Question

Discuss the best funding options for Small and Medium Business Enterprises (SMEs) in Saudi Arabia to keep cost of capital optimum.

Answer 1

The Question Asking that discuss the best capital structure for SMEs in Saudi Arabia.

A Capital sstructure can be easily defined as a mixture of different sources of finance namely Debt and Equity. As per investment we need to pay interest for debt funding and dividend for equity funding. In certain counrtries we will get tax excemotions for interest on debt. but In Saudi Arabia, due absence of Income Tax the company cannot enjoy this benefits.

The average interest rate in Saudi Arabia is in between 3.65 to 7 percent annually. But normally every company paying average 40 to 55% of Net profit as dividen evry Year. So in the perspective of cost of capital equity is highly expense funding method.But as per Optimal debt - equity ratio (1:1.5) is accepted for company's growth perspective.

Most available funding options in Saudi Arabia are

a) Business Finance from Banking Institutions for SME

b) Foriegn Direct Investmet

c) Own Investment

d) Stock Market (only for listed companies in stock exchanges)