What a busy place? Lots of meetings around, phones keep ringing, sales officers defending fiercely their customers’ loan applications like a defense lawyer standing before the judge. This sounds similar to the Wall Street trading floor! But it is not New York, but Dubai and the application is for a UAE business loan. This I talk about is a scene from a credit and compliance unit that I visited once while working for a leading retail bank a long time ago.
The UAE ranks 21st in the ease of doing business. But for credit sourcing, it is on the 90th pedestal out of 190 countries. Is it difficult to secure a loan for business in the UAE? Or is it not as easy as getting funding from non-banking financial institutions?
Much like any other parts of the world, local banks have become more cautious in doling out UAE business loans after the 2008 global recession that hit the banking industry hard. This had made it tricky to apply for a business Loan in the UAE. Last year, only 4% of loans disbursed by the banks in the country went to SMEs though the segment accounts for the maximum number of businesses. However, in the April-June quarter of 2018, the demand for UAE business loans witnessed a rise to +11.8 from 4.6 in the Jan-March quarter. Though the lending is expected to rise to +16.3 in the Jul-Sept quarter, the credit granting standard looks to become stiffen further, according to the forecast of the nation’s central bank.
A few days back, my friend Ahmed, who runs his own venture in IT networking and cabling business asked me if I could you explain to him the process of getting a business loan from Emirati banks. I feel the need to write down what I told him to let anyone looking for a loan for business in the UAE.
The write-up discusses the following key points to educate entrepreneurs.
- When you need business loan in UAE
- The loan factors
- Loan application
- Loan documents
- The approval process
- Verifications/ due diligence clause
- The disbursal
- Value-added benefits
Business Loan in UAE: Is It A Better Option Than Investors?
Capital is the lifeblood of a business and a key determinant of its strength and success. The funding for business comes from two primary sources – investors and bank loans – when your own savings are not enough. For SMEs, UAE bank loans are often a better option than investments from venture or angel investors.
Unlike equity investors, bank loans don’t force you to share the control of your business. You continue to have full say and there is no interference by others. Taking out a bank loan is a better option than selling part of your business especially when market potential looks optimum. You can use your business profits to refinance and expand without having to share it with investors. Also, you have a fixed schedule to repay gradually without additional reporting obligations. You can plan your business, run on your own terms, sponsor or participate in events, and purchase more assets in the UAE without seeking any lender approval.
The Loan Factors: Why There Are Rejections?
On an average, UAE banks approve only 40% to 50% of business loan applied by SMEs. Why so many rejections? This is primarily due to the stringent risk assessment adopted by the banks in Dubai and other major hubs of the country following the 2008 global meltdown. Also, your overall business condition plays an important role in the approval of a Dubai business loan.
Banks usually appoint a relationship officer or sales agent entrusted with the duty of scrutinizing the important aspects of your business and approval is subject to the positive report. Here are important areas subject to examination for a loan approval.
- Business character: What type of business you do? What type of company structure you have? The assessment also covers the profile of the owner and partners.
- Present business conditions: If the business has a market worthy of success and you are in control of business-related elements. Potential market movement and your ability to make profits. Is your business going upward? How is its market condition? If it has been expanding or you are fighting to prevent losses. Whether you can repay the loan considering your market conditions.
- Collateral: Do you have something to mortgage and if it is worthy of being a guarantee against loan default? Is the property owned by you with all right documents?
- Your cash flow: Banks look into your past and present cash flows, accounts, and future financial projections. Their main aim is to ensure that you have the ability to repay the loan.
- What capacity you have: What is the present capacity of your business and whether it can be scaled? Is your market base expanding or shrinking? Do you have enough capacity to fulfill a contract and generate enough cash to repay the loan? What kind of assets you have?
- Purpose of loan: How you are going to utilize the loan? Is it too run day-to-day expansions or to fund expansion, or recapitalize your business?
An established industry in a particular niche or a business with assets has a good chance for getting their business loan application approved. However, it is the turnover that matters the most, as loan repayment is the final thing in the mind of bank officials.
Eligibility for Business Loan in UAE
Each UAE bank has its own criteria set for approving loan applications of businesses. While the repayment ability is the foremost condition to grant a loan, a formal set of criteria every bank has to accept loan application. The most common eligibility conditions laid by banks in the UAE to consider a business loan request include the following.
- Duration of business: The majority of UAE banks consider a loan application only if a business is operational at least for 1 year. Banks, such as Mashreq, ADCB, and United Arab Bank have set the minimum length of business at 2 years. Though Rak Bank grants loans to one-year-old firms, it considers the application of businesses with the 6-month operational length under certain conditions.
