UAE businesses need to get smarter with transparency

It’s budget time at banks and the next few weeks will be very revealing indeed, as results for the last quarter will be announced. And so will budgets for 2017.

Both will have a critical element in determining bottom-lines, both past and future. And there will be the banks’ view on provisions to be created for bad debts, past and future.

For the future, banks can take two approaches to this aspect of lending. First, grow the loan book at a reasonable pace with a more conservative approach to bad debts, i.e., expect a higher level of bad debts and therefore create higher provisions. Or go for option two — curb loan growth to an extremely slow pace, almost in single digits, and with a lower expectation (and therefore provision) of bad debts.

Need of the hour

The former, slightly more aggressive posture, is the need of the hour to a) prevent the economy from sliding into very low growth rates; b) keep client acquisition for banks going so that 2018 and beyond is not affected (because it will if banks don’t add sufficient number of new clients next year). The CEO of Mashreq has alluded to this in a recent article and emphasised the importance of de-risking in this context as well.

What will banks do? I’m almost certain most banks will follow the herd and take the second route. There are a couple of banks that have the courage to take the contrarian view and they will benefit in the long run.

Some underlying assumptions I am making are that the economy of the UAE will grow, albeit at a low rate; some spend on 2020 will start feeding into the economy by 2Q17; and the macroeconomic environment (as represented by the effect of low oil prices and depressed export markets) will continue to be difficult. A look at the past year and the current thinking among bankers will throw some light on what small businesses can expect in 2017.

What lies for SMEs

Here are some facts. First, numerous small companies with financial and business problems were wiped out last year and owners skipped town. Second, dozens of larger companies who were engaged in serious “kite flying” or “accommodation” (fake) transactions to raise bank debt for non-business purposes suffered the same fate.

Third, many of those companies which had raised increasing amounts of debt with the express objective of defrauding banks also skipped. And lastly, thinly capitalised, over geared but genuine companies, operating in badly affected industries, were also wiped out. Banks, for a variety of reasons, lost money.

So, does this all mean that the Augean stables have been cleansed? That this exorcism by bad debts represents a thorough purgatorial expungement of toxic debt? Many bankers think the bulk of the cleansing is done as evidenced by the decreasing number (and pace) of skips. That things have settled.

Lurking problems

This may well be partly true, but there are problems lurking around the corner, certainly not to the same scale as witnessed during the last 12 months, but certainly on the horizon.

Our experience in working with SMES, in assisting them with raising bank finance and advising on restructuring their bank facilities (for those under stress), has been extremely revealing.

First, the challenging environment continues to belabour hundreds of firms that continue to lose money, while putting on a brave but foolish front of being profitable.

Second, innumerable companies (especially the larger ones which show annual sales of Dh100 million to Dh150 million) carry large holes in their balance-sheets, resulting from business losses, diversion of funds and so on, camouflaged by falsified numbers.

Third, these holes are impossible for statutory auditors to detect, even if they had the intention to do so. Auditor firms are supposed to audit books of accounts presented by management and test procedures and practices adopted. They are not forensic fraud investigators, and expecting them to unearth these holes is fallacious and wishful thinking.

Fourth, companies with hollow financials are not necessarily in default with banks. There could be occasional signs of stress, but eternal hope, borrowings from loan sharks and creative accounting keeps the truth at bay.

What should SMEs do?

What does this all mean for banks and their lending strategy for 2017? Based on anecdotal evidence and our own due diligence work conducted for banks, I think we will see defaults among the larger SMEs as the problems have by no means disappeared. This will continue through the remainder of this year and into the next.

Bankers also suspect this and therefore will err on the side of caution. Banks will carry out more due diligence, ask more questions, react at the slightest hint of trouble and will be edgy. Borrowers will not receive the benefit of doubt.

What should SME owners do? Our advice to those we are working with has been to admit there are problems and have open discussions with banks by surfacing issues.

Practicality will determine how this should be handled, but frankly, now is a good time to adopt this strategy. Fear of banks’ reactions is justified, but banks are willing to listen now.

