Upward trend in liquidations points to troubled economy
Clothing retailer Edcon narrowly avoided liquidation early in 2019 when its creditors and landlords threw it a R2.7bn lifeline.
It was too big to fail because its collapse would have put 140,000 jobs on the line. Similarly, business rescue practitioners are working around the clock at construction firm Group Five in a bid to save 3,000-3,500 jobs.
Elsewhere in the country, 1,198 businesses shut their doors in the first seven months of 2019, Stats SA’s liquidation statistics show. Liquidation figures are on the rise despite the trend among financially strained businesses to opt for business rescue as opposed to liquidation.
The number of liquidations increased 24,9% year-on-year in July and 13,7% during the first seven months of 2019, Stats SA data show.
Being one of the leading indicators of economic deterioration, the upward trend in liquidation and insolvencies also up 4,2% in the second quarter of 2019 shows an economy heading deeper into trouble as unemployment is likely to
increase if this does not reverse, says Jennifer Cohen, executive for policy and advocacy at the Small Business Institute, a lobby group for small and mediumsized enterprises (SMEs).
Cohen says it’s not easy to pinpoint a single reason for the rise in liquidations. SMEs are experiencing financial bottlenecks because of many reasons, including late payment from suppliers and increasing regulatory compliance costs.
“It’s not just because of our low-growth environment,” says Cohen. The issue of late payments is not just from government agencies; big businesses in SA effectively use SMEs as a line of credit, with many taking 120 days to pay companies in their supply chains.”
Liquidation lawyer John Walker of John Walker Attorneys deals with these cases every day. His general observation is that businesses fail because of three main reasons: lack of cash flow, corporate fraud and an increase in mismanagement.
In the case of fraud, which he says has increased exponentially, creditors are usually forced to follow the liquidation route to allow for a private investigation into the affairs of a company, given the prosecuting authority’s incapability to prosecute corporate fraud.
Walker echoes the Small Business Institute’s concerns about how delays in paying small businesses tend to strangle the life out of them.
“The inability of companies to collect debts is compounded by the slow process of the law and the delay in getting matters before a judge,” says Walker, adding that businesses now have to wait eight months to obtain a judgment compelling debtors to pay.
But how is this failure rate and gloomy operating environment affecting financial institutions’ appetite to back small businesses? Cohen says commercial funders are reluctant to take on the risk of financing small businesses, compounding the situation.
Kumaran Padayachee, CEO of Spartan SME Finance, says some funders might take a disastrous view on the construction sector and industries that record high numbers of liquidations, but generally financiers are more cautious and are looking at things more holistically than in the past.
“When looking at a big customer, we are paying more attention to their debtors. Are most of them in arrears? Do they have debtors’ insurance for them? Because if their customers go into liquidation, there’s a cascading effect on them as well.”
Padayachee says that if there is any reluctance among banks to back SMEs, it has benefited niche alternative funders who are focused on lending to small businesses. He says Spartan recorded a 60% growth in funding inquiries so far in 2019, with most of those coming through in the past three months. “But at the same time, we are approving 30% less of the funding applications we receive now because we can only take on so much.”
FNB, which has a sizeable SME division, says it continues to see an increase in the number of SMEs qualifying for and taking up credit. The bank says that in its financial year ended June it extended more than R37.8bn worth of loans to SMEs, a further R18.9bn in overdrafts, and R8bn to women-led businesses. “The growth of our credit book defies the current economic circumstances, with a tougher market facing SMEs in a depressed business environment,” says FNB Business Core Banking CEO Daniel Kaan.
Padayachee says financiers who predominantly or exclusively serve SMEs will continue to lend, but businesses have to be prepared for more scrutiny when they apply for credit.
“At the end of the day, they only make money when they lend money. But what it does mean is that they will adapt to this by trying to look at things more deeply, ask more questions. SMEs will have to maturely understand that it is reasonable for funders to do that.”