Whether you are an ambitious startup or an established company looking to upscale, there comes a time when all businesses could do with a helping hand and a cash injection.
In most cases, businesses will look to outside financing in the form of a debt or investment to boost their working capital. Last year some records were broken when it came to startups in the Middle East and North Africa (MENA) region. Over 560 deals were made, totalling more than USD 700m of investment.
And with events such as GITEX Startup Movement and angel investor networks like Envestors, there are certainly opportunities out there.
So let’s look at how to get funding for your business – and how to prepare.
Practical ways to get funding in the UAE
If your startup or SME needs funding, you’ll need to look at what financing options are available. For example:
Bank loan: The most conventional way to get funding is a bank loan. Although not impossible, getting a business loan, for a startup or new entity, from a bank in the UAE can be difficult. It typically requires a lot of paperwork, an impeccable business plan, and a good credit history.
However, there are a few banks in UAE that currently offer loans specifically aimed at SMEs and startups. If you want to apply for a bank loan, compare interest rates, collateral, and length of the loan to find out which would serve your business needs best.
Crowdfunding: Funding projects by raising money from a large number of investors through licensed online platforms is still a fairly new concept in the UAE.
However, in a bid to enhance SME and startup growth in the UAE, the Dubai Financial Services Authority (DFSA) has recently introduced a regulatory framework to help startups and SMEs raise funds through crowdfunding.
Common crowdfunding models are:
• Crowd-sourced equity funding (CSEF) – investors will provide your startup with funds in return for a share in the company.
• Peer-to-peer lending – like a bank loan, you’ll borrow money and pay it back with interest at an agreed rate or a rate fixed by the crowdsourcing platform.
Some notable crowdfunding platforms are available in the UAE.
Venture capital and angel investors: The rapid growth of startups in the UAE has attracted a lot of attention from global venture capitalists who pledge a financial investment in exchange for equity in your business.
Venture capitalists are often angel investors: someone with a strong financial standing who is willing to offer a financial input and mentorship to your business. There are several stand-out venture capital investors in the UAE.
There are also various local events, held throughout the year, which bring startups and potential investors together. For example, the Blockchain Innovation and Investment Summit attracts investors from Dubai and the Middle East who are looking for Blockchain startups to invest in.
The key is to thoroughly research your potential investors and deliver a compelling pitch with realistic figures and a solid business plan.
Getting prepared: study your current income
While it’s important to consider your forecast income, you should focus on what is actually coming in each month. In other words, you need current figures – not projections.
Work out exactly what is coming in each month. Beware of payment terms. On paper you may be earning a certain amount, but you might not actually receive payment for another three months (aka ‘accounts receivable’).
Once you know what you have coming in you will be able to better work out the amount of funding you need to cover your cash flow.
Look at your outgoings: As well as your current income, you’ll need to work out how much money is going out each month. Monthly expenses such as employee salaries, office and equipment rental and taxes are all forms of current liabilities (aka ‘accounts payable’).
This will give you a clear picture of your current cash flow – money that is coming in and going out of your company each month. Knowing your monthly cash flow will help you determine how much working capital you have and how much you’ll need to cover any shortfalls.
Working capital is the difference between your income and outgoings. It gives you a clear idea of whether you would be capable of covering any unexpected liabilities in the course of a year.
Understanding working capital and cash flow is essential for determining the financial health of a business. Your success in securing future funding will be influenced by these two factors. In most cases, you’ll need to demonstrate a positive working capital in order to secure funding.
How to calculate your working capital
The working capital formula is the same for any business. Current assets minus current liabilities = working capital. Your balance sheet will give you a snapshot of your current assets and liabilities.
Current assets are typically listed from top to bottom based on how easily they can be converted into cash, for example:
• Cash and foreign currency
• Marketable securities such as stocks and bonds which can be easily sold
• Accounts receivable – money that your customers owe
Current liabilities, or accounts payable, are listed by their due dates, the most recent being at the top of the list. These might include:
• Wages to be paid
• Loan payments
So, if your total current assets are AED 100,000 and your total current liabilities are AED 50,000, you’ll have a positive working capital of AED 50,000.
Once you know what your working capital is, you’ll be in a better position to decide whether extra funding will be needed for your next stage of business growth.