The Debt Panel: 'Can I secure a business loan if I previously defaulted on credit cards?'

The Dubai entrepreneur has made Dh2.5m in sales since his trading company went live just over a year ago

Illustration by The National 

I worked in the UAE as a sales manager from 2003 until 2017, when I was made redundant due to restructuring. At the time I had three credit cards with varying outstanding amounts I had run up on normal household expenses and other personal requirements.

I spent eight months looking for a new job, which meant I missed payments on the cards. Because it was hard to secure a new role, I started a small electronics trading business with the help of friends and family.

The business has been operational for a year now and during that time I contacted the banks and paid off my cards with settlement plans from each bank. Two of the cards are now cleared completely (I paid them off in October and November last year) and I am still repaying the third one in monthly instalments. My outstanding balance is Dh11,600

I now need Dh200,000 to develop and expand my business. However, it is difficult for the self-employed to secure a business or personal loan and the options are very limited. Plus as a result of my poor credit score, owing to the settlement plans on my cards, I have been rejected from a couple of banks already. As the only partner in the business I have earmarked Dh6,000 as my monthly salary from the business. My monthly expenses are:

Remittance to India: Dh2,000

Credit cards payment; Dh2,000

Personal expenses (rent, groceries, etcetera): Dh2,000

Total: Dh6,000

I am 35, from India, but was born and brought up in Dubai. Is there any way for me to secure a personal or business loan in my current situation?  My company financials are in good condition – we have secured Dh2.5 million in sales since inception in April last year - and I meet the minimum requirements of most banks. NM, Dubai

Debt panellist 1: Philip King, head of retail banking at Abu Dhabi Islamic Bank

You have done remarkably well to get your finances in order and to establish a business with Dh2.5 million in sales.

Despite this, and as you have found, your chances of securing a personal loan from banks have been diminished due to your poor Al Etihad Credit Bureau score, which will lead to banks considering you a high-risk customer. You are also unlikely to have access to a business loan because of the criteria set by most banks - while you meet the recommended threshold for sales turnover, you still need to demonstrate the business’ sustainability over a period of at least two years to be eligible for financing.

You therefore need to exhibit prudence in managing your business, ensuring you have a robust business strategy that can deliver profits even in challenging market conditions. This means adopting a conservative approach to risk, especially when considering taking on debt. At this stage, consider whether you even need to take on leverage to support the business’ expansion. If your business is indeed doing well, you could use your profits to reinvest in the company.

If you do feel it is necessary to borrow to grow, you will have a greater chance in convincing banks to lend once you have established a track record of financial and operational performance, and can demonstrate the viability of your business going forward. The same goes for other non-bank financing options, such as private funding from early stage equity investors, who would provide you with capital for a stake in the business.

Another prospect to explore is finding available funding options from providers through the Thomson Reuters Accelerate SME platform. The website provides access to free repository of useful resources, and practical guidance for start-up businesses.

Debt panellist 2: Steve Cronin, founder of DeadSimpleSaving.com

Congratulations on building a successful business from scratch after being unemployed. Often necessity is the mother of invention. Your difficult few months searching for a job and paying off your cards have hopefully made you careful with the money of your business, which is very important for long-term survival. Remember, most small businesses fail within three years, so you have to manage your business sensibly.

This is also a reason not to take on debt for your business. Why do you need it? Do you want to be saddled with repaying it if, for some reason, your business does not do well? You are making a healthy revenue of Dh2.5 million. Is that not providing enough additional capital to support growth? Are your growth plans too ambitious for now? Revenue numbers are pure vanity anyway - what matters is your profit (operating profit and net profit) and your cashflow.

Is your company generating a healthy profit? If not, you will either have to make it profitable rapidly or abandon the business. You are not Uber, which can raise money for years without making any profit. Are clients paying you on time? It is quite possible to 'grow to failure' by expanding and then finding a major client does not pay you for months and your business dies from a lack of cash. The book Scaling Up by Verne Harnish will be invaluable for you as you grow and help you grow faster and wiser.

Instead of debt, consider offering equity in your business - you say the financials are healthy. An initial seed round can include friends, family, successful business owners and investors. Join local entrepreneur groups, practise your sales pitch and put yourself out there. You can also try crowd-sourcing equity sites and peer-to-peer lending sites if you have an interesting business, though the terms of the deal may not be as good as if you can arrange them on your own. Finally, make sure you hire a good lawyer to prepare the paperwork. It will make an enormous difference if you hit any problems with investors and certainly when you come to sell your successful business and enjoy the fruits of all your hard work.

Debt panellist 3: Ambareen Musa, founder and chief executive of Souqalmal.com

While credit history plays an important role in securing a loan, it isn't the only criterion banks look at. Your income stability and personal assets are also taken into account when evaluating your credit application. Make sure you do your research before applying to lenders. Check their eligibility criteria in detail and speak to a bank representative to get a fair idea of your chances of being approved if and when you submit a formal loan application. For instance, banks may require a business to be operational for at least two years to be eligible for finance. So even if your annual sales turnover meets the criteria, the fact that your business is just over a year old, may get your application rejected.

That being said, it is also important to space out your loan applications - If one lender rejects your loan application, it will lower your chances of getting your loan approved by the next lender. Further, multiple credit applications in a short span of time will negatively impact your credit score too.

It is common for banks to offer 'bad credit loans' to borrowers with a less than stellar credit rating in other developed banking markets. Although these bad credit loans aren't a commonly seen loan product in the UAE banking market, you may be able to secure a loan at a higher-than-average interest rate. Considering your low credit score, banks will look at you as a high-risk borrower. Therefore any credit facility you're offered will most likely come with higher rates, lower credit limits as well as higher restrictions.

Explore other finance options if the formal banking route doesn't help. You could look at peer-to-peer lending platforms in the UAE. Such platforms use crowdfunding technology to connect businesses in need of finance with investors. There's also the option to try and secure funding for your business from angel investors and venture capitalists or reach out to your family and close relatives to help you with an informal loan.

Last of all, remember your current credit score isn't permanent – you can improve it. If you keep making your future repayments on time, and keep a low credit utilisation ratio among other measures, you will be able to improve your score over time.

The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to [e-mail]