Companies need financial support for research, growth and innovation, but with their limited size and lack of appropriate credit history, SMEs find getting loans from banks difficult. Even banks that do have products for such firms believe lending them money is fraught with risk.
Dr R. Seetharaman, Group CEO at Doha Bank, says this is because SMEs often don’t work to a clear strategy. “Some SMEs do not have a robust business model and only a few maintain proper financial statements, fewer still have audited finances. Though business owners or their finance managers understand the business very well, they do not always have a comprehensive understanding of their financing requirement and banking needs.”
Lack of proper standards
Ben Constance, a partner with law firm Taylor Wessing (Middle East), says funding SMEs is seen as risky because many don’t implement good corporate governance measures and standards within the business. “In particular, where there is a lack of proper accounting systems, a lack of risk management consideration and no corporate reporting requirements being met, it can be a difficult and risky assessment for a financier to offer lending to an SME,” he says.
Collateral can also be an issue. SMEs are less likely to be able to offer tangible or real assets as security, which can be called on by a lender in the event of default. “Often an SME is funded on the basis of personal guarantees, which are linked to business owners whose income is principally derived from the SME business itself. This proves problematic in the event the SME is not able to meet its loan obligations,” Constance says.
SMEs are often smaller trading businesses with a greater exposure to local market conditions than larger multinationals. This sort of exposure can result in an inability to meet debt repayments if the local business environment goes through a downturn or grinds to a halt, he adds. SMEs are also necessarily lean and mean, and many tend to be owner-driven and managed, where owners are typically involved in all key aspects of the business, says Siddarth Razdan of I Capital Management Services, a corporate finance advisor.
“A typical example is the use of working capital to buy assets or not doing a basic credit check while extending credit. Due to size restrictions and a lack of financial resources, SMEs are more vulnerable to events such as delayed payments from key debtors, unhedged foreign currency exposures, stock obsolescence, etc and can slip fairly quickly into financial stress,” Razdan says, adding that on the whole, banks need to guide, monitor and mentor SMEs on overall business and financial strategy — day-to-day hand-holding they may not want to (or be equipped to) deal with.
Douglas Stoneham, General Manager, SME Banking, UAE and Middle East, Standard Chartered Bank, explains: “SME owners need to have a detailed business plan that includes cash flow projections. Tailoring appropriate facilities that help our clients manage their cash flows effectively to minimise costs and maximise returns is a very important aspect of our role as a financial partner. We need to also present a balanced view of opportunity and risk to help clients make the right decisions to protect and enhance their profitability and returns on investment. This in turn protects and enhances cash flow generation that is the lifeblood of all businesses.”
SMEs that demonstrate better financial discipline and formal management structures stand a better chance at achieving their growth aspirations, he says. Some SME owners aren’t skilled enough to handle the financial side of their business effectively; his bank encourages them to invest in a good finance manager as soon as they can afford one.
Banks are also cautious because there isn’t enough market data available in the UAE. “With the absence of credit bureaus in the UAE, obtaining comprehensive information on past credit history of SME clients remains a challenge,” says Stoneham. He could just as well be speaking for the entire sector.