I run a business in the UAE and am currently awaiting funds from investors. Due to a lack of cash for operating expenses, I have only been able to pay my employees their wages in instalments and not on a monthly basis.
So far, I owe my employees about Dh200,000 ($54,458) in arrears. I have also been unable to pay my children’s school fees of Dh70,000 for this term and the school is threatening to suspend them. I am under severe mental stress because of my financial situation.
Is it possible to take out a loan to pay my employees’ salaries and my children’s school fees? However, my credit score is not ideal because of late card and car loan payments over the past few years. What should my ideal credit score be if I apply for a loan? Can you advise me on what to do? RD, Dubai
Debt panellist 1: Sameh Awadallah, acting global head of retail banking at Abu Dhabi Islamic Bank
It is not easy to obtain a bank loan if you have a poor credit score, but it is possible. Your history of failing to make repayments on time is likely to draw out the application process.
Please note that lenders would rather receive regular repayments that lead to customers eventually paying off their debts than having borrowers being unable to manage payments in the short term.
I suggest that you contact your bank and explain your situation for it to advise you on the best option.
It is crucial that you communicate with your bank. It may be best that you apply for secured finance, with a form of collateral to guarantee that repayments will be made.
In the meantime, you should also check your credit report with Al Etihad Credit Bureau. A credit score below 580 is usually considered poor.
If you believe there is an error, do not worry. It can be corrected by registering with the AECB and filing the relevant documents.
You can also think of ways to improve your credit score during the process of applying for finance.
Adopt better spending habits even after securing the loan and ensure that other financial commitments are paid on time.
Your bank will want to know that you are trustworthy, even if you have a poor credit score. Moreover, you should be able to handle the debt-to-burden ratio on the loan.
If you struggle to make payments, it will do more damage to your credit score. Hence, I would advise you to be realistic with the amount of money you intend to borrow.
If you are able to repay the loan off on time, you will find that your credit score will improve. Whatever you decide to do, it is important to keep your bank informed.
Debt panellist 2: Jaya Ratnani, managing partner at Freed Financial Services
People often launch their own businesses with the aim of having more financial stability but, sometimes, even the best of plans can go awry.
Managing a business during the pandemic must be extremely challenging and stressful. It is admirable that you have been able to manage it with some delays, and provide for your family and employees even in these tough times.
An AECB credit score is a three-digit number between 300 and 900. It represents your creditworthiness and risk to lenders. Banks use the credit score to decide whether to lend money to an individual and, if so, at what interest rates.
The ideal credit score should be above 570 to avail of any bank products. However, lenders prefer credit scores that are above 700.
If you have missed loan repayments in the recent past, it will hurt your credit score. Even if you had a great record of making timely payments towards your dues, your recent track record could bring down your credit score.
Having a low credit score could also lead to lower limits on credit cards or customers could have their loan applications rejected. Even if you manage to secure a loan despite a low credit score, you will have to pay a higher interest rate.
Since you have been late with payments for the past few months, I presume your credit score is very low, which will affect your eligibility for a loan. To save your credit score from worsening, you could:
- Pay your dues on time. Making timely payments for a minimum of one year is required to be eligible for any new lending.
- Seek a payment holiday or a restructuring plan from your bank on your existing liabilities.
It is important you contact the bank and request a meeting to discuss a restructuring plan. Alternatively, you can reach out to a debt counselling company that can help you to understand your options.
It is crucial that you don't let this escalate any further and risk non-payment, which will not only affect your credit score but also have legal implications.
Debt panellist 3: Alison Soltani, founder of Leap Savvy Savers
I would recommend assessing your business operations and systems before considering taking a loan.
Paying your employees regularly must be your priority as one of them could complain to the Ministry of Human Resources and Emiratisation about your payment practices.
Should this happen, you might incur further charges in legal fees if the case is referred to the UAE Labour Court.
I would also advise you to look carefully at your business balance sheet and check all income and expenses. Are there any overheads that you could cut or reduce and continue production?
Are all your systems effective and efficient? For example, if someone is taking payments or scheduling appointments manually but it could be automated, this may be a strategy to cut costs moving forward.
Another option could be selling business (or personal) assets to pay debts before taking on loans with potentially high interest rates.
In terms of school fees and other personal expenses, you might consider how you could reduce them by looking at cheaper school, housing and transport options.
Again, it is not ideal but if your situation is leaving you stressed, the chances are that a loan will contribute to higher levels of pressure. Making changes to your personal situation may be the more favourable option.
After going through all the above steps and you still wish to take on a loan, your eligibility will be assessed by your income and credit report.
To be eligible for a loan, your credit score must be higher than 570 as a minimum. A good score typically ranges from 680 to 730 and an excellent score, which enables access to more loan options and lower interest rates, is deemed to be above 730.
It may be possible to take a loan against your business as the AECB will generate a credit score for you as an individual and your company, but you still must take responsibility for paying it back.
Before making a loan application, evaluate the likelihood that you will be able to continue paying your employees and other expenses, in addition to loan repayments and accrued interest.
If you are certain that your investors' funds will be received and your business is generating increasing revenue, this may be an option. However, if future funds are uncertain, I would be wary of taking on debt at this stage.
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 firstname.lastname@example.org