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The How-To: Sourcing Finance For Early-Stage Growth Of Your UAE Business To help you assess the different forms of business finance in the UAE, we list a few options for entrepreneurs looking to take their startup or SME to the next level.

By John Hanafin

Opinions expressed by Entrepreneur contributors are their own.

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Ask entrepreneurs in the UAE what they most need to upscale their business and the majority are likely to say finance. Sourcing finance in the early stages of growth is fundamental in taking a company to the next level. It helps business owners to avoid cash flow problems and barriers to expansion.

There are numerous finance options available in the UAE, including bonds, sukuks (Islamic bonds), loans, syndicated loans and murabaha (Islamic loans), but understanding the distinctions between them can be confusing, especially for entrepreneurs without in-depth knowledge of business funding. This, together with banks' reluctance to lend to startups and SMEs following a rise in bad loans, makes obtaining finance one of the most challenging aspects of starting and growing a business in the UAE.

So, what's the best move?

Know your UAE finance options
To help you assess the different forms of business finance in the UAE, I've pulled together some of the more interesting options open to entrepreneurs looking to take a startup or SME to the next level.

A note on bankruptcy and cheques
Before we continue with the finance options available to your UAE business, it is worth speaking on risk and consequence. The UAE is a civil law jurisdiction, and until recently the consequences of bankruptcy and missed payments for personal or business reasons have been significant, often leading to court involvement and jail time.

Two recent changes have alleviated this situation somewhat. 2016 saw the introduction of Federal Law No. 9, known as the "Bankruptcy Law'. Its provisions in this have given greater clarity to the bankruptcy process, incentivizing businesses to be proactive should bankruptcy occur. On an individual level, progressive changes to bounced cheques in the UAE were announced late 2017, wherein fines are issued for failed payments instead of jail sentences.

While these subjects are beneficial to citizens and the entrepreneurial scene in the UAE, said entrepreneurs in particular should be respectful of this risk when seeking finance.

Bank loans: Some people will tell you that obtaining a bank loan in the UAE is virtually impossible for startups and extremely difficult for SMEs. However, it should not be discounted. Loans are available but be sure to have a near immaculate credit score. Conditions are strict, interest rates are not great, and you may need to put up some form of collateral, but some entrepreneurs prefer the stability that bank loans offer.

Non-bank lending: The difficulty of obtaining bank loans and the need to access working capital has led some entrepreneurs to investigate non-bank lenders. These lenders can provide companies with the five to six-year funding that they need to grow. They also provide an alternative for companies such as tech startups, which are unable to meet banks' demand for assets as security for loans.

Private funding: Asking friends and family for money is an obvious but risky choice for entrepreneurs. It could ruin a good relationship if the business fails. However, offering shares in the business is a possibility.

Crowdfunding: In the UAE, platforms such as Aflamnah and Eureeca, enable startups to attract private investment but you need the ability to promote your idea extensively on social media in order to generate interest. The risk with crowdfunding is that, if you go with an equity model, you may end up with many investors with equity on your books, which can quickly bog down your corporate operations.

Venture capital and angels: The rapid growth of the UAE's startup economy, especially tech startups, has attracted the interest of venture capitalists from around the world. The most active investor, Wamda Capital, has reportedly funded 20 businesses alone. Venture capital is finance that investors provide to startups and small businesses they believe to have good long-term growth potential. It normally comes from high net worth individuals (HNWIs), who are known as angel investors, and is also available from investment banks and other financial institutions.

To secure venture capital, you must submit a strong business plan. If interested, the firm or investor will perform due diligence, which includes a thorough investigation of the company, including its business model, products or services, and management. If satisfied, the venture capitalist will pledge an investment of capital in exchange for equity in the company. They often request convertible "preferred shares' in return for their investment. This is a share that entitles the holder to a fixed dividend, whose payment takes priority over that of ordinary share dividends.

Seed funding: Perhaps a better initial option for startups is seed capital. This is similar to venture capital but without the catches. Typically coming from an angel investor or personal contact, a seed investment involves a cash-for-equity (or future equity) exchange but you don't need to pay back the investment or make any sort of personal guarantee. It is generally used as a funding option in the early stages before moving on to venture capital.