Delaying matters and having the problem explode in your faces later will not buy any sympathy from banks in the near future.

The writer is the head of Vianta Advisors

Source- Gulf News

The Advantages of Owning Your Own Business

There are thousands of articles cautioning would-be self-employed types about the pitfalls of starting their own businesses, but almost nothing about how great owning your own business is.

One article certainly won't right the balance, but for the benefit of those who are thinking of plunging into the self-employed life style and opening small businesses of their own, here is a summary of the best advantages of owning your own business.

When you own your own business:

1) You're the one in control.

Yep, the be your own boss thing is pretty great. I should lie to you and tell you that that means that no one tells you what to do, but people (customers, suppliers, government workers) will still tell you what to do all the time (and on bad days, might even tell you where to go, too).

The good news is that when you own your own business, you don't have to do what they tell you (most of the time). You have choices and you get to make the decisions.

2) You get to build something.

From one kid who loved Legos to another, you know how satisfying that is. Want to become a multi-national exporter? Or create a program that increases numeracy among children? Or turn people's yards into truly beautiful spaces? When you own your own business, you get to shape and flesh out your dreams.

3) You get to help people.

A TD Canada Trust Small Business Survey found that ninety-six percent of small business owners said that being able to help their customers and clients was one of the top benefits of owning a small business.

Small businesses also help people by creating jobs in their communities and being good community citizens.

4) You may have the option of a more flexible lifestyle.

For women, especially, owning your own business can give the lifestyle flexibility necessary to raise a family and still have a successful career.

Mompreneurs are a growing trend; according to the State-Owned Business Report, commissioned by American Express, the number of women-owned businesses have increased by 68% since 1997, with more than 9.1 million women-owned businesses operating in the U.S. in 2014 (Fox News).

But it's not just young(ish) women who can benefit from this advantage to owning your own business; people who are close to retirement or already retired may find owning their own businesses gives them both the chance to keep their hands in and to do something satisfying. (See The Best Business Opportunities for Retirees if you're of this age and want to get started.)

5) You might change the world.

You certainly don't have to think back very far historically to come up with the name of a business owner whose enterprise has changed the world. Mark Zuckerberg anyone? Bill Gates? And your business doesn't have to become the next Facebook or Microsoft to be the agent of powerful change. Ten years ago, for instance, Torben Vestergaard Frandsen came up with the idea of the LifeStraw, a personal, low-cost water purification tool that is being used to provide safe drinking water to millions of people.

So okay, changing the world is a pretty ambitious target, but changing just a piece of it for the better is still a worthwhile effort that can be deeply satisfying.

6) You might make more money.

Some businesses make truckloads full of money. Some don't. Most successful small businesses provide their owners with a living, not a fortune. But the point is,owning your own business opens up the possibility of making more than you could possibly make as an employee.

Working on the assembly line that produces cat clocks will bring you in a certain wage but what if, for example, there's a huge surge of demand for cat clocks and the company's profits soar astronomically? As an employee, you won't share in any of those profits. Businesses generally have much more opportunity to make money than individuals do.

Other Advantages of Owning Your Own Business

The advantages of owning your own business that I’ve listed above apply to all businesses with the caveat that those who choose to run retail businesses will find it more difficult to create a flexible lifestyle because of the demands of retail trade.

But people who are self-employed rather than employed by someone else also have other potential advantages. They may be able to enjoy income tax breaks not available to employees, such as hiring other family members and income-splitting. They might be able to work from home. Best of all, owning your own business can have you waking up with a smile on Mondays eager to start work rather than dragging yourself in to someone else's business.

For more information contact Ahmed at +971 50 287 8006. Location: WTC, Al Markaziya, Abu Dhbai, UAE Visit: http://aamal-uae.com/ Email: info@aamal-uae.com 

Source: thebalance

What to consider when choosing a local partner for an LLC in the UAE

When setting up a business, you probably expect to own it 100% outright and have complete operational and financial control.  Would you even consider setting up a business and giving the majority share to a complete stranger?  What risks would you be exposed to?

