I was recently invited to be a panelist at the SME World Summit held in Dubai on the outlook for SME’s in the region. I specifically chose to address the financial outlook for SME’s and some the of the challenges they face in raising finance from banks in the current economic climate. Without doubt the environment for raising finance for SMEs has become increasingly more difficult over the last 24 months. In 2013 – 2014 the market was extremely liquid and banks saw SME lending as a potentially very lucrative part of their portfolio. Oil prices were high, liquidity was strong and banks were very keen to lend increasing amounts of money on a collateral free basis to the SME segment of the market. Sometimes we saw banks lending not only to the company but to the owners as well.
The decline in oil prices in 2015 brought significant change. Liquidity in the market tightened and banks turned cautious on the SME sector. The introduction of the Credit Bureau revealed exactly how many banks SME’s had borrowed from and showed many SME’s having banking relationships sometimes in excess of ten banks. This was clearly was not sustainable. Many SMEs relied on new borrowing simply to repay the existing with funds being diverted from the main business. Easy funding encouraged fraud on a large scale. The result was a sever tightening of the market and the indiscriminate withdrawal of bank facilities by nervous bankers which prompted a large number of skips from SME owners who were faced with the prospect of going to jail if banks presented their total facility cheques. It is estimated that skip cases left total debts of around AED 10 billion.
If you look at the banking results for 2016 which were published in Q1 you will see significantly increased provisions from a large number of commercial banks who are active in the SME sector. RAK Bank for example, increased provisions by over 70% and NBF witnessed doubling. UAB, one of the most aggressive players in the banking market, particularly with regards to SMEs has suffered losses over the last two financial years. Specialist SME lenders were hit particularly hard.
The outcome of this is that there is a much smaller group of lenders, probably around 5 or 6, who are active and willing to participate in lending in the SME space. The banks that are remaining have become very risk averse with lenders making enhanced information requests on the companies they consider lending too with forensic due diligence on receivables, inventories and cash flows. The time taken to review new and renewal of facilities is increasing which results in a myriad of information requests from SME’s and many are just not geared up to provide that kind of information quickly, accurately and in a timely manner. Many of the banks are now only lending on a tangibly secured or fully secured basis and there is very little, if any , cash flow lending. Banks tend to provide standard products and if the customers request fall outside of those boundaries then it becomes difficult for the bank to accede to the customers requirements. The preference is for short term trade and working capital finance with very little lending out over 24 months. Furthermore, anti money laundering requirements have made it more difficult for some businesses to get funding. Banks often require a three year trading history and therefore young companies will find it increasingly difficult to seek commercial finance, and banks will prefer to lend to existing customers rather than to new ones. The result is a very challenging environment for SMEs who are looking for growth finance
So what can SME’s do in this difficult situation especially at a time when economic activity is subdued and payment cycles are lengthening. There are some alternative sources of finance – eg Beehive – a non-bank, crowd funding platform which was launched over a couple of years ago allowing companies to raise up to AED 1 million on their platform in terms of medium term finance. They also provide short term liquidity via invoice discounting facilities to customers, both on a sharia and non-sharia compliant basis. For SME’s that have money tied up in invoices, factoring is a solution which can release cash immediately for working capital. Factoring companies discount invoices and provide 80% of finance up front and the balance of 20% when the invoice has been paid. Often these factoring companies also provide credit insurance so debts are insured against non payment.
A further alternative for companies to raise finance in these challenging times is to raise additional equity from outside investors through crowdfunding platforms such as Eureeca.
What other help is available for SMEs? Firstly there is self help. SMEs are notoriously poor at providing timely and accurate management information for their banks. In times of stress it pays to stay close to your bank’s relationship manager and banks will expect regular updates on trading and especially debtor lists. It also makes sense to diversify banking and funding sources so never to be totally reliant on one provider. Have a plan B. Bank’s love to have audited accounts preferably by a recognised audit firm and clear business plans and cash flow forecasts. Secondly some Government support is available for SMEs through “the Fund” in Dubai and the Khalifa Fund in Abu Dhabi. The introduction of the new bankruptcy law provides assistance to companies seeking to restructure their debts and bank’s are increasingly amenable to supporting genuine restructuring efforts, over long periods rather than force an entrepreneur to flee the country. Finally Dubai SME has introduced a new SME rating framework to assist companies to get access to cheaper funding.