- Location: A branch or subsidiary an offshore entity gets preference.
- Annual turnover: A minimum turnover is fixed for SME loans and this varies from bank to bank. On an average, most banks have fixed a minimum turnover of AED 1 million for a business to seek a loan. A few finance companies, such as Dubai First offer SME loans to those with AED 75,000 turnover. There are other finance companies that also consider those more than AED 50,000 turnover though with conditions.
- Account and address: You must have a business account, a record of invoices, and a physical address.
- Nature of business: A limited liability company can only seek business loans in the UAE.
- Nature of ownership: Whether you are the sole proprietor or have started the venture in partnership with others, you stand a chance to seek a bank loan. Free zone companies and subsidiaries of offshore firms can apply.
- Loan amount: SME loans in the UAE are of different types. The amount of loan each bank offers is subject to their discretion and your business capacity. You can seek a loan between AED 25,000 to 5 million depending on the banks’ lending policies.
- Collateral: Not required for loans up to AED 5 million.
Documents Required for UAE Business Loans
The list of documents needed to apply for a business loan is comprehensive. You must submit copies of/ in original as sought by banks:
- Emirates ID for locals
- Passport of owners/partners if they are expatriates
- Copy of UAE residence visa for foreigners
- Passport and ID of your UAE national sponsor
- Trade license or incorporation certificate
- Audited financial reports for 2 years
- Bank statement for the last 6 months
- Invoices of sales and purchases
- Proof of office and operations in the UAE (Ejari or tenancy /lease contract, utility bills in the name of your business, certified current account details, etc.)
- If a partnership firm, business agreement, share certificate, and details of Directors, POA, and all shareholders with more than 5% holding, directors, and POA along with their Emirati ID, passport, visa, whichever is applicable.
- If a firm, a resolution by the Board of Directors seeking a loan.
- If have an expat sole proprietor, his registered power of attorney of the expat with explicit declaration of the borrowing intention.
- FATCA self-declaration form
All these documents and information will form the basis of your KYC and are also for the larger scrutiny by the bank for the loan processing.
The Application: Making Your Case Rejection-Proof
Visit the bank with the necessary documents and approach the loan desk or relationship officer. Alternatively, you can approach online using a bank’s website and get a return call. Once the contact is established, inquired about interest rates, repayment period, preferential SME loans the UAE bank offers, and fees. While preparing the application, you must be mindful of a few essential things that are likely to have a bearing on your loan approval.
- Your Profile: The application must accompany the details about you, your partners if any, and business details. Showcase credentials and qualifications that can assure the bank of your business ability. Welcome any question or scrutiny about financial and business issues without being rigid.
- Business Capacity: A growing business has a better chance of getting loans from banks. Thus, it is important that your cash flow and business condition highlight achievements clearly to notice. Growth forecasts, assets, incomes, profits, best practices, features, and contracts must be in the spotlight. However, avoid any unrealistic claim or assumption that is questionable.
- The Loan Repayment: Make sure your application and documents address any possible concern on repayment, the foremost criteria for UAE banks to approve any business loan. To make things more clear, include the loan in future financial projections and mention how you are going to use it and generate more revenues.
UAE Business Loan: The Approval Process
As soon as you apply for a business loan in the UAE, the bank empowers a relationship or sales officer to look into it. The first step is the application of scrutiny, which includes your eligibility and document verification. The official or his representative may contact you to help you submit documents and answer queries.
Next is the underwriting stage. The official processes your UAE business loan request. He makes an analysis of your business position, assesses your financial position, and prepares the loan report. You may need to answer questions regarding your business and loan need. Representatives may visit at the given physical address to have a firsthand view of your business and operations.
Then the loan application is forwarded for approval. Based on your eligibility and business qualification, the business loan is approved or declined. If approved, the bank issues a commitment letter mentioning the loan amount, interest rate, conditions, and the repayment terms.
The final stage is the loan closing. You are informed of the details and provided a checklist of documents needed for loan closing. As soon as you submit items required, the loan application is closed. The amount is transferred to your account in a few days.
A few Things to Remember
- Banks offer different types of SME loans in the UAE with preferential interest rates.
- Often bank loans are influenced by business opportunities, such as recent deals, contracts, market expansion, etc.
- Each bank has its own set of conditions, minimum turn over qualification, interest rates, business duration consideration, and repayment tenor.
- No collateral is required for SME business loans in the UAE up to AED 5 million.
- Processing fees range from 1 to 2%.
- Early settlement of UAE business loans is allowed.
- Credit shield insurance is available.
- Every loan comes with a business current account and in most cases, banks offer a credit card.
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