Establishing a Limited Liability Company (LLC) in the United Arab Emirates (UAE) dictates that the majority share needs to be held by an Emirati National. The maximum shareholding by a foreign company or individual is just 49%.

Choosing the right partner is crucial to the future success of your business.  Making a hasty or ill-informed decision could be catastrophic.  It’s essential to do your research first and understand the implications for your business when you set up and, more importantly, further down the line when your business is operational.

Five questions to consider when selecting your local sponsor:

• What do you want from a sponsor?
• Will a high profile sponsor deliver?
• What if something happens to your sponsor?
• What will your financial commitment be?
• Is there an exit strategy?

1) What do what you want from your sponsor?

Are you looking for a sponsor to be actively involved or silent?  An actively-engaged sponsor will contribute to the set up and operational costs of the business; be active in the day-to-day running the business and decision making; and, take their entitlement to profits. Aamal Companies Representation provides a professional corporate sponsorship platform to act as a ‘nominee’ partner; this minimizes the risks associated with appointing an unknown individual and grants total operational and financial control to the foreign party; and, rather than taking a share of the profits, a fixed annual fee is agreed in advance.

2) Will a high profile sponsor deliver what they promise?

Its easy to be seduced by high profile or celebrity individuals and also to be wooed by promises of ‘open doors’, introductions and contracts; however, how can you ensure such promises will be delivered?  Also will you have access to the high profile figure once you have signed a contract?  In reality you are very unlikely to have day-to-day contact with a high profile local partner.  Instead, their staff of administrators and PROs will take care of the sponsorship responsibilities.  Its very important to understand how these responsibilities will be administered to ensure timely availability and efficiency for duties such as document signings during the incorporation and ongoing running of your business, in order to avoid unnecessary delays which can impact financially and operationally.  Aamal Companies Representation is western managed with complete Powers to represent and sign on behalf of the corporate sponsor.  This means that your day-to-day point of contact is an experienced, knowledgeable, Western professional; its easy to arrange appointments of document signings and there are no communications barriers; and, because corporate sponsorship is the key focus of the business, it’s in our interest to be pro-active to our client’s requirements to ensure exceptional client care and speed of service, so that our client’s businesses flourish.

3) What happens to your business, if something should happen to your sponsor?

If selecting an individual as your local partner, it’s crucial to understand what happens in the event of their death.  Sharia law determines that when a person dies, their estate is distributed amongst the next family layer.  However, do you know the beneficiaries and what their intentions will be for their share of your business?  What would happen to your business if the heirs had a feud over the estate?  By engaging with a corporate sponsor, the foreign party is provided with business continuity in times of succession under Article 388 of the UAE Companies Law.  This prevents disruption and uncertainty and allows for business continuity.

4) What will the financial commitment be to your sponsor?

The financial remuneration to a local sponsor / partner will be dependent upon the terms of their engagement.  An actively-engaged partner will take a share of the profits.  However, Aamal Companies Representation approach, as a professional corporate nominee, will assess the risk and liability of the activities of the company and the number of their employees to determine a fixed annual fee in advance of signing an agreement.  The added benefit of this, is that it helps Client’s to budget and have the peace of mind that their profits are all theirs.

5) Is there an exit strategy?

Terminating agreements in the UAE can be very difficult.  Sponsors naturally don’t want to lose the business, but also the cultural aspect of viewing a liquidation as a failure can have a significant impact, even if a large exit fee is involved.  Aamal Companies Representation approach provides for an easy, three month, written notice period.  This provides security for clients knowing that there are no long tie-in periods or exit fee requirements.  Like any business, we don’t want to lose clients, but we understand that strategies change and we would wish our clients well with their future endeavours.  Reputation is key, so its important that we stand by our promise.           

For more information contact Ahmed at +971 50 287 8006. Location: WTC, Al Markaziya, Abu Dhbai, UAE Visit: http://aamal-uae.com/ Email: info@aamal-uae.com 

Source: Gateway to abudhabi