As companies tighten their belts in the wake of low oil prices, the effects are washing over small and medium enterprises, which struggle so much more with cash flow when payments are late, reduced – or withheld.
The UAE Banks Federation, which calculated that defaults by SMEs reached more than Dh7 billion last year, said it expected banks to tighten lending to SMEs.
Small businesses already struggle to get loans: the global consultancy Cedar Consulting says they account for only 5 per cent of total lending, despite the 300,000-strong ecosystem accounting for 94 per cent of all UAE businesses.
The lack of lending means that getting paid promptly is all the more important to SMEs.
An events business, speaking anonymously, told The National that late payments are “standard issue for service-based businesses” and, indeed, for firms “of all sizes and phases”. Many large companies are now employing 60-day payment terms, which “can be crippling to SMEs, especially when large amounts of money are at stake”.
“This has always been the case, but it does seem to happen more and more since the drop in oil prices,” the business owner adds. “Surprisingly, the issue happens more with larger companies than the small, private ones.”
Mohammed Nassar, managing partner of the steel and metal works construction contractor WMS Metal Industries, says that SMEs have, by and large, little recourse when it comes to getting paid.
However, he adds that the situation is not getting worse in the construction sector – because it was “bad to begin with”.
“Construction is not a point-of-sale transaction; it’s a difficult industry,” he says. “The sector never fully recovered from the 2008-09 problems, although there was a brief glimmer in 2015.
“It’s nowhere as bad as then, though, due to liquidity and availability of projects. Nothing launched has been rescinded, no project has stopped midway, all big companies are busy and getting paid.”
All the same, builders Arabtec and Drake & Scull both reported third-quarter losses of Dh1 billion last year.
So where can SMEs turn when a payment is delayed? Mr Nassar, whose nine-year-old business has 220 employees, says the small claims department of Dubai’s Department of Economic Development has helped, in his experience.
“Generally there is good faith here. Payment takes four to five months on average; in extreme cases it can take one to two years in instalments – and we, in turn, delay payments to suppliers. We all support each other,” he says.
“A couple of projects have been suspended and our client terminated by the paymaster, but we’ve written off 5 per cent, tops, through our history. I’m not going to sue one of the UAE’s big contractors for Dh80,000. Legal fees would double or triple that, and you’d just burn bridges and isolate yourself.”
Last summer the UAE cabinet approved a draft financial regulation law to help bail out companies at risk of bankruptcy and regulate accumulated debts.
Rachel McArthur, managing director of the content company Digital Ink, agrees that it can take a while to get paid, but warns not to work with anyone who will not sign a contract which forms “your main protection”. “A serious partner will have no problem signing your terms and conditions of payment,” she says. “And if it is a big service, don’t be afraid to ask for 50 per cent upfront towards costs.”
Wadih Haddad, founder and chief executive of self-storage firm The Box, which has been in business nine years, says commercial customers tend to go slow on payments because of internal processes and approvals, but “end up paying at some point”.
Individual customers cause “most of our challenges”, he says. “The defaulters end up fleeing the country, leaving the debt behind. We try to collect post-dated cheques and upfront payments to hedge our risk – and give 10 per cent discounts on upfront payments while imposing 5 per cent late payment fees.”
Mr Haddad adds that he only resorts to the legal route to collect payments if they have exhausted all other options.
“The customer will receive a legal notice and negotiate a final settlement,” he adds.
Noor Shawwa, managing director for the UAE of non-profit entrepreneur accelerator Endeavor, says it can take time for SMEs to build trust with their suppliers to command long payment terms.
“It is a common red flag when an SME has the majority of its business coming from a few large clients, leaving an entrepreneur vulnerable to a cash flow squeeze. Endeavor mentors usually advise entrepreneurs to offset their reliance on a few large customers.”
Mr Nassar hopes that in 12 to 18 months, the problems “bearing down” on the UAE economy because of oil prices will ease off. But getting your dues will continue to be hard, he warns: “The entire system is modelled in favour of large corporates in terms of access to finance and protection of rights.”
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