Demand for bank loans to fund day-to-day operations at UAE businesses is surging as companies seek to expand after the global financial downturn. Bankers say the increased demand for working capital finance is helping to boost the economy by easing the flow of cash and enabling companies to buy stock.
Companies are seeking alternative finance as traditional funding such as bank loans remains trickier to access. Working capital finance is money provided by a lender to meet a company's expenses until it is able to repay the lender. Banks are more keen to provide such loans over conventional lending as their short-term tenure presents less risk. "We see an increase [in] focus and interest from companies to make the most of working capital after the financial crisis," said Anna Koritz, the head of global transaction services at Royal Bank of Scotland.
"Companies want to know how they can release working capital from their own balance sheets sooner and control their receipts from their customers." During the pre-crisis years, companies could easily obtain loans and extend overdrafts to expand their operations. Since last year, however, they have found it tougher to access affordable finance as banks have become more risk-averse and tightened lending requirements. As a result, companies are having to tap different forms of bank finance.
One of the alternatives is supply chain finance, where the bank acts as an intermediary in a transaction by paying a supplier on behalf of a buying company. The advantage of such finance is that it allows the buyer to pay later and the supplier to secure its money earlier. It also reduces the risk to banks by enabling them to rely on the creditworthiness of the buyer rather than the seller. Letters of credit issued by banks on behalf of companies to guarantee payment for the purchase of goods and services on credit is another form of alternative financing.
Ms Koritz said working capital finance could help develop the mix of funding sources companies could use, complementing traditional bank lending and bond sales. "Now that other sources of financing are no longer as easily available as they were before the crisis, working capital solutions are relatively attractive," she said. Working capital finance also encouraged companies to focus more closely on better cash management as that option helped companies to make better use of their cash flow, she said.
Standard Chartered reports almost 50 per cent more interest from companies in working capital products than before the financial crisis. "We see a lot of customers and a lot of them are looking for working capital finance rather than a loan," said Haytham el Maayergi, Standard Chartered's managing director for transaction banking in the UAE. "It offers more security for banks as they can see there's a continued flow of cash, which makes them more comfortable."
The advance of working capital finance was related to the demise of name lending, the practice whereby banks were willing to lend to companies on the basis of their size and reputation, say bankers. "Gone are the days of name lending as customers have got to provide more openness about their financial situations," said Ady Yatim, the head of trade finance and cash management corporates for Deutsche Bank in the MENA region.
"In 2010, in addition to traditional trade products such as bank guarantees and letters of credit we have been approached by some customers to provide them with alternative working capital solutions." email@example.com