Bank loan

‘Can I take out a bank loan to pay my employees?’

I am running a business in UAE and am currently awaiting funds from investors. Due to a lack of cash for operating expenses, I was only able to pay my employees in installments and not on a monthly basis.

So far, I owe my employees around 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 suffer from severe mental stress due to my financial situation.

Is it possible to take out a loan to pay the salaries of my employees and the school fees of my children? However, my credit rating is less than ideal due to 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? DR, Dubai

Debt Speaker 1: Sameh Awadallah, Acting Global Head of Retail Banking at Islamic Bank Abu Dhabi

It’s not easy to get a bank loan if you have bad credit, but it is possible. Your history of not paying refunds on time is likely to prolong the application process.

Please note that lenders prefer to receive regular repayments that lead customers to repay their debts rather than having borrowers unable to manage short term payments.

I suggest you contact your bank and explain your situation so that they can advise you on the best option.

It is crucial that you contact your bank. It may be best for you to seek secure financing, with some form of collateral to guarantee that repayments will be made.

In the meantime, you should also check your credit report with the Al Etihad credit bureau. A credit score below 580 is generally considered bad.

If you think there is a mistake, don’t 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 financing application process.

Adopt better spending habits even after getting 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 bad credit rating. Additionally, you should be able to manage the debt to loan ratio.

If you have trouble making payments, it will further hurt your credit score. Therefore, I advise you to be realistic about the amount of money you intend to borrow.

If you are able to repay the loan on time, you will find that your credit score will improve. Whatever you decide to do, it’s important to keep your bank informed.

Debt 2 Panelist: Jaya Ratnani, Managing Partner at Freed Financial Services

People often start their own business with the goal of having more financial stability, but sometimes even the best of plans can go wrong.

Running a business during the pandemic must be extremely difficult and stressful. It is admirable that you were able to manage it with some delays and support your family and employees even in these difficult times.

An AELC credit score is a three-digit number between 300 and 900. It represents your creditworthiness and risk to lenders. Banks use credit score to decide whether to lend money to an individual and, if so, at what interest rate.

The ideal credit score must be above 570 to qualify for all banking products. However, lenders prefer credit scores above 700.

If you have missed loan repayments in the recent past, it will hurt your credit score. Even if you used to pay your dues on time, your recent history could lower 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 get a loan despite having a low credit score, you will have to pay a higher interest rate.

Since you’ve been late with your payments for the past few months, I’m assuming your credit score is very low, which will affect your eligibility for a loan. To prevent your credit score from deteriorating, you could:

  • Pay your dues on time. Making timely payments for at least one year is required to qualify for any new loan.
  • Request a payment holiday or a restructuring plan from your bank on your existing debts.

It is important that you contact the bank and request an appointment to discuss a restructuring plan. Alternatively, you can contact a debt counseling company who can help you understand your options.

It’s crucial that you don’t let this escalate further and risk non-payment, which will not only affect your credit score, but also have legal implications.

Debt 3 Panelist: Alison Soltani, Founder of Leap savvy savers

I would recommend evaluating your business operations and systems before considering taking out a loan.

Regularly paying your employees must be your priority because one of them could complain to the Ministry of Human Resources and Emiratization about your payment practices.

If this happens, you could incur additional costs in legal fees if the case is referred to the UAE Labor Court.

I would also advise you to take a close look at your company’s balance sheet and check all income and expenses. Are there overheads that you could cut or reduce and continue production?

Are all your systems effective and efficient? For example, if someone takes payments or schedules appointments manually, but it could be automated, this can be a strategy to reduce costs in the future.

Another option could be to sell business (or personal) assets to pay off debts before taking out loans at potentially high interest rates.

In terms of tuition and other personal expenses, you might consider how you could reduce them by researching cheaper school, housing, and transportation options.

Again, this isn’t ideal, but if your situation is stressing you out, chances are a loan is contributing to higher stress levels. Making changes to your personal situation may be the most favorable option.

After you’ve followed all the steps above and you still want to take out a loan, your eligibility will be assessed based on your income and credit history.

To qualify for a loan, your credit score must be above 570 at a minimum. A good score generally ranges from 680 to 730 and a great score, which provides access to more loan options and lower interest rates, is deemed to be above 730.

It may be possible to take out a loan against your business, as the AECB will generate a credit score for you as an individual and your business, but you still have to take responsibility for paying it back.

Before applying for a loan, assess 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 confident that funds from your investors will be received and your business is generating growing revenue, this may be an option. However, if future funds are uncertain, I would be wary of going into debt at this stage.

The Debt Panel is a weekly column to help readers manage their debts more effectively. If you have a question for the panel, write to [email protected]

Updated: May 11, 2022, 05:00

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