Every small to medium enterprise (SME) needs a cash injection from time to time, whether to finance new equipment, a commercial property, an expansion plan or short-term funding to see a business through a cash flow crisis.

However, unlike corporate entities, SMEs do not have direct access to the debt and equity markets to finance those needs, which is why many still turn to the banks for loans. The type of finance available depends on what the SME is borrowing the money for. This guide will help to explain the different types of loans on offer to SMEs in the UAE.

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Business finance

A business loan is very similar to a personal loan, except that it is intended solely for a company’s needs rather than an individual. Like a personal loan, a bank will lend an agreed sum of money over a set period of time, with the interest rate and monthly repayments fixed over the loan’s tenure.

Business loans for SMEs are designed to either provide working capital, to get a business rolling, or short-term cash relief when times are tough. They generally come with a higher rate of interest than a standard consumer loan; how high depends on how long a business has been operating for, as well as the amount of collateral available for a loan.

As a result, smaller enterprises and start-ups often struggle to gain approval as eligibility may only apply to those operational for a certain number of years, with a high minimum annual turnover.

A bank’s willingness to lend can also depend on the type of company applying, i.e. a Limited Liability Company (LLC) or a partnership, and whether the company opens an account with the lender.

Documentation required for approval is lengthy; it can include a copy of a company’s trade license, a year’s worth of audited financial statements and copies of residency and passport documentation, company utility bills as well as contracts with suppliers and customers. The bank may also want to conduct annual reviews to flag up any potential issues over the future repayment of the loan.

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Equipment finance

When a business decides to expand, the company may need to invest in new machinery, vehicles or other commercial assets. For these types of medium to long-term capital assets, an SME can approach a bank for equipment finance.

Depending on the sector your business is in, this type of business loan will cover everything from buying new vehicles, such as lorries, vans or company cars to medical equipment for a clinic, professional equipment for an office and construction equipment.

Banks in the UAE generally offer loan tenures of up to 48 months, and the loan will often fund up to 100 percent of the equipment cost. The financial institution may offer the option to refinance existing assets to help pay for new items, and ask the borrower to submit monthly financial statements and to take out insurance cover on the item or items that have been financed.

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Commercial mortgages

Commercial real estate loans are designed to either finance the purchase of commercial property or to provide added cash for the SME that wants to borrow more than a standard business loan can offer.

For the SME looking to buy commercial property – either as an office space, a showroom, a shop, a warehouse, and so on – the loan would be used to finance that purchase.

Eligibility can depend on where the commercial property is, i.e. inside or outside the UAE or which emirate, where the company is registered as well as how much the SME wants to borrow and for how long.

However, for the small enterprise that wants a bigger cash loan, it can receive finance from a bank for general business needs against the future rental income on its existing property holdings.

This means that an SME can potentially borrow more over a longer tenure than a standard business loan. A business loan that is only secured by a company’s inventory, for example, will have a shorter loan tenure and a higher interest rate applied than a commercial real estate loan that has been secured by a company’s commercial holdings.