By Ed Attwood
Fees, red tape, a slowdown in lending and the tough economic conditions are all combining to produce a grim period for the country’s SMEs, says Ed Attwood
If you’re running a small business anywhere in the Gulf, the chances are you’ve never had it tougher. Red tape, licence fees, the cost of visas and the lack of insolvency regulations are all combining with the difficult economic conditions to create an environment where even the hardiest entrepreneurs are thinking of pulling the plug.
Last week’s sentiment survey from Gulf Finance, which surveys small businesses in the UAE on a quarterly basis, made for refreshingly honest reading. Looking through the responses, it wasn’t easy to find any cause for optimism. From orders to payment collection, and from confidence to the ability to raise finance, respondents reported a significantly worse quarter than the one before.
The survey’s results chimed with comments made recently by entrepreneurs and commentators brave enough to speak out about what they see as problems facing the sector.
“It’s important because perception is reality,” Sultan Sooud Al Qassemi told us last month. “You send the message that you are entrepreneurship-friendly but go and start a business in any country in the Middle East and come talk to me.
“How much money will it cost you? How much bureaucracy? How many stamps? How many business departments do you have to visit? Everywhere the same.”
That sentiment was echoed by the co-founder of delivery start-up Fetchr, Joy Ajlouny. “We feel frustrated as entrepreneurs because the ecosystem here is not conducive for helping start-ups,” Ajlouny told our sister magazine, Arabian Business StartUp. “You need to buy a licence — that’s $25,000. You need to register with the government — that’s another $25,000. How do you prosper as start-ups?
“Every time we hire someone there’s a visa restriction and then they’ve got to leave the country, pay for a ticket for them to leave, then another medical examination. Think about all the expenses that rack up trying to run a company like a start-up. You’re dead before you start.”
Now if Ajlouny had been in charge of a failed start-up, you might be forgiven for thinking this was a case of sour grapes. But Fetchr is the first outfit from the Middle East to be funded by New Enterprise Associates, the world’s largest venture capital firm. Last year, the firm raised $11m in Series A funding from Silicon Valley, again a record for the region.
There are some areas in which the UAE could potentially make some changes. The requirement for office space is a particular bugbear. In an age where many small businesses can be run out of homes or coffee shops, the need to pay upwards of AED60,000 ($16,330) a year on rent seems to be a rule more geared towards established foreign firms setting up shop here, rather than home-grown start-ups. And a limit to the number of visas that these companies can offer — without paying significantly increased fees — also appears to be counter-intuitive. Surely small businesses should be encouraged to hire more staff if they need them?
The UAE is certainly outshining its neighbours in the Middle East when it comes to attracting, nurturing and developing entrepreneurs, but perhaps the country should be benchmarking itself against its global peers. The World Bank’s Doing Business rankings for 2016 puts the UAE in a very creditable 31st place overall, but when it comes to starting a business, its ranking drops to 60th.
In these straightened times of budget deficits and low oil prices, persuading governments that they need to cut fees rather than increase them seems like a tall order. And no-one is saying that licences should be handed out for free. But without giving start-ups the tools they need to survive, the long-term loss to the economy could be incalculable.
Certainly, UAE is much better than other countries in the region, especially for expatriates but it is still tough and difficult. In the USA, I had started a business for $75 working out of my house.
- No capital,
- No office to rent,
- No visas; because plenty of nationals looking for work
- The business is separate from the person and the person does not have to guarantee loans or things of that nature
- Funding is easier
- If you are minority or SME - in some places you do get support
Although my company was on the SME 100 in 2011/12 we never got a single contract from Dubai; Gov. or private; except from our repeat clients who are mostly outside Dubai.
Hello Ed. I am a long term resident in UAE and apart from a full time gig at a big MNC, am very closely involved (financially and operationally) with a small business, that is actually not doing great financially. However, comments from the Fetchr lady and similar diatribes on start up fees and so on are IMO completely off-base. As a tax-free environment, we benefit not only from unlimited profit upside but, more relevantly for a small business, a much easier and cheaper accounting and reporting requirements. In addition, high start-up costs deter criminal and "front" businesses as well as keep a limit on 'license-for-visa' shops. The fees themselves are transparent and easily built into the business plan. Hundreds of thousands of businesses thrive in the country while paying them. If your business can't handle that, perhaps you don't have a business in the first place!
your argument does not hold up to scrutiny.
1. a tax free enviroment only helps if you are making money.
