UAE businesses face late payments
The ripple effect of the low oil price continues to be felt as businesses report having to wait beyond the agreed terms to receive payment.
UAE companies, particularly SMEs, faced financial hurdles in 2016 after having to wait twice as long for payments. 2016 saw low recovery and low growth in the GCC due to the recent drop in the oil price, which impacted the liquidity in the market, according to Coface’s Chief Executive of Middle Eastern Countries, Massimo Falcioni.
The metals, construction, and building materials sector was the hardest hit, registering payments after 243 days; payment terms are usually 120 days. The chemical sector saw an average delay of 21 days over and above its usual 45-day terms, meaning it took 66 days to receive payments. The IT sector had an average 75-day delay on payments, with payments received after 105 days. Food distributors and retailers received payments after 79 days, instead of the usual 45.
“This liquidity issue had the knock-on effect of leading certain businesses to bankruptcy. The UAE did not have its bankruptcy law in place at that time, which is why we witnessed a high number of runaway cases–around 880 runaway cases were registered, mostly in construction and general trading. At COFACE we monitor 23,000 businesses in the UAE and Saudi, which means we also register the delay of payments to companies. We saw that they really suffered in 2016 due to these liquidity issues,” said Falcioni.
At an SME level, the obvious negative impact of late payments is on cash flow, but it can also lead to loss of productivity or even business closure. On a macro level, these consequences could have a major economic impact on the UAE’s national development plan which aims to create more job opportunities for its citizens, according to Saad Maniar, Senior Partner at accounting, consulting, and technology firm, Crowe Horwath.
“With poor cash flow due to late payments, SMEs are less likely to absorb new staff. Additionally entrepreneurs cannot afford to reinvest in their business if they do not have sufficient cash flow to fund that growth,” said Maniar.
SMEs will also struggle to meet their obligations to suppliers as well. Karl Jeffs, Founder of Gecko Media said he has had a few problems receiving payments from smaller business, PR agencies, and magazines. He added he has received payments within the agreed credit terms from larger clients, for the most part.
“As a photography agency, we are general the last to be paid. This is frustrating; we are a small business and we always pay our suppliers and contractors on time, often before we have been paid. Having said that, we have not had any non-payers yet, we always get paid eventually,” said Jeffs.
Flacioni said after the drop in oil price, some companies took quick action to better manage their cash flow and any working capital issues. They started by reducing their costs in labour by downsizing their organisations and they kept salary increases in the range of three or four per cent which is lower than preceding years. They have also started to review their payment terms they have with their customers.
At the end of 2016 the UAE Government took steps to help SMEs avoid failure and bankruptcy, as well as to deter further runaway cases, by approving and implanting its Insolvency Law, which will protect small business owners from criminal prosecution if they become insolvent.
Falcioni said by putting this law into practice will improve the ease of doing business in the UAE and will attract foreign direct investment. When an entrepreneur has an issue meeting their payment obligations but has an opportunity to restructure their debt, it can only improve the SME sector as a whole.