- With better access to VCs, banks can help UAE SMEs
Easier access to venture capital (VC) can improve the business environment for UAE SMEs, says Hisham Farouk, managing partner at Grant Thornton.
“There needs to be a much more accessible platform for VCs to be here, which is one of the key things that is missing, because most of the ideas need a shot of injection to go out. This could be through SME funds or crowd investing platforms, among others. You’ll have to look at what attracts VCs and start working towards that. Build it and they will come. That is what Dubai has always been doing exceptionally well,” he tells SMEinfo.me.
Another thing the emirate and the UAE, in general, have been doing extremely well is promoting, marketing and celebrating SMEs, he adds. However, “doing business in Dubai is very expensive. The demographics within the greater region are coming to Dubai. The irony is that the cost of development in those countries is actually far less than it is here, but [Dubai offers] accessibility. [When they come] here, they will need some financial support to get them going. So, VCs are critical and a softer approach from banks is what is required.”
In a recent interview with SMEinfo.me, Dubai SME revealed plans of launching a research on the start-up equity ecosystem in the emirate, in a bid to understand and improve the equity financing environment. The Dubai SME Equity Financing Study, which will include recommendations and proposed initiatives, is expected to be released in Q4 2014, says Alexandar Williams, director of strategy and policy for Dubai SME.
Farouk also urges banks to increase their risk exposure to SMEs.
Bank financing is often considered a traditional form of raising capital, but it is rarely an option for early stage start-ups. In the UAE, only four per cent of total bank lending goes to SMEs, and even this is for more established firms. While many banks are opening up to SME financing, start-ups aren’t necessarily in that equation.
“Banks are not in the business of risk taking by investing in start-ups,” says Williams in the interview. “As a rule of thumb, the first three years, when the start-up is trying to do revenue streams and get contracts, no banks would want to invest in it. If you want to get a loan, the founder or owner probably has to pledge his personal assets as collateral. Many banks have made it clear in the UAE and the region that the start-up scene is not for them; they are only investing in established companies with a track record, good potential cash flow, transparency and all of those factors.”
“You can’t come and tell a start-up that I need two years of positive profits, when everybody in the world knows that it takes three years to break even in any business,” adds Farouk.
Both Farouk and Williams also encourage start-ups and SMEs to create and maintain sound financial records from the onset of their businesses to improve their chances of getting access to finance. A number of SMEs don’t have corporate governance or reliable financial statements in place, which makes it difficult for banks to assess their risks and determine whether they can provide a viable return on investment.
“Once you have a corporate governance culture in the early stage of the company, you lay the foundation to be investable and bankable for the future,” adds Williams.
Article published online and accessed via: http://www.ameinfo.com/smeinfo/2014/06/24/better-access-to-vcs-banks-can-help-uae-smes/