Small- and medium-sized companies (SMEs) in the UAE are major exporters and importers of goods sold both here and abroad.
In fact, a survey last year by Zurich of 3,250 SMEs in 12 countries, including 250 here in the UAE, found that they were the most export-focused in the world.
Data on SMEs elsewhere in the UAE is scarce but, in Dubai more than half (51 percent) generate a “significant part” of their revenues outside the Emirates, according to a 2014 report by Emirates NBD. The percentage is highest with SMEs in the trading sector, 68 percent of which receive revenues from international markets.
So what sort of products do banks offer to help SMEs, and do these change their banking choices?
Banks extend various loans and products to SMEs to protect them when importing or exporting goods.
Take, for example, a letter of credit (LC), which is often used in international transactions to make sure payments are received in full and on time, according to Dubai Chamber. If buyers cannot make a payment, banks are required to cover the remaining amount of the purchase, it says, making it a very useful form of guarantee for an SME.
According to a report by Dubai Chamber: “The bank also acts on behalf of the buyer, or holder of the letter of credit, by ensuring that the supplier will not be paid until the bank receives confirmation that the goods have been shipped. This financing vehicle involves significant risk, which will likely result in a higher interest rate – especially for first-time applicants. Banks will sanction LC facilities both for overseas and local purchases.”
Other products offered by banks to SMEs include a Trust Receipt (TR), which is based on the normal amount of cash flow that a firm usually generates, the Chamber says. Banks prefer to grant TRs as a “structured facility,” paying suppliers directly on the presentation of invoices.
Banks also offer short-term loans; import finance to make advance payments to suppliers to bridge the gap between the purchase of merchandise and the subsequent sale and realization of proceeds, according to the Chamber.
Short-term financing in the form of pre-shipment finance – to pay for things like raw materials, processing, packing, transportation and warehousing – is also available through banks, as is post-shipment finance to bridge the gap between the shipment and realization of sale proceeds from the buyer, says the Chamber.
[ Compare SME business finance | Compare SME equipment finance ]
Other financing, such as bank guarantees, are also available.
A number of banks in the UAE offer finance facilities to importing and exporting SMEs, including RAKBANK, which offers loans to importers to provide finance for buying against an ‘at sight’ payment. This is a payment due on demand, which will require the party receiving the good or service to pay a certain sum immediately upon being presented with the bill of exchange – also known as a ‘sight draft’ or ‘sight bill’.
On their website, RAKBANK say: “Each loan is related to a specific import transaction, and the terms of finance can vary depending on the type of product and the importer’s requirements. Importers who have orders from customers, backed by a Letter of Credit, are provided with the necessary financial backing to meet larger orders than they could based solely on their own financial strength.
“When you export, you significantly reduce the risk of non-payment by requesting your buyer to pay under a Letter of Credit. RAKBANK helps you to get paid quickly by discounting Letters of Credit after acceptance by the issuing bank.”
Other banks to offer facilities to importing and exporting SMEs include CBI, which offers letters of credit, acceptance of credit, collection of bills, letters of credit conformation and letters of guarantees.
However, it is not just local banks that extend credit to SMEs importing or exporting goods. International banks do too – and banking with them can have its benefits.
Using an international bank means that it can be easier to transfer globally between your accounts in different countries.
Standard Chartered offers a range of import finance such as a letter of credit and the facility to submit your invoices to the bank that then pays your suppliers, in addition to the facility to receive payments from Standard Chartered when you present your invoices to the bank, among others.
[ Compare SME accounts | Compare SME credit cards ]
What else do SMEs need to keep in mind?
Jitendra Gianchandani, chairman and managing partner of Jitendra Consulting Group, says: “If your customers/ suppliers fall in the risk zone, such as the CIS (Commonwealth of Independent States, from the former USSR), Iran or West African countries, then most of the banks will be reluctant to do give you loan facilities (trust receipt or a letter of credit).”
“Some banks might charge higher rates and interest as well.”
This could be a problem for a number of SMEs because, according to Emirates NBD’s report, Africa is among the major international export destinations for SMEs in Dubai.
Another thing to consider, according to Mr Gianchandani, is that banks like to keep security deposits before they extend credit. Sometimes the bank may require a margin of up to 30 percent of the TR, which could be a significant cost to an SME.
A good idea, particularly for SMEs without access to LCs, TRs and other credit, is to secure terms from your importer/ exporter that match your working capital cycle so as to avoid stress on your resources, according to Deuskar, managing director of Salvus Advisors JLT, which consults with SMEs.
“This is very important because many SMEs do not have banking facilities that they can fall back upon,” he adds.
