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Furthermore , all the trade credit insurers in South Africa are currently reporting an increase in claims lodged both from a frequency and a severity perspective ; while adding to the evidence . Global credit insurers all forecast an increase in insolvencies and report rising credit insurance claims .

Behind all these factors is that businesses are suffering a triple blow of high interest rates , high inflation and high load shedding .

The cost of credit is calculated as a factor of : the interest rate , plus the inflation rate , plus opportunity cost . The prime lending rate is 11.5 %, inflation is currently at about 7.5 %, while the opportunity cost consists of what that business could do differently with its debtor book : such as getting a discount from a supplier or buying some unique stock . If you add all three elements together the cost of credit has increased over the past year from about 15 %/ year to in excess of 20 %/ year . 1

This means that every R1-million debtors account outstanding for a 12-month period actually costs the creditor R1.2-million and this difference implies that in many cases

there ' s no possibility of making a profit from that account anymore as that is in excess of most trading margins .

Locally , this is only partially to do with interest rate hikes , but also the uncertain political climate as well as low business confidence in the market – particularly loadshedding . This latter event is alone costing private companies billions in turnover , which translates to lower profitability , which in turn means lower tax receipts for government .

Nonetheless , it ’ s worth bearing in mind that South Africa has actually not done too badly compared to our peer group of developing countries including Brazil , Argentina and Turkey which are all far worse . Unfortunately , there is no sign of global inflationary pressure easing as there ' s still lots of inflation at the moment in the American and European markets .

For businesses , the key strategy right now for businesses must be to better protect cashflow , as a debtors ’ book represents a large source of funding capable of readily being converted into cash . I recommend all companies in the business of offering credit to be extra vigilant in their selection of new credit customers , to manage existing customers extra tightly and to ensure their collectionday cycles are as short as possible . A danger lies in businesses trying to drive turnover in these hard times and thereby

allowing the quality of their credit book to deteriorate – perhaps sharply .

If ever there was a time to pick quality debtors , it is now . A mitigating strategy is for companies that haven ’ t already insured themselves to look seriously at taking out a credit insurance policy . Surprisingly , this type of insurance is not yet that expensive given the cycle hasn ' t fully turned . Cover may become more expensive in the medium term . Finally , businesses should make sure that all their credit processes are properly in place , their credit data is regularly assessed and monitored properly , for instance , as to whether there is sufficient security . A debtor approved five years ago may be in a much different risk condition today .

Some companies have been more creative in managing their debtors ’ books . During the Covid lockdown period many businesses had become more risk averse and kept cash on their balance sheet to weather potential storms . That has stood them well in the current market .

While this worsening risk profile is fairly general , it is not entirely across the board . In our own sector air conditioning is certainly struggling , while refrigeration and the cold chain less so . Perhaps this is because one surprisingly robust sector is agriculture – the starting point of the cold chain – which has improved markedly since late 2019 when it was considered high risk . The mining sector too has been buoyant ,

in both cases driven partially by increased commodity prices and the exportfavourable exchange rate for them .

The sectors mostly suffering are consumer focused , which includes a large component of the A / C sector . Fundamentals can rapidly alter : a drought or fall in commodity process would rapidly affect those sectors currently looking robust . There is lots of potential for quick change in either direction – if Putin were voted out or the Ukraine war stopped , many problematic issues could vanish . CLA

1 . Source : Frank Knight , CEO of Debtsource , interview .

Eamonn