Dubai-based entrepreneur Shraddha Barot Amariei, co-founder of eCommerce consultancy 1115Inc, took a loan of Dh450,000 in 2016 for her venture. It was her biggest financial undertaking to date, for funds she needed temporarily as one of her business partners had exited the business.
“I had to pay for the partner’s shares, which meant all of a sudden my cash reserves were depleted, so taking a loan helped in the interim to get through the transition. While the company was still young - just under three years of operation, the loan I got was at 12 per cent interest charges.”
Financing advice #1: It is best to consult loan brokers to avail better deals on business loans or visit private SME lending companies.
Barot explained visiting private SME (small and medium-sized enterprises) lending companies, not banks, is ideal as they have lower fees and interest rates, and you may get a better deal.
“The loan was available too quickly as Etihad Bureau didn’t exist when I had taken the loan. The situation at that time can be pretty scary, especially when someone doesn’t have the discipline to manage the loans and payments.”
Financing advice #2: Take a loan when you have confirmed and secure business in hand, as in for trading businesses.
She considered loans a better option and advisable, primarily only for trading businesses who need cash flow to fulfil their specific orders and have confirmed secure business in hand, so it does not get too stressful for the founder.
“As I am a service-oriented solopreneur, it was a bit stressful for me as I have never had loans or credit cards on me. It added a lot of mental pressure to meet the timely loan payments timeline. At some point, I had to take on clients that we were not much passionate about.”
“Ever since I have paid off the loans in 2 years, it has completely changed my mindset and business operations to boutique services and have much healthier margins.”
When I had taken a loan, I had a big team, office, a good set of clients and a massive turnover, but the loan payments, staff costs etc., would eat away my profit margins, she added. “Once I finished paying the loans, I changed my business model to boutique services. I selected a team and clients whereby my turnover and operations may look small on paper. Still, I have much healthier profit margins as I no longer have unnecessary expenses and overheads.”
She said sometimes, success can be very deceptive on the outside -companies with large offices, multiple branches etc., and may look like they are very successful, but on paper, they could be doing okay and might have large debts. “Even though one is self-funded like me, the requirement for taking up a loan may happen because of the cash flow and payment terms being 45 to 90 days in the region. But I strongly advise you to tread with caution and make sure one has at least three times secure businesses to justify these amounts.”
Money experts suggest practical tips and strategies for making financial decisions and loan undertakings for business growth.
A cash injection is needed in almost every business, and there are various sources of cash such as the owner’s capital, an equity investor or a bank loan.
Carol Glynn, personal finance coach and founder of Conscious Finance Coaching, said that traditional high street banks provide business loans, and online lenders also have various cash influx options. “Angel investor options are also available, and many are explicitly tailored to start-ups, SMEs and even specific ownership such as female-owned businesses.”
While figures vary on an annual basis, as recently as 2017 angel investors put approximately $25 billion (Dh92 billion) into 70,000 companies globally.
However, getting a business loan is only a good idea if the owner has evidence the business is viable and shows clear data-backed signs of success, she added.
Financing advice #3: Take a loan with proper scenario planning and analysis.
Glynn said, “There should be a clear plan for the use of the funds that should outline how you will use the money to generate not just growth but profits too. Scenario planning and analysis are crucial so the borrower can truly understand the risk they are taking on.”
She added that the following factors are essential to consider for a loan decision:
• A proven record that business is viable: Belief in your business is not a good reason to obtain a loan. Belief and passion for your business are fundamental, but it needs to be combined with evidence that it will work in reality.
• Assess the pros and cons of a loan versus obtaining an equity investment: You must understand both options from a monetary and business obligation perspective and personal values and emotional perspective. Many choose loans over equity as they do not want to dilute their business ownership, but is this the wisest way to support your business?
• Check how quickly your business can generate cash to repay the loan: Will the monthly repayments push the company into further cash flow issues in the future? Ideally, your business is already generating enough cash profit to absorb the monthly payments. Spend time working on and understanding the financials behind your business. If you are not confident reading or assessing the accounts, get the help of a professional.
Financing advice #4: Use loan options with business growth in mind and never as a tool for survival.
Simran Samtani, co-founder and senior partner with Dubai-based bookkeeping service provider Xcel Accounting, said taking a strategic and future-focused approach is ideal for making the business growth process less stressful and increasing the chances of getting the funding.
“Your current financial situation directly impacts the financing options one can access. Be clear on the ‘Why’ you need the loan and by when and how much. Relying on loan for fueling business growth is recommended, but using it for survival is dangerous,” Samtani added.
“Evaluating the current business situation can help point on whether you need to borrow now, whether you are ‘bankable’ and in position to receive the funding or take alternative strategic initiatives to modify plans, or even delay big initiatives and expansion plans.”
Financing advice #5: When you decide to take a loan, be prepared with all lenders requirements.
Samtani recommended viewing the situation from a lender’s perspective. “A lender will need to have confidence in your business model and ability to repay the amount. Be prepared with all, including past business trajectory, credit history, a strong business plan, and they may ask for access to your bank accounts.”
“Before the loan hits your bank account, you need to have a well-thought-out plan for what to do with the funds. Be clear on your goals, that is, whether you need funds to scale up or business expansion, establishing emergency funds, marketing, purchasing equipment and inventory, managing cash flow, creating funds for the future or refinancing or paying other debts.”
Samtani also recommended using the loan amount in a bank account separate from the main business account and giving each dirham a purpose. “Set up automatic loan payments and continue cutting costs and setting budgets.”
However, before deciding on the loan, she suggested seeking expert advice. “Short-term debt always comes at a price, and hence weighing in on the risk versus reward becomes critical.”
“You want to ensure that you get the lowest-cost loan available to your business. Compare the available loan offerings before selecting the one that best fits your funding needs. Or get help from accountants, business networking peers, someone you know who has taken a loan and research on it through the websites,” she said.