Money matters

One of the key challenges faced by resellers and IT start ups is the low credit availability and limited financing options. While many view the Middle East as a haven for SMEs and start ups, this perception is far from truth.

Experts believe that this apprehension to offer financing options to SMEs roots down to the perceptions of SMEs and start ups in the eyes of banking and finance institutions in the Middle East.

According to Vikram Venkataraman, director at Salvus Strategic Advisors, banks view these organisations as being high risk borrowers due to the following:

Concentrated high risk – Traditionally, these organisations focus on a niche product segment or a select group of buyers. While this may seem like a positive to the organisation in question, the bank looks at this element from a sustainability point of view, in that the risk managers often ask the question, “how would the business sustain its growth and its ability to repay the loan if competition within the product segment increases or if it loses out on its primary buyers?”

Key man risk – A majority of these organisations run on the qualifications and abilities of one key individual who assumes a number of roles from being founder and MD to sales and marketing. The question then arises on the organisation’s ability to sustain performance in a situation where this key individual is unable to perform or in the case of his or her long term absence.

Limited fall back options – The fact that these enterprises often depend on a key individual and focus on niche products and a select group of buyers mean they don’t have much to hedge the risk associated with the loss of any one of the previously mentioned elements.

Poor financial management – An unfortunate minority of SMEs and start ups actually invest in maintaining a transparent record of their accounts even fewer of these organisations understand the difference between financing and accounting. Most even fail to realise the importance of using proper accounting software to maintain records. This is why balance sheet lending is practically impossible.

Skip risk – Perhaps what makes the situation worse is the ability to exit the country without any hassles especially in the case of an organisation that has no tangible assets as is the case with most IT services or consulting companies.

All of the above in addition to the inability to articulate their financial needs results in their loan applications being rejected, he says.

Specific to the IT hardware and service companies in the region, banks believe the low barriers to entry associated with this industry together with the lack of exclusivity associated with distribution partnerships makes these businesses a risky deal. In addition, technology is a field with a very high obsolescence rate which makes business even more volatile.

According to him, the scenario is a lot more bleak for first time borrowers from mature companies because banks hesitate to lend to enterprises or individuals without a previous track record.

This is why, Venkataraman says that SMEs and start ups need to manage their accounts and finance records with a long term vision. “Begin with the assumption that in a few years time you will need to borrow whether it’s for expansion or reinvestment. Try and maintain clean accounts (less than four bounced cheques), if you can’t employ an in house accountant, outsource the task. Ensure that you use good accounting software and do not maintain your records on an Excel file. Get your accounts audited by a bank empanelled auditor (ask the bank you are most likely to approach for a loan to recommend good audit firms). Most importantly, open operating accounts with atleast two ‘right’ banks, never put all your eggs in one basket,” he says.

The ‘right’ banks Venkataraman believes are those that you know are most likely to lend, either with a strong background of operations in the SME and start up segment or one referred to you through a peer or colleague (who may have acquired a loan from the bank)

In addition to these recommendations, he advises that entrepreneurs and business owners build a good reputation with their customers and vendor partners for the bank is always more keen to lend when they have a few reputable and positive testimonials to turn to.

He concludes that the situation isn’t all bleak, more banks are venturing into the SME segment and some are even to begin focusing on the small and micro business segments. As is the case with all verticals, as competition within this space grows, Venkataraman expects the scenario to ease up for IT resellers and start ups. //


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