I recently saw a survey in the UK that 55 Billion GBP is owed in late payment of invoices to UK companies.
This is a staggering amount and a sizeable chunk of their GDP. I would hazard a guess that the figure is even higher in the MENA region. Many people I speak to in the SME sector have common issues with getting paid on time. In fact some of the problems of payment force many companies out of business, put others off doing business in the region and kill some great ideas before they even get started.
This article aims to dispel some of the myths about doing business in the MENA region and aims to provide guidance in securing prompt payment. I have run SME’s in the UAE and UK for the last 14 years and I can cite only two cases where I haven’t been paid. The first case was in the UK where the company folded. The second case was in the UAE where I found that I could not enforce payment due to bad planning on my part - I vowed that this would never happen to me again.
The effects of late payment
The figure mentioned above demonstrates that a considerable amount of money is owed to UK companies. Assuming that money normally tends to flow – or trickle – from larger companies to smaller ones, the effect is that weaker businesses would tend to provide zero or low interest loans to cash-rich larger businesses. This is surely inefficient. Getting paid is essential for the survival of your business.
Prompt payment gives your business stability. The cash would immediately have a larger marginal impact on hiring and investment. As it’s the smaller companies that are mainly owed, that cash would go to businesses with a greater need and would not be for storing cash on their balance sheets. In addition, because of the multiplier effect, however much of that money was then spent it would consequently have an even greater impact on economic growth.
On a catastrophic level, cash flow issues may force viable companies out of business altogether. Not only do you have to scrap and fight for cash you have to figure the time factor on chasing invoices. Once again this is largely an SME problem. SME’s are seen as a major economic growth driver, creating jobs and hence arguably, the need for cash flow is often greater.
Taking these factors together, it is clear that there is a lot to be gained by solving the cash flow problem.
Background work and research
It is important you do your research and know the systems, protocols and customs of getting paid. The UK, for example, is well protected and regulated. It has clear bankruptcy laws. The MENA region’s laws aren’t as evolved but that doesn’t mean to say they are not as equally efficient. You should also understand the consequences of not getting paid. Many companies in Europe doing business in the MENA region are surprised and unprepared for the very different legislative framework of chasing debt.
Research the company you are about to do business with. Look through their portfolio of clients, compare their services and prices, read referrals and testimonials. Check whether the company belongs to a legitimate, national and industrial organisation; someone authoritative which you can report them to, should any problems arise. Do as much research as you can to check the credit worthiness of that company. The bankruptcy rules in the UAE for example, are unclear and it’s certainly a lot easier for a company owner to fold a company, thereby avoiding paying a debt and walk away from it.
If you have any doubts about the company simply don’t do business with them or at least be prepared to write off the debt in the event that it refuses to pay your invoice later down the line.
Make sure your business terms are signed
Make sure your business terms are signed and stamped by both parties – this is a must. If you are doing business in the MENA region the contracts should be governed by the Dubai International Financial Centre (DIFC) Laws and subject to the jurisdiction of the DIFC Courts. I will briefly discuss the DIFC Courts later including how they are providing business stability through their framework and why you should use them.
In my experience, there is a culture in the Middle East of suggesting payment terms between three to six months. Be strong and do not agree to such terms. Invoices should be settled within 30 days. Say "no" to those "interest free loans" - if we all stand strong, then collectively we can change this approach!
If you can, insist on upfront payment
If you are in a business that allows it, always insist on upfront payment and don’t be afraid to ask. Many professions ask for payment, either 50 percent or 100 percent up front these days as it saves time chasing for payment once the work has been done.
As well as sending an electronic version of the invoice, send a hard copy by courier. Make sure your terms expressly mention the 30 day payment period and contain a DIFC Courts jurisdiction clause. Some companies offer an early payment discount if the invoice is settled within 14 days. This would depend on how important cash flow is to your business.
Don’t be intimated and be aware of some of the tricks people use to not pay
If your invoice is overdue, do not be afraid to chase. We normally start chasing with a polite e-mail on the day the invoice is due and thereafter slowly ramp things up. If there were any concerns about payment they really should have been raised before the payment date but they may raise their head at this stage, so talk to the client and be patient. Don’t be combative at this stage.
There are a few tricks of the trade that I have learned in the Middle East. Paying invoices can sometimes be a "game" of "who will cave in first". If you are chasing invoices, you may find that phone calls and e-mails are ignored at times. Don’t let that put you off, keep trying and be politely persistent.
Another common trick is if the company senses you need payment for cash flow purposes, they will seek a discount as soon as you start to chase them. Of course, listen to their reasoning as to why they would want a discount, but stay strong and insist on full payment (keep referring to the signed business terms). If you do agree to a discount, make sure it’s on the strict condition that it is paid within two to seven days.
If the company you are chasing is definitely experiencing financing issues, always listen and offer solutions; perhaps you can agree to accept payment in stages.
If you have included a DIFC Courts jurisdiction clause within your Terms of Business, and have not been paid after four weeks of chasing for payment, it is advisable to proceed to lodge a complaint with the DIFC Courts. My greatest experience to date has been with the Small Claims Tribunal (SCT) in the DIFC Courts.
The SCT was established in 2007 and will hear cases that fall under the DIFC jurisdiction on the condition that the parties have signed a contractual document agreeing to the jurisdiction of the DIFC Courts (in this regard it is imperative that you have your Terms of Business signed by all parties).
Up to 90 percent of complaints lodged to the SCT are settled within three weeks. The SCT can deal with claims up to AED100,000 and further up to AED500,000 if all the parties elect in writing to do so.
The SCT fees are minimal (two percent of the value of the claim) and a complaint can be lodged online using the DIFC Courts' online portal. The defendant has seven days to respond (either to admit liability or file a defence). If a defence is filed there will be a consultation before a SCT judge. There is no legal representation allowed, so there are no legal fees to be paid (just court fees). If the consultation doesn’t settle the dispute then the claim will be transferred to the Court of First Instance. The DIFC Courts are based on common law and DIFC Courts' judgments are enforceable anywhere in the world.
So make sure your Terms of Business includes the DIFC Courts jurisdiction clause and rely upon it! The DIFC Courts jurisdiction can be used if you are a company in the UK doing business with someone in Saudi Arabia or anywhere else in the GCC. Some of the biggest customers of the SCT are law firms, which proves how effective the process really is.
I have had a number of personal dealings with the SCT and have found them to be personable, highly effective and business friendly. For me, they really do offer the infrastructure and reliability to do business in the region.
If you follow these steps, cover your back and do your research, I am very confident that you will experience as few problems as possible with late payments. Admittedly you have to do a lot more to protect your position in the MENA region than in Europe, but if you go in with your “eyes wide open” you will experience few issues. Doing business in different parts of the world can be challenging so it is important that you are fully prepared.