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SME Matters: Mapping out the financial life cycle of a company

In order to scale, SMEs need proper financial inclusion, adapted to their development stage. Here is how they should approach their growth path’s financing:

Small and medium enterprises (SMEs) are major economic drivers and account for about 94% of businesses in the Emirates. There are specific sets of financing challenges that micro/small- and medium-sized enterprises face, and different solutions that they can adopt. To support international ambitions and maintain their momentum, financial stability and support are essential.

Small and medium enterprises (SMEs) are major economic drivers globally, and even more so in the UAE.

Indeed, according to the World Bank and the UAE’s Ministry of Economy, they account for about 90 percent of businesses in the world and 94 percent in the Emirates.

They generate more than 50 percent of the private sector’s employment worldwide and a whopping 86 percent in the UAE. And they contribute almost 50 percent to the global GDP, and 53 percent of the Emirates’ GPD in 2019.

SMEs, that are traditionally involved in either trade, manufacturing or services, go through various development stages that can be classified from start-up – when the business is actually launched – to micro, small, medium and large, based on each category’s number of employees and turnover, as the table below shows:

Segment Trade Manufacturing Services
Micro enterprises ≤ 5 employees;

or ≤ AED 3 million annual revenues

≤ 9 employees;

or ≤ AED 3 million annual revenues

≤ 5 employees;

or ≤ AED 2 million annual revenues

Small enterprises 6 – 50 employees;

or ≤ AED 50 million annual revenues

10 – 100 employees;

or ≤ AED 50 million annual revenues

6 – 50 employees;

or ≤ AED 20 million annual revenues

Medium enterprises 51 – 200 employees;

or ≤ AED 250 million annual revenues

101 – 250 employees;

or ≤ AED 250 million annual revenues

51 – 200 employees;

or ≤ AED 200 million annual revenues

Source: Cabinet Resolution No. 22 of 2016 defining an SME under the UAE law.

They each evolve at their own pace, but the ones that scale up rapidly generate on average 3.4 times more revenues and eight times more jobs than other SMEs in the country, as per a PwC report that, however, shows fast-scaling organizations represent on average only five percent of the UAE’s total. 

Access to finance – a critical factor in their ability to scale up – is one of the biggest challenges UAE SMEs face, with 61 percent of them saying that securing finance is their second biggest concern, as per a 2018 report by the Dubai Chamber of Commerce. 

Khalifa Fund data shows that approximately 50 to 70 percent of SMEs applications for funding are rejected by conventional banks, with loans to SMEs accounting for just four percent of the outstanding bank credit in the country.

Here are the specific sets of financing challenges that micro/small- and medium-sized enterprises face, and the solutions that they can adopt:

Micro and small enterprises

Micro and small businesses are often considered high risk, due to their small number of employees, limited assets, focus on their immediate survival, lack of a proven record and often haphazard financial management. 

At the micro stage in particular, revenues generation is often irregular and unreliable for at least a couple of years, meaning that these organizations have to keep their costs under tight control and aligned with their actual income.

They are therefore treated conservatively by banks and less susceptible to access financing – even though they are the development stage that would benefit the most from it.

Indeed, beyond the basic ability to open a bank account in order to merely operate, an International Monetary Fund report indicates that, for example, “access to financing increases employment growth by about 3.5 percentage points among micro and small enterprises, compared with only 1.2 percent for larger firms.”

Small companies with growth potential but elevated risks may also attract venture capital and angel investors. Moreover, they can leverage various regional and international programs that can help with financing and provide much-needed mentorship, such as the Khalifa Fund, the Mohammed Bin Rashid Establishment for Small and Medium Enterprises (Dubai SME), the Arab Monetary Fund and the World Bank, among others. 

Medium enterprises

As organizations grow, so do their financing needs – especially considering that, according to a Dubai SME report, 51 percent of Dubai SMEs export to other countries (compared to 44 percent in the European Union, for example) and 40 percent of trading SMEs in the Emirate generate more than half of their sales from international markets/consumers. 

To support these international ambitions and maintain their momentum, financial stability and support are essential. 

At this stage, medium-sized businesses can start showcasing the performance track record they have been building and demonstrate they are reaching the next maturity level: at this pivotal period in a company’s life, a key milestone is the adoption of proper corporate governance practices – such as setting up a structured management team, including a CFO, to take over certain duties performed by the owner so far and focus on extensive operational and strategic planning.

As a result, sources of credit such as bank loans or asset-based lending should become increasingly available – and this loan securitization will often help mobilize new financing. 

Private equity and venture capital remain important avenues for these organizations to scale, along with corporate trust services (such as real estate services and commercial escrow services) and financial market solutions (such as FX hedging, interest rate hedging, commodities, comprehensive risk management solutions). 

With the proper ecosystem, they will become large enough to focus on scaling globally, managing risk and protecting the value that they have built over time. 

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