Cost cutting
SMEs will find the rate hikes particularly burdensome, as they are staring at borrowing rates of 8-9 per cent. Image Credit: Supplied

Dubai: UAE-based businesses, especially those in retail and construction sectors, are trying to drastically reduce credit periods on payments owed to them, or bring forward their repayment of outstanding loans to get a handle on increasing costs.

On the early repayment, the thinking is that it’s best to clear all outstanding loans now rather than risk having to pay up when there will be additional interest rate hikes and making loan instalments even more expensive to bear. “Paying off bank loans in full will have an impact on our cashflow now, but waiting could prove more painful,” said an owner of a logistics business. “Both inflation and rate hikes suggest carrying less debt on the books is the best way for now.”

A week on from the US Fed Reserve’s 0.75 per cent hike – and matched by the UAE Central Bank – businesses and borrowers are having to come to terms with what all this means to their operations. They need to make some quick adjustments because another – similar sized? – hike is due in July too.

Right now, any borrower – whether individual or business – with a loan still on a fixed-rate basis is best placed. If there is any chance to extend the fixed-rate period on instalments, then go for it without a second thought, is what consultants are saying.

Atik Munshi

A fixed rate of interest on a term loan - or a mortgage - could be beneficial for the borrower in a rising interest rate regime. Businesses can opt for hedging – on supplies, forex, etc. – and that could provide a buffer to them. Yet, this too is a short-term benefit.

- Atik Munshi, Managing Partner at the audit and tax consultancy FinExpertiza UAE

Mortgage rates are in line to hit upwards of 7 per cent by year-end, while for SMEs, the cost of borrowing could be in the range of 8-9 per cent. All of which are a few percentage points higher than what they were paying until recently.

No more generous payment terms
It was during the peak Covid phase that credit periods were extended to help suppliers and clients adjust to the difficult phase. Those extended payment periods continued even as the economy rebounded sharply during 2021.

It is these payment terms that are being cut into - and even shortened further.

Pay up sooner

It’s the smaller businesses that are facing the brunt of the costs. In the retail sector, the bigger players have trimmed credit periods from, say, 90 days to 45-60 days, according to market sources. “Everyone wants to ensure that they have sufficient cash coming in to manage the cashflow – reducing credit periods is one option,” said a retailer.

The same is the case in the construction space, with the big names insisting that payment delays will not be tolerated.

Pass on the costs

Inflationary pressures have already seen businesses pass on some of the increased costs they are having to bear. Now, with the successive rate hikes, the process will become frequent. “The natural result of any bank rate hike is increased costs for the borrower,” said Munshi. “Businesses will pass these additional costs to customers sooner or later. The idea of a rate hike is to deter people from borrowing so as to rope in inflation - the results may or may not be as desired.”

Challenges for SMEs
Any increase in the cost of borrowing will have immediate consequences for SMEs.

"Small and mid-sized businesses will be restricted from growth strategies like taking out loans, investing in new equipment, or hiring more workers," said Nelson Holzner, CEO and co-founder of Modifi, a fintech. "Under the current environment, banks will become more risk averse and money will get more expensive for supply chain finance programs.

"This opens the door to digital trade finance companies to penetrate further in the SME market through technology-focused solutions."

Cost of debt

Amr Yussif

The cost of servicing the debt will increase - for businesses that are cash-intensive, this increases costs and reduce their margins significantly. A smart move would be to shorten their cash cycle by negotiating longer payment terms with vendors - while collecting money faster from clients.

- Amr Yussif, co-founder and CEO of FinFlx

That could turn out to be one difficult balancing act...