An article by Hannah Curran, the founder & CEO of PureBorn 

In many ways, we are in an exciting era for SMEs. Accessible digital tools and platforms have enabled smaller business owners to streamline operations, reach wider audiences, and compete with their larger counterparts on a more level playing field.

Meanwhile, innovations like AI-driven analytics, blockchain for secure transactions, and cloud computing for scalable infrastructure have converged to empower SMEs to enhance efficiency and reduce costs while allowing for agile decision-making. 

Add to the mix the rocketing rise of e-commerce and social media, and you have unprecedented opportunities for businesses to connect directly with their customers worldwide.

In the MENA region, we have certainly seen something of an SME boom in the past few years—and yet, when it comes to financial backing, there are still challenges to overcome. According to the World Economic Forum, MENA-based SMEs represent 96% of registered companies in the region, but only 8% of bank lending is available to them, which severely impacts their growth and ability to hire. 

The main problem is SMEs often lack a framework for banks to gauge their creditworthiness and risk, making them hesitant to lend. Traditional financial institutions also tend to have strict lending criteria, requiring extensive documentation and financial statements. SMEs, with their limited resources and manpower, find it hard work to fulfil these requirements, further restricting their access to credit. 

The tide is turning to a certain extent, but while the banking market is evolving, it is not always easy for asset-light businesses to find the right banking partner and get access to finance. This is especially true for early-stage start-ups in the consumer goods space who face funding obstacles alongside high overheads and tight cashflow. Once you get over a certain revenue threshold of around $15-$20 million, banks are far more likely to offer their support because the risk is lower. But in the meantime, options are limited. If you look for venture capital, similar issues still arise for lower-value companies that are considered more volatile and don’t meet the fund’s aggressive growth targets. Another factor to consider is that if you do receive significant investment, you will be reducing the overall percentage of ownership, something to be cautious of when protecting your interests as a founder-led business.

Limited access to credit can slow down growth, and speaking for my own company, PureBorn, there have definitely been moments on our journey where we might have expanded or explored new ideas faster if financing had been easier. 

This all brings me to the benefits of convertible debt as an alternative to equity financing (the process of raising capital through the sale of shares in a company). 

With convertible debt, a business borrows money from a lender or investor where both parties enter into the agreement with the intent to have the loan repaid by converting it into a certain number of its preferred or common shares at some point in the future. The agreement specifies the repayment and conversion terms, which include the timeframe and the price per share for the conversion—as well as the interest rate that will be paid until either conversion or maturity.

My company only began using convertible loans last year but we have found the option a great tool to plug short-term funding requirements; we chose to use convertible debt to bridge from a 100% founder-financed situation to a Series A equity round. 

There is more to this strategy than just flexible terms. 

With convertible debt, the interest is carried over into the equity, reducing the immediate financial burden and resulting in less cash leaving the business, while still providing access to capital.

Plus, the option to convert debt into equity at a later stage also offers potential benefits for both the SME and investors. It allows the SME to delay valuation negotiations until the company has achieved milestones or demonstrated growth, while investors can participate in potential upside if the company performs well and they decide to convert.

Another bonus is that convertible debt can be attractive to investors seeking potential equity ownership in the company, as it provides the opportunity to benefit from the company's growth while offering downside protection in the form of debt repayment if the company does not perform as expected.

Finally—and this is a big plus for stressed-out business owners—compared to equity financing, convertible debt transactions often involve less complexity and faster execution, making it an appealing option for SMEs seeking access to capital without the extensive due diligence and legal processes.

When you need more money to achieve your business goals, it’s tempting to move quickly. However, it’s always wise to take a step back and apply a long-term, rather than a short-term, view. The devil is in the detail when it comes to any contract and a debt instrument is no different, so it is important to pay attention to what you are agreeing to. This is still a significant financial commitment, and businesses should treat it as such. 

As with everything in the entrepreneurial journey, the best approach is to ask for advice from peers, friends, and financial and legal advisors before you take the plunge.