Author: Biancka Gracias, Partner and Head of Start-ups & SMEs at The International Consultant Law Office (ICLO)
February 2020 heralded in some news that lit up the entrepreneurship segment in UAE. UAE ranked first regionally and fourth, globally, on the Global Entrepreneurship Index, as proclaimed by the Global Entrepreneurship Monitor.
It's a new era for the entrepreneurship ecosystem. Whilst the world is experiencing burgeoning innovation and fostering entrepreneurship, how smooth is it really to be an entrepreneur when you want to establish a startup or set up a small business, and are there any practical hurdles that one isn’t really informed about when they first start?
Biancka Gracias, Partner and Head of Start-ups & SMEs at The International Consultant Law Office ‘ICLO,’ sheds light on some of the prevalent issues and how start-ups and SMEs in the UAE can tackle those roadblocks:
1. Over 53+ Free Zones and mainland options to choose from
If one wants to set up a business in the UAE, you have the choice of 7 Emirates, 53+ Free Zones and the mainland options as well, the differences primarily being the distance/ location, pricing and activity options. Choice is good, but in this case, how do you choose what’s best for you because as a small business, you cannot really “afford” that mistake because of short-sightedness. Due to poor judgment and lack of information, a lot of entrepreneurs choose to incorporate in the cheapest jurisdiction as opposed to the most effective one for their business. The very minimal description of activities by the regulators also leaves a lot to the imagination.
2. Licensing authorities linked with applicable regulators
Some activities such as insurance activities, (only by way of example) require additional approval or licensing from the Insurance Authority. However, if one has to apply for an activity with a regulator, one may or may not be informed because that regulator and the Insurance Authority would have different internal systems and there may not be a free flow of information to the client setting up the business.
Something as simple as products for human consumption (such as cookies) or organic soaps for sensitive skin, needs to have an additional authority (like the municipality) approve the labeling requirements on these products. Products cannot be sold without the appropriate regulatory approval and labeling requirements being met. Prior information therefore is key to setting up a business and one should always be aware of, and comply with the regulations applicable to them.
3. Bank Accounts
Regulators customarily facilitate laws and regulations in the financial activity sector and the banks are not prevented from opening accounts for small businesses – they just conveniently choose not to do so, at their own discretion. We assume it is because the costs of compliance from the bank’s perspective are high and they would rather not shoulder a high risk at little or no income.
We are however optimistic about the banking system as we are beginning to see changes and proactive action by at least 2 major local banks that are facilitating opening bank accounts for little businesses, which is a huge step in the right direction.
4. Payment Gateways
Payment gateways have to be acknowledged especially for their understanding (or lack thereof) of how startups or new businesses work. We have a bit of a situation here called ‘what came first, the chicken or the egg’ where payment gateways (or most of them these days) insist on 3-months bank statements prior to setting up the payment gateway. How is an e-commerce gateway meant to start any sort of business to begin with, if they do not have a payment gateway linked to their account? It is just a paradox of entrepreneurship and we wait and wonder how long until payment gateways understand this situation.
5. Lack of Education
Laws exist to regulate most commercial activities. However, understanding the laws that are applicable to one’s business cannot be found off an internet blog, from a company set-up agent or through posting a question on a social media group. One needs to seek out adequate legal advice to understand the laws applicable to their own business activity from someone who understands the law i.e. a well-experienced lawyer.
The biggest mistake entrepreneurs make is that they expect a company set up agent or ‘one person’ to provide them with all the information about legal risks and costs of setting up and they under-estimate or ignore the “legalese” element of this entire process. Remember the popular saying ‘it takes a village to raise a child’, in this case the child being a small business and the village being the whole ecosystem that needs to be consulted foremost to plan how the business will be incorporated, operated and ultimately be successful. Most often it's the ignorance of law that has businesses end up in loss, be penalized or worse still, shut down from their under-estimating the pitfalls one would have to overcome.
“Navigating the legal aspects of any startup is tough when you don't have experience,” Chang Sup Shin, owner and founder of retail concept 1004 Gourmet, said. “Especially in real estate where most contracts with landlords are strongly in their favor, understanding the fine print is confusing and negotiating terms can be intimidating. Since contracts are long-term and binding, it's very important to reach out to somebody who has experience, whether it be a mentor or a lawyer, to remove potential red flags that can help you avoid problems in the future.”
Education can compensate for experience, when obtained correctly.
From a practical perspective, business owners need to realize that they cannot avoid ‘education,’ which is key to ironing out any challenges whatever these may be and seek to obtain knowledge and legal advice before they take a plunge into an entrepreneurial abyss of cash flow disruption, penalties and overall disruption for themselves.
Biancka Gracias, Partner and Head of Start-ups & SMEs at The International Consultant Law Office ‘ICLO’