenue levels. Depending on the requirement, a company can select from a number of working capital loans like short term loans, accounts receivable loans, factoring and so on.
A lump sum amount borrowed from a bank or a financial institution that has a repayment schedule set for one year or more. Depending on the period of the loan, there can be short term and long term loans. Few banks might require collateral against the loan and will charge a fixed or floating rate of interest on the loan.
Repayment for a short term loan is required to be made within a year. SMEs might require this loan for expenses including but not limited to start-up costs, emergency repairs and inventory purchases. Long term loans are offered for longer periods exceeding one year and are usually used for capital investment and expansion purposes.
Loan Against Property
You can leverage your existing real estate assets to generate the funds you need for your business. Essentially a loan against property provides you with a loan using your real estate asset as collateral. Both residential and commercial real estate can be used to garner this type of a loan. Banks can offer you a loan amount of as much as 75% of the value of the property based on your creditworthiness.
A loan arrangement under which a bank allows an entrepreneur to withdraw funds from the bank account even if the account balance is zero. You can avoid paying charges on returned checks by getting an overdraft line of credit from your bank. This arrangement is less expensive as you only have to pay interest on the borrowed amount as opposed to paying for individual overdraft cases. Moreover, you pay interest only on the utilized portion of the overdraft i.e. pay as you use and avoid the high interest charges. It is preferable to use this option for short term financing purposes only.
In situations where there is a gap between the receivables and payables in your account, it might be wise to consider bills discounting instead of a loan. In this situation, the bank or financial institution buys the bill (i.e. Bill of Exchange or Promissory Note) of receivables before it is due and provides you with the value of the bill after a discounted charge. This charge is effectively representative of the interest on the advance received, from the date of purchase until its due date.
This method allows you to capitalise on your receivables without the risk of borrowing money from a bank.
Compare a list of business financing options (here.)