The UAE’s banks offer a wide variety of business loans and credit products. The key to the selection process is documentation and proper research before making a commitment.

More than 95 percent of all businesses in the UAE are SMEs, yet this important segment of the country’s economy as a whole has very limited access to finance. According to a recent study by the Khalifa Fund, the SME share of bank lending in the UAE stands at only four percent – much lower than the regional average of 9.3 percent. There is a clear need for more data in this area, as there is still a lack of clarity among businesses on what criteria banks are looking for when issuing loans.

Types of loans

Looking at some UAE banks that do cater to this sector, it’s safe to say they offer a wide variety of products, a majority of which fall in the short-term financing category (overdrafts, instant loans, letters of credit, equipment finance, commercial vehicle finance).

A recent study by international law firm Pinsent Masons found that some 73 percent of loans offered to SMEs in Dubai are secured loans, meaning they are attached to some type of collateral (say a car or house).

This would entitle the bank to hold the deeds until the loan is paid off in full. The maximum amount loaned can vary according to the bank’s rules and ranges from AED 1 – 3 million for small businesses. Repayment schemes also vary from 24 to 72 months, depending on the type of loan as well as the amount.

For other business needs like commercial vehicles and equipment, several banks have credit products that can cover 80 to 100 percent of the total cost, including RAKBANK and ADCB. Loans for these products can range from AED 10 – 20 million, while they also offer lower interest rates than other loan types.

[ Compare SME business finance | Compare SME equipment finance ]

Interest

As far as the interest being paid on these sums, rates in the UAE are usually higher than in other parts of the world.

According to The Khalifa Fund study, loan rates average

  • 15 percent for unsecured loans
  • 6 percent on secured loans
  • 10 percent on overdrafts.

One of the main advantages of an overdraft is that it requires you to only pay interest for the amount and exact time leveraged.

Eligibility and application process

  • Most banks require a business to be at least two years old before they apply for a loan and to have an annual sales turnover of at least AED 1.5 million. There are specific documents that must be submitted along with your application. These include a trade license copy, incorporation documents such as power of attorney, a memorandum of association, partnership agreement, bank statements for the last 12 months and passport and visa copies. All need to be valid at the time of evaluation.
  • For overdrafts, the documentation process is not as lengthy but you must have a minimum monthly salary of a specific amount (depending on your bank’s requirements). You must also be a customer at the bank you are applying to. For personal loans, most banks will require a salary certificate to prove a minimum monthly salary of at least AED 5,000. The loan office may also check see to see if the company you work for is listed with the bank.

Other information banks consider for when reviewing applicants include financial and projected income statements, a detailed statement describing the purpose of the loan, as well as profiles of the company’s senior management team. Banks have become more flexible recently regarding the minimum balance requirement on accounts, and a number have waived this altogether, including United Arab Bank and Mashreq Bank.

[ Compare SME accounts | Compare SME credit cards ]

Payments and refinancing options

Keeping tabs on the number of loans you have taken out, as well as your credit card use, is key to determining when and how you will be able to pay it all off. If you intend to make higher payments with the aim of paying off your debt more quickly, it would be wise to first check if you will be subject to any penalties. Most loans in the UAE, whether commercial or personal, are usually designed to be paid over the full term and you are likely to be charged a ‘resettlement’ or early settlement fee on the entire remaining balance, which can be from one to three percent.

If your plan is to consolidate all your debts, there is always the option to apply for a refinancing loan. The benefit of this type of loan is to put all of your loans into one ‘basket’ and pay a single interest rate on the total amount instead of a multitude of separate charges.

Banks vs other funding options

Businesses and start-ups that have not managed to secure bank loans often try other avenues. This is common practice in the UAE, and many have succeeded in securing funds from angel investors, venture capitalists or seed funding. The advantages of these are that, generally, such investments are sizable and offer businesses most potential for growth.

The downside is the extent to which these players want a part in in management decisions, while the burden is still placed on business owners to show timely results after receiving funding.

As rigid and limited as bank loans can be, they still offer the borrower to make spending decisions as he or she sees fit, with no interference from the lender’s side.