A large portion of SMEs fail within the first year of operation due to an inability to access finance. They find it very difficult to get financing from banks and other conventional sources, and face a rejection rate as high as 90%. In this article, Craig Moore explains how to manage risk in business.
There are some 300,000 Small and Medium Enterprises that contribute more than 60% to the UAE’s GDP, providing more than 42% the jobs in the country, the Development Enterprises Company reported. However, SMEs find it very difficult to get financing from banks and other conventional sources, and face a rejection rate as high as 90%. Business that do successfully get financing often face rigid terms, with some banks charging interest rates of up to 26% annually, undermining the chances of profitability.
Access to affordable funding can make the difference between expansion and bankruptcy, without which SMEs risk entering the dreaded danger zone. A large portion of SME failures we have seen arise from the inability to access finance. Cash remains king for them, as it is vital to enabling SMEs to grow, succeed and ultimately create jobs that grow the economy.
But things don’t have to be this way. Today, there are viable alternatives to traditional banking such as peer-to-peer financing, a field that is rapidly becoming a mainstream solution for SMEs. Beehive, the UAE’s first online marketplace for peer-to-peer financing, has brought this proven financing concept that has seen huge success in the UK and USA, to the Gulf, focusing initially on the UAE.
But while initial financing is a huge challenge, the ongoing cash flow problems of a business pose another danger for SMEs. Often, businesses spend their cash on expenses before even seeing any revenues from sales, leading to a liquidity gap. Even when a business is profitable, it can face cash flow timing issues that can prevent it from covering expenses such as salaries and rent. This can significantly hamper development and restrict the growth of an otherwise healthy and successful business.
In response to this need, Beehive recently launched its invoice financing service as a short term financing solution that allows businesses to get cash in advance on invoices from large companies. Invoice financing provides businesses with faster access to cost-effective sources of funds that can be a critical lifeline that boosts their working capital or cash flow.
There other danger zones, too, like failing to embrace technological innovations, losing touch with customers and failing to spot market changes, as well as failing to harness the human capital in the business.
There are technical solutions designed specifically for SMEs and managers rarely even have the time to explore the solutions that exist. Technology creates a more level playing field and is vital in helping SMEs compete with larger competitors.
It is essential that business owners “take time to save time” as it can help reduce costs, enable more efficient development, and bring products and services to market more quickly.
Some entrepreneurs tend to retreat into their own world once they launch a business, focusing on the day-to-day operations while forgetting to keep an eye on the market. This isolation often tends to be counterproductive; how can you turn your eyes and ears away from the very market in which you identified a potential opportunity and based your whole business model and proposition?
Keeping your pulse on the market and listening to your customers should be the focus of every business to remain relevant to its customers and to differentiate itself from competitors.
Human capital is another crucial enabler of any business which plays an indispensable role in steering a business’s path towards success. Hiring the right employees with relevant skills and ensuring their continuous development is a key driver for maintaining an SME’s competitive advantage. Making the bad decisions when finding, training and retaining staff can be very costly, both from financial and morale perspectives. It is therefore even more critical for SMEs to get it right as compared to larger corporates.
Small and medium-sized enterprises are a fundamental pillar of a robust, thriving economy. The SME sector in the UAE, a massive contributor to the UAE GDP, will play an increasingly significant role in driving the country’s advancement and sustainable growth towards the vision of being a leading nation on the global stage. However, SMEs will only be able to deliver on their potential if they are able to access the financial resources necessary to start, sustain and grow.