As interest rates peak, should UAE business owners go for collateral-free loans? How about gold?

Dubai: Owners of small and medium sized businesses in the UAE are looking towards collateral-free loans and even using their gold holdings to pull in much needed funds to keep their operations going.

Some of the leading UAE banks are pushing no collateral backed loans to businesses, especially those that are relatively new or those that don’t have the physical assets or receivables to put up as collateral.

For that matter, even single individual businesses can apply for such loans.

Sure, such collateral-free loans come at a higher interest rate, but business owners who have taken these recently say this made sense because interest rates have peaked and sometime next year, the first set of rate cuts could happen. (If they are lucky, that could even happen during first quarter 2024 itself, as the US Federal Reserve signalled rate cuts are on their way after the meeting on Wednesday (November 13). The UAE rates rise or drop depending on the Fed decisions, given the dollar-dirham peg.)

“Collateral-free loans are not exclusive to SMEs in the UAE, but they are more common and beneficial for them,” said Bal Krishen, Chairman and CEO of Dubai-based Century Financial. “Banks also offer collateral-free loans to individuals and larger corporations.

“However, SMEs are a particularly attractive target market in the UAE for collateral-free loans as they have potential for growth, but lack in tangible assets to pledge and need timely financial support.” (The base rate in the UAE currently is at 5.4 per cent.)

Businesses that signed up for collateral-free loans have typically gone in for 3-6 month tenors. "It would have been difficult for me to come up with sufficient collateral for a traditional business loan," said the owner of one such business. "All I needed was a short-term loan for a capex requirement, and I didn't want to put up my home as collateral either. So, I took the collateral-free option for a very short loan period."

If gold continues to be at or around $2,000 an ounce levels, 2024 could well see more UAE business owners using it to secure their funding requirements. For lenders too, it is an easy transaction to get into.

- Bal Krishen of Century Financial.

How much do these collateral-free loan cost?

Currently, banks are offering these unsecured loans for SMEs at rates ranging from 16-26 per cent on a reducing balance basis. Or 13-16 per cent on a flat rate basis. (Of course, the rates varies on credit profile of the company and the tenor of loan offered by the banks.)

“SMEs often face difficulties in accessing credit due to lack of collateral, limited credit history, or low profitability,” said Krishen. “Collateral-free loans can help them overcome these barriers and obtain financing for their business needs, such as working capital, expansion, or innovation.”

Gold serves more than one purpose

In recent weeks, UAE’s legion of small businesses – ranging from traders to café operators – have been using gold to pull in some loans. They were helped by gold setting itself up at well over $1,950 an ounce level. Last week, it even found time to surge past $2,100 and set a new all-time high for the metal before dropping to $1,980 levels at the start of the week.

After the Fed announcement Wednesday, gold is back at $2,000 plus.

“Gold-backed loans are not necessarily the most popular choice for business loans, but there are many traders who continue to find uses with their gold holding,” said a Dubai-based market analyst. “Some financial institutions too had introduced gold loans, with sold take up rates.

“If gold continues to be at or around $2,000 an ounce levels, 2024 could well see more UAE business owners using it to secure their funding requirements. For lenders too, it is an easy transaction to get into.

“2024 looks like gold will firm up its safe haven status further. Not that anyone doubted it…”