A rise in insolvencies is becoming a growing concern for businesses offering trade credit, with load shedding posing significant challenges, according to Frank Knight, the CEO of Debtsource, a credit management services company.
Additional costs and disruptions caused by power outages could adversely affect cash flow and profitability.
However, rising interest rates are the primary contributor to the rise in insolvencies.
“Interest rate hikes correlate with an increase in delinquency ratios in certain markets. Even a small increase in the repo rate leads to a corresponding rise in delinquency. By staying informed about the potential impact on your customers, you can proactively manage your credit exposure and adjust risk management strategies accordingly,” Knight says.
South Africa’s elevated dependence on portfolio investment flows, currency volatility, and ageing infrastructure are also are increasing the rise of insolvencies locally.
“Insurance providers have observed an increase in claims related to insolvencies. Debtsource reports a 27% year-on-year increase in delinquency ratios, which closely aligns with trade credit insurance provider Allianz Trade's prediction of a 21% increase in insolvencies over the next 12 months.”
Knight pointed to a potential lag effect preventing these statistics from reflecting the current state of insolvencies.
“The lack of formal business rescue statistics makes it difficult to gauge the impact of this process on insolvencies. However, it is evident that more businesses are opting for business rescue and staying in the process for longer periods. Company boards and directors are becoming more aware of their responsibilities under the Companies Act, leading them to initiate business rescue proceedings early - before summonses and judgements are issued,” he said.
Debtsource said that entering business rescue proceedings represented one of the starkest danger signs of customer insolvency, but by then, it might be too late for creditors.
“While the aim of business rescue is to avoid liquidation and provide a better outcome for creditors, the success rate is disappointingly low, with only around 12% of companies successfully implementing their plans. By then, there is no guarantee that creditors will receive any money owed to them. Creditors must be aware of this risk and should not rely solely on the assumption that business rescue will lead to a favourable outcome,” it said.
Knight said companies should be cautious about giving excessive security to banks in exchange for limited funding. ‘’While banks naturally seek as much security as possible, companies need to evaluate whether the amount of funding justifies the collateral requested. Over-reliance on bank facilities and limited access to alternative financing options can place additional strain on a company's finances and increase the risk of insolvency,” he said.
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