Survey findings for the UAE
Trade credit plays a key role as a source of short-term finance in the domestic market
Responses to the Atradius Payment Practices Barometer survey in the UAE highlight that an average of 64% of the total value of respondents’ sales to B2B customers was transacted on credit, while 36% was traded on a cash basis. The proportion of credit-based B2B transactions in the UAE is the highest recorded in Asia and is significantly above the 56% regional average, pointing to the key role that trade credit has in UAE B2B trade.
Furthermore, survey findings highlight that 78% of the B2B sales on credit have been transacted on the UAE domestic market (well above the 61% average for Asia). This is most often the case for respondents from large enterprises in both the manufacturing and services sectors. In contrast, UAE respondents are less inclined to grant trade credit to their B2B customers abroad, as 22% of sales to B2B customers were transacted on export markets (around half of the 40% average for Asia).
UAE extends region’s longest payment terms
The UAE offers the longest average payment terms of all of the countries surveyed in Asia, at 57 days from invoicing (regional average: 43 days). The survey data shows that 25% of respondents requested payment from B2B customers within 30 days of the invoice date, 46% in the range from 31 to 90 days, while a sizeable percentage of respondents (29%) reported having set payment terms of 90 days or more from invoicing. This finding is consistent with the key role played by trade credit as a source of short-term B2B financing, as noted earlier. UAE large enterprises and enterprises in the manufacturing sector report far longer average payment terms (both 66 days).
When asked about the underlying criteria for setting payment terms, 41% of respondents in the UAE, chiefly large enterprises and the services sector, reported that they set payment terms in accordance with their company standards and internal business practices (below the 51% regional average). In contrast, over one quarter of respondents (26%) set payment terms that are in line with the trade relationship with the customer (regional average: 19%). This is particularly true of enterprises with turnover ranging between 4 to 7 million AED and in the wholesale trade sector.
Payment duration in the United Arab Emirates
d = average days Sample: companies interviewed (active in domestic and foreign markets) Source: Atradius Payment Practices Barometer – June 2020
Letters of credit the most often used B2B trade financing tools in the UAE
A sizeable proportion of working capital in the UAE is tied up in B2B receivables, and is vulnerable to the risk of payment default from customers. This may explain why respondents in the UAE display a strong focus on the liquidity aspect of credit management. This is reflected in the nearly 60% of survey respondents reporting that their credit-based B2B sales are normally preceded by the request of a letter of credit, to be initiated by the customer as a guarantee the timely payment of the invoice amount (average for Asia: 65%).
Letters of credit appear to be most often used by large enterprises and by businesses in the services sector. Bank guarantees for credit sales are also quite extensively used instruments of B2B trade financing in the UAE (requested by 53% of the respondents, vs. a 67% average for Asia). Both these instruments are most often used by mid-sized businesses and again in the services sector. Payments in cash and cash equivalents are also methods often requested by survey respondents in the UAE (45%).
of UAE respondents expressed concern about a deterioration of their B2B customers’ payment practices, leading to an upswing in long overdue B2B invoices over the coming months.
Atradius Payment Practices Barometer – June 2020
Businesses hit hard by late payment in B2B trade
Despite the extended payment terms enjoyed by B2B customers, it appears that many do not pay invoices in a timely manner. Survey findings highlight that, on average, 72% of the total value of the B2B invoices issued by respondents in the UAE is overdue (above the 52% average for Asia). 13% extend over 90 days overdue (average for Asia: 15%), with a high likelihood of ending up as bad debts that may never be collected. Despite this, the percentage of write-offs of uncollectable receivables amounts to less than 1% of the total value of B2B invoices (below the 3% average for Asia). Of note, respondents reported that they had the most difficulty in collecting outstanding debts from B2B customers in the construction industry. For most respondents in the UAE (68%, well above the 49% average for Asia) late payment from B2B customers is chiefly due to liquidity issues. This was most often reported by mid-sized and in the services sector.
For 52% of respondents (regional average: 28%), chiefly from large enterprises and in both the manufacturing and services sectors, the most frequent reason for B2B customers’ late payment is the market power of the customer.
This seems to tally with the finding that large enterprises and enterprises in the manufacturing sector report far longer average payment terms than the country average, in the sense that long payment terms seem not only just dictated by financing reasons but also by the customer’s market share or position in the market. Not surprisingly, given the high percentage of overdue payments, nearly half of the respondents in the UAE reported that due to late payments they had difficulty in paying bills and staff. Nearly 30% of respondents reported they needed to delay payments to their own suppliers, while around one quarter put in place measures aimed at strengthening their own credit control procedures, including the suspension of deliveries until overdue invoices are settled.
UAE companies responding to our survey expressed concern about their future business performance, anticipating a deterioration of their B2B customers’ payment practices that could negatively affect their cash flow position. To face these growing challenges, it is essential for UAE businesses to protect their core value from unrecoverable trade receivables. This involves reducing customer credit risk exposure to levels that are manageable for the company and which can, in turn, free up capital that can be used to weather these challenging economic times.”
Uncollectable B2B receivables in the United Arab Emirates
(% of total value of B2B receivables)
Sample: companies interviewed (active in domestic and foreign markets) Source: Atradius Payment Practices Barometer – June 2020
Majority of businesses in the UAE anticipate worsening of B2B customers’ payment hab
Due to the disruptive impact caused by the coronavirus pandemic to international trade and the domestic economy, over half of the survey respondents in the UAE (53%) expressed concern about a deterioration of their B2B customers’ payment practices, leading to an upswing in long overdue B2B invoices over the coming months. The remaining 45% anticipate no change, and only 2% foresee a positive trend in customers’ payment habits going forward. In response to this, the majority of respondents in the UAE (70%) will continue to focus on their internal credit control procedures, using the same credit management instruments they currently use and strengthening their internal debt collection procedures going forward (58%). Nearly 60% of the respondents are of the opinion that their industry’s indebtedness will trigger an increased dependence on bank finance.
Interestingly, a sizeable percentage of respondents (28%) believe that banks will be less likely to lend financial support to businesses in the coming months. This contrasts with the 33% of respondents with a more optimistic view of bank behaviour and 29% who are convinced that the situation will remain as it is now. Against this backdrop, and amid measures undertaken to support the economy, nearly half of the respondents in the UAE (49%) expressed concern about a deterioration of the business performance of their industry, in terms of sales and proﬁts, over the coming months. The remaining half of respondents did not have a clear cut view on the future trend of their industry’s business performance.