If I look at the cost of hiring, office and fees, I have a much higher opex, I first of all have to generate those revenues.
2. I have more than one company, I was asked to have a separate licence for each activity, I even had to have separate offices. I can only physically be in one office at a time. As a result I have two office being paid for and both are empty.
3. many countries do not require reporting for small busineses.
4. if high fees deter criminality, why do I hear from so many people about being cheated. Myself included.
5. micro business have a huge issue as the fees far outweigh any revenues they can produce.
as mentioned, your argment does not hold upto scrutiny.
I'd have to agree with Mazher, and further point out that the costs mentioned to start up in the UAE are either vastly inflated in the article or refer to a specific type of company requiring addition approvals and office space.
One can set up an offshore company here for just over $1000; a fully operational free zone company (minus visa entitlement) for less than $5000; or a free zone company allowing you to live & operate in the UAE for less than $9000.
Compare this to the $75 mentioned in another letter from a USA resident, which doesn't necessarily entitle the business owner to live in the States, but does entitle Uncle Sam to tax them left, right & centre wherever they move in the world, and you may see things a little differently. In France, a colleague had to pay the government nearly $100,000 tax purely for the privilege of employing just one of his employees.
So it all depends on perspective. Personally I've never experienced a more entrepreneurial place than the UAE.
Thanks for your reply Gordon.
1. The initial OPEX outlay is a function of the business plan; factor it in and you're set; hundreds of businesses in the emirates are able to do it; if anything, it forces a more robust business plan
2. Yes and no; you can definitely have multiple activities covered by a single license and can have multiple licenses located in the same office, though it does depend on locations & business activities; again, consider this when setting up the business
4. They help with prevention of "front" businesses, not legitimate businesses defaulting or not meeting their obligations; this is definitely an issue here and in many other parts of the world
5. Please provide an example of a "micro-business" that we legitimately miss from the country and is being restrained by the fees. The bakala shop downstairs is a micro-business in my books, and is doing very well.
I agree with Mazher and Neil, but I also sympathize with small businesses that are suffering. Frankly, the cost of doing business is not that much when compared to North America and taking all sorts of taxes and various filing requirements into consideration. Businesses exist to make money, so Gordon's comment that a tax free environment only helps you if you make money means that his business is unprofitable and maybe the company should not exist. As to his other comment that many countries do not require reporting for small business, try to explain your views to the IRS or the FBI (Money laundering anyone). In short, these are bad times for most businesses and many will go under, which is normal; too many businesses chasing too few dollars. I also suffered financially, but it is a risk that I took and hopefully will not repeat the same mistakes in future.
Whether it is the startup fees or recurring Govt. fees for existing SMEs, the costs are spiralling, if you do an audit on the total value of recurring fees this forms a significant number and way above the fees being even discussed above, the thing is at these fees are fixed whether you make a profit or not and companies may have to struggle with these fees during a downturn, you will be surprised during a downturn some SMEs cannot sustain fees and rent in the emirates beyond a year and they have to make some difficult decisions, it costs a lot to wind up as well. The argument about high cost deterring front companies well individuals with the intention of putting front companies usually have huge or unlimited resources and certainly high startup costs may not guarantee any deterrent
I own an SME that employs 6 people. For the last 7 years we have barely survived. As per some comments we should close down. But I am helping support 7 families back in the Philippines, India & Sri Lanka. I have enough to retire on but do I abandon these 6 people when jobs are hard to find ? The "No Taxes" status is a myth. Maybe Rich companies benefit, but many SMEs like us are struggling under the burden of very one-sided fees for every government service. Take "Sponsor's fees", 20% land tax on rent contract, 5% tax on home rent, Market Fees (??), Garbage fees (when no garbage is being collected), Commercial register fee (??), Quota fee, Labour card fee, Medical examination fee, Residence visa fee, etc etc. It is just taxation by another name. This hurts the SMEs not the fat cat MNCs.
With the lifting of the 6-month ban SMEs will suffer more as many will take up any job just to get a residence visa & then jump jobs for as little as AED250 pm extra leaving their benefactor high & dry.
You had my sympathy until the last comment on employment bans. Yes, how dare these poor people you care so much about switch jobs freely - they should be trapped working for a terrible boss like you who uses the labour ban to keep wages low and people scared. You should retire already.
same comments like Mazher.....on one hand you talk about playing a good role of supporting 6 families and how they cannot find other jobs if you close but then talk about given free will people will leave your firm to join other companies.
Can you be more selfish than this?