UAE Small Business Owners Consider These 5 Factors Before Taking A Loan
Dubai-based entrepreneur Shraddha Barot Amariei, co-founder of e-commerce consulting firm 1115Inc, took out a MAD 450,000 loan in 2016 for her business. It was her largest financial firm to date, for funds she needed temporarily because one of her business partners had left the company.
âI had to pay for the partner’s actions, which meant all of a sudden my cash reserves were depleted, so taking out a loan helped me through the transition in the meantime. While the business was still young – just under three years of operation, the loan I got was 12% interest charges.
Financing Tip # 1: It is best to consult loan brokers for better deals on business loans or visit private SME lending companies.
Barot explained that visiting private loan companies (small and medium-sized businesses) and not banks is ideal because they have lower fees and interest rates, and you can get a better deal.
âThe loan was available too quickly because Etihad Bureau did not exist when I took out the loan. The situation at this point can be quite frightening, especially when someone does not have the discipline to handle loans and payments.
Financing tip # 2: Take out a loan when you have confirmed and secured business in hand, as with trading companies.
She considered loans to be a better option and advisable, mainly only for business ventures that need cash to fulfill their specific orders and have confirmed business secured in hand, so that it doesn’t become too stressful for the founder.
âBeing a service oriented solopreneur, it was a bit stressful for me as I never had any loans or credit cards with me. This added a lot of mental pressure to meet the loan repayment schedule in a timely manner. At one point, I had to take on clients that we weren’t very passionate about.
“Since I paid off the loans in 2 years, it has completely changed my mindset and my business operations into boutique services and I have much healthier margins.”
When I took out a loan I had a big team, an office, a good number of clients and a huge turnover, but the loan repayments, staff costs, etc., were eating away at my profit margins, she added. âAfter I finished paying off the loans, I changed my business model to boutique services. I have selected a team and clients in which my turnover and operations may seem minimal on paper. Still, I have much healthier profit margins because I no longer have unnecessary expenses and overheads. “
She said that sometimes success can be very deceptive on the outside – companies with large offices, multiple branches, etc. âEven if one of them is self-funded like me, the obligation to take out a loan can arise due to cash flow and 45-90 day payment terms in the area. But I strongly advise you to proceed with caution and make sure you have at least three times secured companies to justify these amounts.
Money experts suggest practical tips and strategies for making financial decisions and loan commitments for business growth.
A cash injection is needed in almost any business, and there are various sources of cash such as owner’s capital, an equity investor, or a bank loan.
Carol Glynn, personal finance coach and founder of Conscious Finance Coaching, said traditional banks offer business loans and online lenders have a variety of cash flow options as well. âAngel investor options are also available, and many are explicitly tailored for start-ups, SMEs, and even specific owners such as women-owned businesses.â
Who are angel investors?
Angel investors are individuals who provide funding to promising startups in exchange for a portion of the business, usually in the form of equity or royalties.
Although the figures vary on an annual basis, as of 2017, angel investors have invested around $ 25 billion (92 billion dirhams) in 70,000 companies around the world.
However, getting a business loan is only a good idea if the owner has proof that the business is viable and shows clear, data-backed signs of success, she added.
Funding Tip # 3: Take a loan with proper planning and scenario analysis.
Glynn said, âThere should be a clear plan for the use of the funds which should outline how you will use the money to generate not only growth but also profit. Planning and scenario analysis is crucial so that the borrower can truly understand the risk he is taking.
She added that the following factors are essential to consider in a loan decision:
â¢ Proven proof that the business is viable: Believing in your business is not a good reason to get a loan. Belief and passion for your business is fundamental, but it must be combined with proof that it will work in reality.
â¢ Evaluate the advantages and disadvantages of a loan compared to obtaining an equity investment: You need to understand both options from the point of view of monetary and business obligations and personal values ââand from the emotional point of view. Many choose loans over equity because they don’t want to dilute their business ownership, but is this the wisest way to support your business?
â¢ Check how fast your business can generate cash to pay off the loan: Will the monthly repayments push the business into other cash flow issues in the future? Ideally, your business is already generating enough cash profit to absorb the monthly payments. Spend time working and understanding the financial aspects of your business. If you are unsure of reading or rating the accounts, seek professional help.
Funding Tip # 4: Use loan options with your business growing in mind and never as a survival tool.
Simran Samtani, co-founder and senior partner of Dubai-based accounting services provider Xcel Accounting, said taking a strategic and forward-looking approach is ideal for making the process of growing the business less stressful and increasing the chances of obtaining the financing.
âYour current financial situation has a direct impact on the financing options you can access. Be clear on “Why” you need the loan and when and how much. It is recommended that you rely on the loan to fuel the growth of the business, but using it to survive is dangerous, âadded Samtani.
âAssessing the current business situation can help you determine if you need to borrow now, if you are ‘bankable’ and able to receive financing or take other strategic initiatives to change plans, or even delay major initiatives and expansion plans. “
Funding Tip # 5: When deciding to take out a loan, be prepared to meet all lender requirements.
Samtani recommended looking at the situation from a lender’s perspective. âA lender will need to be confident in your business model and your ability to repay the amount. Be prepared with everything including past business history, credit history, a solid business plan, and they can request access to your bank accounts.
âBefore the loan reaches your bank account, you need to have a well-thought-out plan for what to do with the funds. Be clear on your goals i.e. whether you need funds to grow or expand your business, establish emergency funds, market, purchase equipment and inventory, manage cash flow, create funds for the future or refinance or pay other debts.
Samtani also recommended using the loan amount in a separate bank account from the main business account and giving each dirham a target. âSet up automatic loan repayments and continue to cut costs and set budgets. “
However, before deciding on the loan, she suggested seeking expert advice. âShort-term debt always comes at a price and therefore weighing the risk over the reward becomes critical. “
âYou want to make sure you get the cheapest loan available for your business. Compare the loan offers available before selecting the one that best meets your financing needs. Or seek help from accountants, business networking peers, someone you know who has taken out a loan and research it on websites, âshe said. .