By: Maria Teixeira, Trade Credit , Surety and Political Risks Business Unit Manager at Aon South Africa
With South Africa’s current economic and trade environment remaining constrained and unpredictable, businesses are increasingly recognising the beneﬁts of trade credit insurance to protect their bottom line.
Trade credit insurance protects a business against the risk of a buyer or debtor from defaulting on payment for goods.
Factors such as liquidations, a stalling economy and ﬂagging investor conﬁdence in the face of persistent downgrade threats are all culminating in a melting point of serious business challenges, which in turn leads to greater levels of insecurity and business failures. Small and medium businesses face greater risks, possibly even closure, if a major debtor defaults as their balance sheets are often not strong enough to pull them through a major and extended ﬁnancial crisis. However, history proves that it would be foolhardy to believe that large businesses don’t fall too, which is why trade credit insurance is a business imperative regardless of the size of the company.
Large-scale liquidations are prevalent but lately the trend to watch is business rescues. Most businesses now go into business rescue ﬁrst, before liquidation, and this has skewed liquidation stats. Thus business rescues have become more prevalent, and this is unlikely to see a reversal of the trend in the short to medium term. It’s very evident that businesses are struggling and cash ﬂow is becoming increasingly constrained, evidenced in the fact that payment terms in many instances are being stretched beyond 90-120 days.
The other factor is how consumer spending will be inﬂuenced due to the bracket creep in individual taxation,
leading to an increased tax rate for most South Africans. In such an environment, credit insurance for business has become an absolute necessity as businesses could face decreasing sales and turnover. Companies need to put appropriate measures in place to insure their debtor’s book against liquidations, non-payment and business rescue scenarios.
ACCESS TO CREDIT
Another often overlooked beneﬁt of trade credit insurance is that it can signiﬁcantly boost the ability of the business to obtain bigger and better terms on bank loans to fund expansion plans. With more stringent lending criteria in place, banks are looking to ensure that the risk is protected when they lend. While smaller commercial businesses are often viewed as a higher risk by lenders, credit insurance can help companies overcome such hurdles. It also means suppliers can offer more appealing and extended payment terms to their clients, a distinct competitive advantage for them. In addition, businesses get a much deeper analysis into the creditworthiness of their customers.
There is still a misperception that credit insurance is expensive and complicated, and many companies never venture into the credit insurance space to their detriment. The other misconception is that credit insurers only insure good debtors.
Although credit insurers do not insure very bad debtors with serious adverse records, they do still insure marginal debtors. But the important question that remains for any business leader is whether you would want to deal with a potentially bad debtor and not know about it? Credit Insurance provides clarity on exactly these issues.
Creditors and all suppliers should not underestimate the dire implications for their business if
major debtors default. Job losses and retrenchments are the order of the day while drastic cost reduction programmes prevail as companies seek to avoid compromising their long-term sustainability. The lack of spending and extended nonpayment of accounts by debtors is exacerbating already volatile markets.
EASING CASH FLOW
Under these conditions, even with tight cash ﬂow controls and working capital, companies would be foolhardy not to have payment protection in place, given the tough trading conditions. Business rescues are becoming commonplace and it is important to note that when a company is placed under business rescue, payments to suppliers and creditors are put on hold, usually for months until a plan is approved by all stakeholders.
This creates serious cash ﬂow problems for suppliers. Couple this with lack of payment or delayed payments by any other debtors and one has the makings of a vicious circle.
The key premise of credit insurance is to protect your debtor’s book, and in turn ensure that cash ﬂow remains in the case of a bad debt. It also allows management to get a deeper understanding of their debtors’ book due to the extensive credit vetting done by the insurer. In addition, another beneﬁt of having credit insurance in place is that it allows a business to explore new markets and suppliers that may not ordinarily be possible under restrictive credit policies.
Credit insurance is not complicated or expensive, and with rates stabilising it should be an integral part of a well-conceived risk mitigation strategy. Payment protection through properly scoped credit insurance is a non-negotiable given the current market.