How to find your financing

Dubai: While opinions may differ widely on whether now is the right time to launch a start-up, the promoters would do well to first put together a feasible business plan. More so if the scale of their planned operations places them among the expanding class of small and medium enterprises (SME).

Without a proper business plan, the chances of them tapping bank financing are severely constrained, especially in an economic climate where lenders prefer extreme caution to taking risks on untested businesses.

Banks are clear on this. "We prioritise sectors which have higher growth rates and businesses with simple and clear business models," said Nicholas Levitt, regional head of business banking HSBC M. E.

"Some of the key factors HSBC will review include, but are not limited to, are the credibility of the promoters, financial standing of the company, the number of years in business, length of banking relationship, market reputation and finally it should be an acceptable industry."

That sounds a lot for a fledgling business. But it is just as indicative of the higher levels of due diligence potential lenders have adopted.

Access to credit — and at favourable terms — has become even more difficult in the last 12 months. At Emirates Money, a subsidiary of Emirates NBD, the number of loan approvals in favour of SMEs is split equally with those that are rejected. The credit exposure to SMEs at other lending institutions could be even lower.

Local regulations

It would have helped — immensely — if there were local regulations that would clearly define the financial requirements that promoters of a SME start-up should have. But in their absence what these businesses could do is to go in for voluntary transparency.

As an SME looking to apply for a loan, it is important to keep your financials transparent and accounted for to allow banks to effectively evaluate their repayment capacity. "Even when you're maintaining your business you should make sure to get them audited and get your account certified," said Vikas Thapar of Emirates Money. "You should ‘over manage' your liabilities with the bank so there is no risk of default."

During the application process, a clear and ordered balance-sheet goes a long way. "One of the key things we look for include a healthy balance sheet with profitable operations and acceptable ratios," said Levitt.

Also be prepared to provide information around the future prospects for the business and the quality of the existing business, which can be demonstrated by cashflow forecasts, debtor-and stock-lists.

SMEs in the UAE are not pressed to reveal their fin-ancials and this can partly be attributed to "cultural" factors.

"As a matter of habit, businesses were not as open as they could be when providing information," said Zaid Kamhawi, chief business officer at Emcredit.

"Businesses, especially family-owned ones, are more conservative and less transparent in terms of information about their company. That needs to change."

Credit history

There is every incentive for SMEs to be vigilant and be transparent with their credit history and financials. They should demonstrate their business models are workable, especially as it makes it easier to get their loans approved.

In the case of corporate loans, banks can rely on the client's balance-sheet to determine whether to reject or approve a loan. However, since the same is not readily available with SMEs, banks are less willing to assume these risks.

It is important to make sure all transfers and payments are accounted for to avoid confusion. "If you manage three companies, accounts should be kept totally separate and should be properly accounted for and don't transfer your funds from one company to another company which is jointly owned and maintain your credit history," said Thapar.

Most banks maintain a scoring model primarily based on the type of industry the business is in. This include how long the company has been operational, the receivable cycle trade, cycle turnover and information on growth.

"For example, it's a proven fact with SMEs that if they've lasted for the first three years they are more likely to succeed," said Thapar.

But guiding a small business through its first year can be risky when there is a general credit squeeze in the market. One more reason why it would work better if SME's voluntarily improve their financial reporting process.

In mature markets, parameters such as the International Financial Reporting Standards (IFRS) ensure compliance. In several countries, IFRS is a requirement even for unlisted companies.

Local SMEs would have to change with the times. "The way credit assessment is done in the last two to four years is changing," said Kamhawi. "Banks are moving away from name lending and advising SMEs that they should start being more transparent in their financial records."

It would be a new beginning for local SMEs. As their numbers grow, more financing products and facilities would be made available by banks. Simultaneously, the government is working on a number of initiatives to ease the lending process.

"A lot of requirements have been taken away," said Thapar. "For example, when setting up a company you needed to put some capital in the bank and take a capital requirement certificate. Now that requirement has been taken away."

SMEs would clearly wish more such requirements would gradually be phased out and they have easier access to capital.

Five tips for small and medium enterprises seeking bank financing: