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Alternative Funding Options For SMEs


Sheetal Soni

Alternative Funding Options For SMEs

The role of the SME sector in generating employment cannot be denied in any economy and more so in the UAE where SMEs contribute to about 90% of the total employment. One of the major challenges faced by SMEs is to get funds from banks for their working capital requirements and for capital expenditure. In the UAE, only 4% of the total bank lending is in SME sector. Approximately 77% of SMEs in Dubai have no access to bank lending.

In such a scenario, alternative funding options will remain an integral part of SME’s financial toolset as credit for them remains constrained. An OECD Scoreboard, which assessed access to finance for SMEs in 34 countries, found that though bank lending is still the main source of finance for small businesses, bank lending hasn’t recovered to pre-crisis levels. The OECD report points out that alternative instruments such as crowdfunding and factoring are gaining traction, but warns that high levels of non-performing loans will continue to hamper bank’s willingness to lend to SMEs.

In the UAE, there are few government-backed initiatives to support SMEs, the notable amongst them being the Khalifa Fund and Mohammed Bin Rashid Establishment for SME Development (MBRE). However, most of the aforementioned institutions aim to fund UAE nationals.

In light of SMEs not getting easy access to funds from banks, what are the alternative funding options available for SMEs? I would like to highlight a few alternative funding options for SMEs in UAE.


Factoring can provide a quick and easy alternative funding to business. Factoring companies can fund part of the working capital cycle swiftly. There are several advantages of factoring. Notable ones are:

Factoring is possible for export sales to advance 80% to 90%

  • Factoring could potentially be non-recourse financing
  • Financing without providing additional securities
  • Improve your balance sheet ratios
  • Factoring company does a collection of receivables & book-keeping on your behalf
  • Factoring companies deal with your customers in different Jurisdictions and speaking different languages

However, factoring can only provide part of your working capital needs and the factoring solution is available only when you are dealing with good customers. The cost of financing for factoring can be on the little higher side compared to bank financing due to insurance cost involved and potentially higher cost of capital for such factoring companies.

Lease Financing

One of the most popular asset financing products in most of the industrialized world is leasing. Business houses procuring cars, equipment, machinery, IT hardware, healthcare equipment, shipping vessels, etc. may require significant capital to procure such assets. Such assets can better be funded through leasing compared to bank loans. Vendors (who are selling such equipment) can also offer lease financing solutions to their customers by tying up with leasing companies. Some of the key advantages of lease financing are:

No additional collateral required.

  • The cost of lease finance is competitive with traditional credit, given the increased security held by lessors and the low transaction costs of processing a lease.
  • Leasing also offers matched maturity of assets/liabilities.
  • Islamic compliance: Leasing is seen as an interest- free product and considered the same as a rental.
  • Leasing enables companies to match income and expenditure.
  • Leasing also has advantages of a quick decision-making process, flexibility, and negotiability.
  • Leasing deals may make less use of the restrictive covenants that appear in more traditional forms of lending.
  • Where lessors have asset knowledge or relations with suppliers, lessees may “outsource” certain tasks (such as negotiating with suppliers), reducing costs and risks.
  • Leasing enables investment in equipment that can modernize production and improve productivity and profitability.
  • Due to reduced upfront costs, leasing frees up capital for other business needs.

In the UAE, other than banks, there are few leasing focused companies providing lease finance solutions directly to customers as well as by tying up with vendors (who are selling such leasable assets). For vendors, tying with a right lease finance company can potentially be a game changer for their business. Vendors selling high-value assets on credit terms can offer different payment options to their customers with the help of such leasing companies, whilst at the same time, significantly reduce their working capital tied up in the receivables.

Crowd – Funding

Crowd-funding can be a cost-effective way for businesses to raise funds and evidence suggests that its popularity is growing among businesses globally. The level of crowd-funding awareness across the globe has increased significantly over recent years. Policy makers and media have significantly contributed to raising this global awareness. This trend will continue into 2016 leading to a significant rise in the number and diversity of crowd-funding sites. In the UAE as well, there are emerging crowd-funding platforms providing an alternative funding solution for the SME sector. Crowdfunding is still a relatively new concept in the UAE and few businesses have obtained finance using it to date. But, as awareness of crowdfunding will grow in the region, it has the potential to become a viable alternative to a bank loan.

Unlike traditional financing methods, where businesses try to raise large amounts of money from a few financial institutions or individuals, in crowdfunding, a business utilizes an online platform to target a larger number of potential funders.

This usually involves creating a profile of your business project on a crowdfunding website, before inviting people to lend, invest or donate money to help make it a reality. Each funder pledges a small proportion of the overall funding, which is then pooled together with other funders until the target amount is reached.

It is not a new idea – in reality, crowdfunding is just an updated version of collective fundraising or a co-operative. However, because it’s based online, crowdfunding provides access to a virtually limitless pool of potential funders, improving access to finance for businesses in a way that simply would not have worked a few years ago.

Finally, Apart from the above options discussed, there are other alternative funds/financing companies providing working capital finance, project-based mezzanine financing, and last mile financing solutions to companies in the region. We have come across a few good businesses who are struggling due to erratic pullout recently by their relationship banks, putting significant pressure on their working capital cycle. There are some clients in niche sectors, not able to find bank funding because such clients are not the focus of banks generally. The alternative available options can potentially help in financing / refinancing efforts. There are alternative financing companies tapping on the opportunity currently being provided by the banking sector in the UAE.

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