Late payments in B2B trade have been a persistent issue in the UAE for many years. Small and Medium Enterprises (SMEs), which account for nearly 95% of all UAE businesses and represent approximately 60% of GDP, are particularly vulnerable to the negative effects of late payments. These effects include disrupted cash flow, financial instability and difficulty in planning for the future. This article explores the impact of late payments on SMEs and the wider economy, as well as provides potential solutions to address this issue.
Scale of the Problem
The issue of late payments is widespread in the UAE. According to a survey conducted by the Dubai Chamber of Commerce and Industry, over 60% of businesses in the UAE experience late payments. SMEs are the most affected, with 70% of them reporting late payments. This is concerning, given SMEs’ contribution to the overall economy.
A recent survey conducted in the UAE by the trade credit insurer, Atradius, found that 53% of the total value of all B2B payments were delayed, with an additional 8% uncollectable and written off as bad debt. In other words, only 32% of the total value of all B2B invoices was settled on time. The survey included 200 UAE based companies of various sizes across several sectors.
The negative impact of late payments is indisputable and significant. SMEs often rely on a steady cash flow to pay their bills and suppliers, but when payments are delayed, it can lead to a domino effect of financial difficulty. For instance, suppliers may have to borrow to pay their own bills, leading to increased debt, higher interest payments and reduced profitability. This can result in stunted growth and even bankruptcy for SMEs, which in turn impacts the overall health of the economy.
Importance of Early Payment
While buyers need solutions that enable them to pay their bills on time (or even early) with minimal impact on working capital, suppliers also need to consider offering early payment discounts, which are commonplace in markets like North America and Europe. The nuanced and tactile nature of business traditionally conducted in the UAE (and MENA as a whole) does present a hindrance when moving towards a more transactional approach to business. However, a shift towards early payment options as a standard offering on B2B invoices is needed. This approach will offer buyers a clear and visible monetary incentive to pay early, while creating a space for innovative solutions to enter and further streamline the payment process.
To address the issue of late payments (and B2B liquidity in general), commercial credit cards have been seeing a dramatic rise in popularity over the last few years, as they offer a solution that benefits both buyers and suppliers simultaneously. Commercial credit cards allow buyers to pay suppliers early without impacting their own working capital.
Commercial credit cards are particularly relevant in the UAE, where digital payments are on the rise. In fact, the UAE is one of the fastest growing markets for digital payments in the world, with a projected growth rate of 16.8% per year from 2021 to 2025. This trend makes commercial credit cards a compelling option for B2B trade payments in the country.
Benefits of Commercial Credit Cards
Commercial credit cards offer several benefits that make them an attractive option for B2B payments in the UAE. Firstly, they provide interest-free extended credit (typically 55 days), allowing buyers to manage their cash flow and working capital more efficiently. Second, buyers can benefit from rebates and cash back incentives, resulting in improved profitability. Third, card payments are free to make, saving bank transfer fees and the cost of processing cheques. Lastly, but most importantly, suppliers can receive early payment, improving their cash flow and reducing the need for them to borrow to pay their bills. To help streamline the process, solutions like Swipe2B offer an automated card-to-bank mechanism enabling buyers to pay their suppliers by card instantly, securely and without the need to manually enter, transmit or swipe their card details to make payment.
According to Mastercard’s ‘B2B Payments in the UAE: Digital Payment Solutions in the COVID-19 Era’ report, commercial credit cards help reduce payment cycles by up to 60% for suppliers. This reduction in DSO has led to improved cash flow and working capital for suppliers and better cost management and savings for buyers.
Whether it’s buyers paying suppliers early, or suppliers willing to accept card payment to begin with, businesses can demonstrate their reliability and commitment to each other, which in turn leads to increased trust and stronger buyer-supplier relationships.
In addition to commercial credit cards, other solutions to tackle late payments include invoice financing and trade credit insurance.
Invoice financing (aka invoice factoring or invoice discounting) is a process whereby businesses can borrow against their unpaid invoices (usually from their bank), allowing them to access short-term funding and improve their cash flow. As this facility in the UAE is mostly offered by banks, its availability is reliant on the seller’s relationship with its bank, with the final decision and pricing heavily dependent on the buyer’s credit-worthiness. in the end, the overall process is not automated and the banks’ ad hoc decision and pricing can vary from invoice to invoice, depending on the buyers’ and sellers’ standing.
Trade credit insurance is an insurance policy that a seller can purchase to protect against unpaid invoices. This has the dual benefit of assured collection, and helping to reduce the cost of invoice financing as the lender has the added security of an insurance payout in the event of a late or defaulted payment from a client.
In the UAE, late payments in B2B trade pose a significant challenge that requires urgent attention. It negatively impacts SMEs, their cash flow, and the economy as a whole. However, by implementing solutions such as commercial credit cards, invoice financing and trade credit insurance, it is possible to mitigate the risks associated with late payments and improve the overall health of the economy.
Commercial credit cards are a particularly promising solution, as they offer benefits for both buyers and suppliers simultaneously. By using commercial credit cards, buyers can benefit from extended payment terms, rebates and process automation, while suppliers can receive early payment and improve their cash flow.
As the UAE continues to grow as a market for digital payments, commercial credit cards will become an increasingly popular option for B2B payments. Companies that embrace this solution stand to gain a competitive advantage by improving their cash flow, working capital and cost management.