Collect Payments Or Wind Up? UAE SME’s warned!

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A new poll from Wirestork reveals that one in four small businesses say they are two months or less from closing permanently amid the economic downturn caused by the coronavirus pandemic. One in 10 (11%) say they are less than one month away from permanently going out of business.

This was however expected. In May 2020, the Dubai Chamber reported that a staggering 70% of businesses in Dubai may close their doors as the coronavirus pandemic and global lock down ravage demand. The Chamber surveyed 1,228 CEOs across a range of sectors between April 16 and April 22, during the emirate’s strictest lock down period. Nearly three-quarters of those surveyed were small businesses with fewer than 20 employees. Of the respondents, more than two-thirds saw a moderate-to-high risk of going out of business in the coming six months: 27% said they expected to lose their businesses within the next month, and 43% expect to go out of business within six.

Dubai, which has one of the most diversified and non-oil dependent economies in the Gulf, relies on sectors like hospitality, tourism, entertainment, logistics, property, and retail. Its hotels and restaurants are internationally acclaimed, but nearly half the restaurants and hotels surveyed by the organization expected to go out of business in the next month alone. Some 74% of travel and tourism companies said they expected to close in that time, and 30% of companies in the transport, storage, and communications expect the same fate.

“Full and partial city-lockdown measures are bringing demand in key markets to a standstill … The double-shock impact is pushing economic activity down to levels not seen even during the financial crisis,” the Dubai Chamber wrote in its report released Thursday, entitled “Impact of Covid-19 on Dubai Business Community.”

The Present

About one in four (24%) small businesses have already shut down temporarily in response to COVID-19. Among those that have not, 40% say they are likely to close at least temporarily within the next two weeks. This means a total of 54% of all small businesses report that they have closed or expect to close temporarily in the next 14 days. For many suppliers, delayed payments have become a bitter pill to swallow, especially for small and medium-sized enterprises (SMEs). These companies have become particularly vulnerable to market volatility, unable to find external financing owing to the continued fallout from the Covid financial crisis.

The Hard Market Crisis

So, what happens with all the money? The Middle East is developing a reputation of a ‘hard market’ referring clearly to its late and lack of payment system. A Debt Collection survey by Euler Hermes, France based economic research organization revealed that UAE is the second most complex country for debt collection around the world. While Sweden ranks an easy 30 on the debt collection complexity score, UAE has been termed as ‘severe’ with a high score of 81.

Insolvency-related complexity is a severe challenge in the Middle East than in Western Europe, the most frequent issue being the low probability to recover a debt as an unsecured creditor in practice when the liquidation proceedings have commenced. With many international organizations wrapping their bags from the Middle East, domestic firms are struggling too.

In early 2019, nearly 800 firms had exited from the UAE due to the inability to settle their dues. Previously, a March 2020 study had found that SMEs around the country were collectively owed $26 billion, rigorously handicapping the business’s ability to deliver quality projects within the decided budget and time. Especially in the Metals and Construction sector, notifications of overdue payments have soared by 26%.

The severe problem of reduced repayments has not only decreased the capacity of businesses to cover expenses such as rent and power but also has led to an increase in the stress and anxiety of numerous business owners. “Follow-up is the key to cash flow and the Middle East is yet to tap into the potential of receivable management services,” says Deb Weinstein, CMO at Wirestork, the region’s leading receivable management firm serving likes of Global giants like Google and Nestle.

The coronavirus crisis follows a number of years of declining revenues for some of the emirate’s most important sectors, primarily real estate and hospitality. Residential property prices had already fallen 30% from their 2014 peak amid oversupply and weakening demand, and revenue per available hotel room was down more than 25% since 2015.

Consumer debt is piling up in the Middle East and so is the problem of delinquent accounts. Many small businesses fail to recover debts on their own mainly because of a lack of legal intelligence; and possibly the lack of staff to chase the debtor. We solve that,” explains Viktor Vesnin, CTO at Wirestork. Given the foundational problem that the company offers solutions to, we already have a diverse clientele including financial institutions and Telco & insurance providers, continues Viktor.

Last year Dubai’s economy grew at just 1.94%, its slowest pace since the dark days of its near economic collapse in 2009. That crisis, more than ten years ago, was sparked by a property crunch that forced Dubai to seek a $20 billion bailout from its wealthier and more conservative neighbor, UAE capital Abu Dhabi.

But the global pandemic will likely exact a toll on Dubai far greater than the downturn of a decade ago. The Chamber’s report warned: “The impact of COVID-19 crisis on the world economy during 2020 is projected to be greater than the 2008-09 financial crisis.”