The Challenge of Raising Capital for your Business
24

Jan 2020

In current times, the notion of having one's own business is a prevalent idea. This is the reason that there is an increase in the Small and Medium Enterprises all over the world. Many entrepreneurs have the idea to start a new business but very less are able to get the required funding for the company. If the proper financing for a company is not achieved, the company may have to shut down in a few years.

The inability to acquire the correct amount of funds can also lead to tremendous stress which can affect the health of a person adversely. Many of the corporates fear that if they are not able to acquire the necessary funding, they might have to close shop whereas the providers of finance are not so confident about funding every up and coming business idea. They require a deep understanding of the business and other guarantees and securities before they can give out the funds.

Dubai in particular and UAE, in general, are on a learning curve and are inviting people in business and entrepreneurs from all around the world with open arms. This is the reason there has been a substantial increase in the number of Small and Medium Enterprises (SME) in the United Arab Emirates.

The SME's play a huge role in UAE as almost 95% of all the enterprises in the country are made up of SME's, and nearly 42% of the workforce in the country are employed by the SME's. This is why there is a need for focusing on SME's and understanding the problems faced by them.

Challenges Faced by the SME’s

There are many challenges faced by the businesses in the UAE, which is evident from the fact that there are many trading houses and other companies which become defunct and leave the country overnight. In the process of moving away, these companies leave behind a significant amount of bad loans for the banks. This has led to the fact that now the banks have put up stringent laws and rules for granting loans which though have decreased the chances of defaulting a loan but have also caused a barrier for funding for even the good business organizations.

Some of the challenges faced by Small and Medium Enterprises in the United Arab Emirates are:

1.Absence of a Proper Business Funding Plan

A business funding plan should address every possible problem which the company may face in the future. One of the vital topics which it should discuss is if the company should rely on the Private sources for the capital needs of the company or should they look into the government sources of funding. 

2.Defining your funding strategy

The management of the company should be evident upon the basics of the funding strategy. It is essential that the company should possess the answers to specific questions such as what is the optimal gearing level for the business? What should be the ratio of fixed capital, variable capital and working capital? , if the company should rely entirely on obtaining a solution from debt or should the company expand through the dilution of its equity stakes or both, and many other questions.  

3.Finding the right balance between Equity and Debt for funding

Financial leverage plays a significant role in the existence and growth of a company. The companies need to decide if they should use a higher level of debts or a lower level of debt. The Companies which use a high level of debt may get the required funding but face considerable risk as in case they miss a payment, the company will be shut down. Leveraging a company can increase the return on investment for the company, and there is also a tax advantage which is usually associated with the borrowing.

4.Finding the correct funding instrument

There are many financial instruments which can be used to fund a company, but using the particular tool of finance for funding of the company will be decided upon various requirements of the company. There have been cases where countries or businesses are massively affected by a crisis or instigate a financial disaster by using the wrong kind of funding solution.

A company can tackle the problem of raising finance for a company by keeping the financial history of the business clean and spot-free. The management should also be in connection with the right set of financial institutions and bankers so that the challenge of raising capital can be overcome.

Are you looking to set up a small company in the UAE then it is recommended that you avail the services of a financial firm such as JAXA Chartered Accountants which will properly plan the finances of your company and will also provide you with various services which will enhance your business further? For more details, Contact Us. We will be happy to help you.