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Starting a New Business Relationship - Part 2

Starting a New Business Relationship - Part 2

23 Jan 2020
Starting a New Business Relationship - Part 2

In our previous article (Starting a new business relationship PART 1), we discussed a number of key matters that businesses should attend to before and during the process of bringing customers onboard. We initially discussed the importance of conducting due diligence exercises and completing the relevant onboarding procedures in the UAE. Further considerations to take are as follows:
 

1. Requesting trade references

Trade references are generally used to increase a company’s creditworthiness in front of a third party and is commonly a kind of judgement about another company’s ability to fulfill a commitment. When businesses request trade references they are looking for a stable history of on-time payments and although it is impossible to foresee if a company will pay a debt within the expected terms, information about past behaviour is often used as a good predictor. The reference itself can be as simple as a name with its contact information. However in other cases, there may be a requirement to produce a letter with an opinion and precise data about the past or present credit along with complete contact details should further information be required. 
 

2. Obtaining credit risk reports

 
When a company does not ask for payment before delivering products or providing services, its credit risk increases. Many business transactions are conducted on credit; however it is important (for small businesses especially) to investigate more than just the information that is provided in company financial statements. Ultimately a business would need to know whether a potential customer is a good or bad credit risk and this is where credit risk reports come into use. They help to determine a company's profitability, financial stability and payment performance and can allow a business to:
  • reduce the risk of payment defaults by assessing a company’s payment history before doing business;
  • assess a company’s credit with risk indicators and explanations;
  • determine the amount of credit to extend; and
  • mitigate potential business risks by accessing a company’s bankruptcies and liens.
 

3. Requesting Security

 
If a business is entering into a contract (particularly one of high value), it is recommended that some form of security is obtained for certain types of transactions or business relationships so that the business is protected should a dispute occur. Security can be requested in a number of ways including by way of signed and post-dated cheques, letters of credit, personal & bank guarantees and parent company guarantees. However, arguably one of the most effective forms of security in the UAE is a cheque for the reason that if a cheque is given as security and it is dishonoured, a police complaint can be filed as this constitutes a criminal offence under UAE law. It is especially important to note that a bounced cheque received over the sum of AED 200,000 would automatically take the offence outside the tariff of fines (in the Emirate of Dubai).
 
In conclusion, requesting information upfront is not only commercially prudent, but from a litigation standpoint, is invaluable. Once a relationship sours, such information is almost always very difficult to obtain and can often lead businesses down the route of expensive and time consuming litigation.
 
This article does not constitute legal advice and should not be relied upon as such. For specific advice, please contact Enquiries 

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