Bonds: A form of fixed-term borrowing, bonds have traditionally appealed to more mature companies, but this is changing. They provide a way for companies to borrow money from investors in return for regular interest payments. There is a predetermined maturity date when the bond is redeemed, and the investor repaid. "Creditworthiness' is a key factor, while the borrower must consider the currency, issuing period and market conditions.

Recently, there has been more interest in green bonds, which are used to finance projects that benefit the environment. The green economy is one of the fastest growing sectors in the UAE as the government seeks to achieve a target of 44% renewable energy by 2050. Thus, green bonds could be an attractive option for entrepreneurs seeking to demonstrate a commitment to a low-carbon future.

Asset financing: Startups and SMEs requiring a short-term cash loan or working capital to buy items such as plant and equipment or vehicles should consider asset financing. This is a form of financing that is applied toward the purchase of tangible and movable assets. It facilitates the purchase of equipment required for the day-to-day running of businesses.

In the past, asset financing was generally considered a last resort. It has since become more popular, especially among startups and SMEs that lack the track record or credit rating to qualify for alternative funding sources. The asset being financed is the primary security provided to the lender and the revenue generated from the asset is used to repay the debt and service interest payments.

Shari'a compliant financing: Islamic products have become popular among borrowers in the UAE, particularly the ijara financing structure, which enables borrowers to use existing assets, such as real estate, to secure working capital, while continuing to use and access their assets. Ownership of the leased asset is then transferred to the client upon termination of the lease.

Another option is the Shari'a compliant murabaha. This is a form of direct financing where the bank purchases the asset directly from a third party and immediately resells the same asset to the borrowing entity at a profit, the repayment secured in the form of a pledge. However, this structure is not popular for medium or long-term financing because the profit rate may not be benchmarked to London Inter-bank Offered Rate or Emirates Interbank Offered Rate and must be a fixed rate.

If you prefer bonds, sukuk is an Islamic bond structured in such a way as to generate returns to investors without infringing Islamic law (which prohibits riba or interest). Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. Islamic syndicated loans are also worth considering. In this case, a group of Shari'a-compliant financial institutions pool together to fund a client.

Government support: Financial support, including interest-free loans, can be obtained from the UAE Government's Khalifa Fund for Enterprise Development, which aims to support and develop small to medium-sized investments in the UAE. However, the support available does depend on the nature of the business. The official portal of the UAE government states that the Khalifa Fund provides finance solutions for "a variety of feasible projects that serve the interests of the national economy in different sectors and project categories such as farming, fishing, agriculture and even home-based businesses'.

Dubai SME: As an agency of the Department of Economic Development in Dubai, Dubai SME also offers financing options and support services, including advisory and incubatory services to startups and SMEs. Another option for startups is to seek financial assistance via the Intelaq program, under which Emiratis residing in Dubai receive support through all the phases of setting up a business.

Your next steps to securing UAE finance
Seeking support from a specialist in startup and SME funding is strongly advised before you take the plunge into the complex and varied world of business financing. With competition mounting among lenders, 2018 would appear a great time to shop around for good value finance deals. Some expert guidance from an experienced local adviser will help to make sure you secure the best deal for you and your business.

Related: Own A UAE Company And Run It From Your Home Country

John Hanafin

Founder, Huriya Private

John Hanafin is the founder of Huriya Private, a specialist advisory firm aimed at bringing financial expertise to high-net-worth individuals and families. A focused professional with entrepreneurial drive and a commercial mindset, Hanafin has over 25 years experience in the trust and corporate services industry, with 15 years based in the Middle East, and an extensive background serving the specialised needs of high-net-worth investors around the world. Approved, licensed and recognised by many international FSCs, Hanafin is a trusted advisor to governments for the structuring and implementation of programmes to boost corporate re-domiciliation and foreign direct investments. Hanafin is a chartered member of the Securities Institute (CISI), a member of the Society of Trust and Estate Practitioners (STEP), a member of the International Tax Planning Association (ITPA), and sits on the boards of various organisations around the world.

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