Lending craze FundingCircle.com shuns banks

The Life: A website coming to the UAE links start-ups with people who will lend money, but credit checks will be vital.

Rony El Nashar, the founder of SeedStartup, was previously the head of venture capital at The Khalifa Fund. Andrew Henderson / The National

It is a common dilemma across the Emirates: you're running a small business and need a loan to take your company that one step further. But you are hitting walls at the bank and your business plan is in danger of remaining exactly that - just a plan.

Fortunately for UK residents, this conundrum now has an answer. A lending craze is sweeping the UK and local experts say the concept could be transferable to the UAE.

FundingCircle.com links small businesses with people who want to lend money at an attractive rate, cutting out banks.

Almost 7,000 people have signed up to FundingCircle.com, either as a small business borrowing money or as Joe Bloggs lending his cash.

Since August last year, about £10 million (Dh58m) has been loaned to almost 300 small companies at an average rate of 8.4 per cent, and so far, less than 0.5 per cent of the total loan book has defaulted.

Investors spread their risk over at least 20 businesses and can lend to up to 100 companies if they want to diversify further.

"It's clearly transferable," says James Meekings, the founder of FundingCircle.com.

"Most important is the amount of credit information that's available and audited in some form in the country."

FundingCircle uses credit agencies to examine the creditworthiness of a small business. If it passes various criteria, it receives a loan. Experts say this process is the biggest obstacle to transferring such a scheme to the Middle East or the UAE.

"The website depends on credit rating systems being available," says Rony El Nashar, the founder of a new angel investing concept called SeedStartup and previously head of venture capital at The Khalifa Fund.

"In the UAE we do not have a credit bureau and that's a big problem for business in the Middle East."

However, the UAE is developing a nationwide credit information company that will enable banks to determine an applicant's credit history.

"From an SME point of view, the website makes a lot sense to address the financial needs in the region," says Stephan Schubert, an affiliate professor of entrepreneurship at Insead business school. "But I see quite a few challenges on the investor side."

Mr Schubert believes the transient nature of many expatriates means they do not want to tie up their money in businesses in the UAE, while Emiratis usually already have exposure to companies.

Rather than a loans-based website, Mr El Nashar believes a better business model would be to link the general public with small businesses through equity funding because it is banned under Sharia law to earn interest from loans.

"In the Arab world it is taboo to make money by lending money," he says. "FundingCircle could be adapted to work if you transferred it into an equity model rather than debt."

Experts say the real lending gap for businesses in the Emirates is among start-ups, which FundingCircle does not address because a small business has to have two years trading experience to qualify for a loan. Mr Meekings says he did consider a website in the UK to help with start-up debt and equity. However, he says analysing a business for start-up funding requires a totally different skill to offering finance to young businesses.

Checking the creditworthiness of businesses through a bureau and running analysis on their financial statements takes much less time than meeting a start-up's management, understanding the idea and then grasping the market.

This more complicated process means the general public are less likely to hand over their hard-earned cash to a website, Mr Meekings says.

"You have to give people confidence that they will get their money back again," he says.