Demand for trade credit insurance rises as uncertain trading conditions prevail in SA
Johannesburg - Many South African businesses and in particular small and medium enterprises (SMEs) currently find themselves in a vulnerable position, as economic pressures and tough trading conditions continue to impact companies' ability to stay afloat.
Given the highly uncertain operating environment, the demand for trade credit insurance has never been stronger, with businesses increasingly looking for cover to protect themselves from risks involving trade debts.
According to data released by Stats SA at the beginning of this year, company liquidations have surged at the end of 2022, rising 18.3% month-on-month and 30.3% year on year.
The rise in insolvencies can be attributed to load shedding, higher interest rates, low growth and high inflation, which make for a difficult trading environment and create financial distress that continues to have an impact on businesses not being able to generate sustainable revenue.
Considering the increasingly challenging business environment in South Africa and therefore the extreme risk that smaller businesses can potentially face when debtors fail to pay due to circumstances beyond their control, trade credit insurance cover should be a top priority for all small and medium companies.
In 2020, retail giant Edcon was placed under business rescue, owing about R3.7bn to more than 80 entities, with at least 10 former suppliers approaching the high court in Pretoria for permission to litigate against Edcon, to improve their low payout. It was reported at the time that some creditors were to receive as little as four cents for every rand they were owed under the business rescue plan.
"The Edcon case is a perfect example why trade credit insurance is important, as it offers protection against the non-payment of debts due to insolvency, business rescue or payment default incurred by debtors domestically or internationally. This is key for businesses that want to mitigate some of their biggest risks, namely their debtors," says Gareth Joubert, Managing Director of Hollard Trade Credit.
"We know that maintaining cash flow to grow a business can be challenging, and even more so considering the current state of the economy. After all, if a company delivers goods or services on credit, just one bad debtor can cripple their entire supply chain."
Joubert says that the current trading environment remain extremely tough for small and mid-sized companies that represent about 98% of the country's businesses and employ between 50% and 60% of the workforce.
"Unfortunately, SMEs are also some of the most vulnerable types of businesses, in most cases lacking the funding and resources of bigger enterprises yet facing the same operational and environmental challenges that larger enterprises do," he says.
While in the current economic climate many SMEs are forced to operate on tight budgets, Joubert says that this should not stop them from getting trade credit insurance, as the peace of mind of having cover far outweighs the risks associated with a debtor defaulting on their payments.
"Businesses seeking trade credit insurance should opt for a specialist risk insurer that has expert trade credit underwriters that are highly experienced and adept at discerning good credit decisions and take the time to work through and understand all the information presented on each and every case," he says.
"This, together with the insurance provider's economic and industry understanding means that they will be able to provide the right credit management and risk transfer mechanisms to guide a business on offering credit to its clients."