Seven years ago on my first day in the Middle East, I sat with my Omani business partner under a date palm tree in Muscat to have a coffee where he taught me the most valuable cultural lesson about doing business in the Middle East; that business in the Middle East is all about relationships.
Today as a creature of habit, at 11am each morning I get out from behind my desk and take a 15-minute coffee break. My staff make jokes at how I am never a minute late for my coffee break, yet I am late for everything else.
While many people see breaks as wasting valuable work time, for me it is my chance to talk to some entrepreneurs and get first-hand information on the state of the economy.
You see, I work in a serviced office shared with many small businesses from varying industries and services, all trying to get their first foot on the ladder.
I often work late and even come to the office on the weekend to get some important tasks done, and more often than not each office has an entrepreneur in there doing exactly the same.
I love this environment and my coffee breaks are a good chance to talk with the other entrepreneurs and get a taste of what is going on in their industry and the economy as a whole.
Most recently the message has been the same across the board; we are all waiting on late payments.
For months we have been reading about how low oil prices and a stagnant property market will have a knock-on effect in other industries, but now it is as clear as day that companies are scared and hanging onto their cash. Larger companies can weather the storm as they have larger cash reserves and access to bridge funding from banks, but for SMEs, one delayed payment can be life-threatening.
So where do you turn for help when this happens? In the UAE we do not have a small claims court, so litigation costs for small contracts can often be more than the contract value and turning to the legal system for contracts less that Dh100,000 is generally not a financially beneficial method. There are private debt collection agencies that will work on your behalf to recover debt, although the problem again is that these agencies are not short of business and tend to focus on the large debt repayments. For businesses like mine, which send invoices under Dh100,000, these options do not pose much benefit.
Philip White, the director of Fairway, a debt collection agency based in Dubai, tells me he strongly recommends that SMEs ensure contracts are governed by the DIFC Courts, as this will drastically reduce the time spent in the legal process.
Until the government creates a small claims court to deal with these matters, you will have to focus on your cooperation with your clients. The most common method to ensure timely payments is the inclusion of a penalty clause in contracts, and this is standard practice in many industries.
However, in other industries this is not a standard practice and will be viewed negatively, so you may need to try reverse psychology, build the penalty into your price and offer a discount for early payment. A discount will be seen as a more positive gesture than a penalty.
Penalties or discounts can be anywhere from 1 to 10 per cent after 30 days, and this should provide some incentive for people to pay on time. But the same problem occurs that it is still difficult to enforce and doing so would again be more costly than the value of your contract. So while it may pose some incentive, if you are dealing with people who refuse to pay an invoice you aren’t going to have much luck getting them to pay the penalty either.
The options I have suggested clearly do not provide a robust solution for SMEs looking to get paid for small contracts and forms of recourse are slim. When looked at this way, the wisdom of my Omani business partner’s words start to come alive; that business in the Middle East is all about relationships.
Without this legal framework for SME support, we have to rely on our strong bond with our clients. Having a strong relationship not only ensures that we look after the people we do business with, but more importantly the best way to ensure you get paid promptly is to ensure that your client needs and values your service on an ongoing basis.
The American speaker Stephen Covery once said: “When the trust account is high, communication is easy, instant, and effective”.
Paris Norriss is an entrepreneur and partner in Coba Education, which provides educators to schools and institutes