How can SMEs ensure a healthy financial future?
Even two years after the introduction of the Federal Bankruptcy Law, UAE is still witnessing entrepreneurs leaving the country to avoid debt repayment. Smart SMB interviews some experts to find out what can SMEs do to avoid such situations and secure themselves financially.
In September 2016, when the UAE Federal Bankruptcy Law was introduced, it came as a breath of fresh air because those were the days when
entrepreneurs would leave the country abruptly to avoid debt repayments. The law led a new step forward in providing a legal framework to help
distressed companies in the UAE avoid bankruptcy and liquidation. The law was, thus, being looked upon as a huge step forward in enhancing the
nation's economic and administrative condition.
The new law did a lot to improve the credit elements of the UAE economy. It encouraged greater consistency and empower a legal framework to
restructure or liquidate troubled organizations. This increases investors ' confidence and be of incredible value to SMEs who have for some time
needed a legal body that offers them more noteworthy stability. However, two- years down the line too, the country is still witnessing quite a few skips (a term
used for entrepreneurs who leave the country abruptly to avoid being jailed for not clearing their debts).
“As of now, we believe that some business owners still prefer leaving the country out of the fear of being arrested,” says Dr. Michael Krämer, Senior
Lawyer at Meyer-Reumann & Partners, Dubai. “(However)…it is probably still too early to really judge the effectiveness of the new bankruptcy law.”
According to him, while two years may sound like a very long time, in legal terms it isn’t as it takes time for judges, practitioners and the general
audience to get used to the new law and apply it in practice. And even when it is applied, insolvency procedures tend to be quite time-consuming.
While it cannot be said for certain if, and to which extent, has the law been effective, the fact that businessmen are still considering leaving the country
as an option to avoid repayment is not a healthy indication. Carla de Silvo, the associate executive at Finsbury Associates, a financial advisory and wealth management firm, says that firms are still facing the issues of late/no-payments due to inadequate cash flow on the other side.
Carla attributes it to the lack of awareness of the businesses’ financial liabilities. “Many businesses are unaware of the full extent of their financial
liabilities, particularly if an unforeseen circumstance or event occurs.”
According to a report, the average consumer debt in the UAE alone stands at $95,000 which would total up to $114 million, a huge sum to repay. In such a
situation, financial education and planning become even more important.
Another reason behind this is the liquidity crunch that SMEs in particular face because of supporting larger firms and industries. “As most SMEs support
bigger Industries, nowadays they face liquidity problems more than ever before,” says Manasi Correa, associate sales manager, Nexus Insurance Brokers, Dubai. “I always hear that due to liquidity crunch they cannot take future projects which can yield them better profitability and higher return on their investment.” While she recommends most of her business clients to keep at least 15-20% of their funds in liquid investments which can yield safe
and secure returns, most businesses are unable to do even that much because of the debt cycle, they get into which often keeps the money caught
up in too many places.
How can SMEs make their way to a healthy financial future?
According to Carla, firms should first consider including the following factors within their financial plan: planning for gratuity liabilities, ensuring business
loans are protected and ensuring adequate cash flow reserves are maintained. While often being overlooked, these will help businesses understand their true financial situation and if managed well can help them survive during various market fluctuations.
As far as cash flows are concerned, every business owner should review their monthly cash flow and also have clear future projections of quarterly, half-
yearly and annual cash flows. Also, whatever the profitability may be, every business should keep at least 15-20% of their funds in liquid investments
which can be used for unplanned and important business needs in the future. For late/no-payments, there are insurance solutions in the market which can
protect against them.
“We are tied up many International and highly rated companies who can provide SME owners with ‘Business Protection Key Man Insurance Plans’”,
says Manasi. A key man insurance policy is one that protects the company in the event of a key person in the business falling sick with a critical illness or
even death. “The lump sum amount given to the company allows for enough time to recruit a new person to fill the vacancy and to avoid the loss of profits,” says Carla.
Manasi adds: “Depending on their business valuation or yearly business transactions they can have themselves insured from AED 10 million to AED
500 million.” This way entrepreneurs can protect themselves, their families and business assets which they have created with much hard work and toil
over the years.
Another really important thing to consider, which is also overlooked because of the lack of time most SME business owners have, is in-depth background
check of the vendor they are liaising with. A good background check about their payment history, the kind of transactions which have been delayed and
how often, and their current payout pattern would help entrepreneurs understand the third party better and protect themselves from financial risks.
Choose only those vendors who have a timely payout system, which is quite a necessity in today’s competitive world.
Ensuring VAT returns are completed on time is also very important. Returns submitted after the deadlines can lead to unnecessary fines and expenses,
the amount of which can largely vary.
And finally, as Michael says: “Be careful when exposing yourself to debt. If, however, a trader finds himself in a situation where s/he is unable to repay his
or her debt, the first thing that the trader should do is immediately stop incurring even more debt since this could, in a worst-case scenario, even be a
A healthy financial future is not created in a day. It requires rigorous financial planning and assistance from experienced consultants. Hence, a regular
review of your financial situation is the key to ensuring a sustainable financial future.