Debt burden weighs on businesses
Subdued consumer spending, high interest rates, global macroeconomic headwinds and structural challenges that hold back domestic economic growth continue to negatively impact businesses, particularly in the small, medium and micro enterprises (SMME) sector, vital for job creation in SA.
“We continue to see a significant deterioration in the Experian Business Debt Index (BDI), which fell from a betterthan-expected 0.445 in Q2 to 0.141 in Q3 2023,” says Jaco van Jaarsveldt, Head of Commercial Strategy and Innovation at Experian Africa.
Experian data on outstanding debt also negatively impacted the BDI in the most recent report. While the number of outstanding debtors’ days on average decreased to 47.9 in Q2 from 49.9 in Q1, the specific ratios relating to outstanding debt, which are applied to measure debt stress, deteriorated slightly.
According to Van Jaarsveldt, subdued domestic demand, electricity supply issues and logistics constraints that impact stock levels are putting businesses under pressure.
“To keep their businesses afloat, owners are drawing on personal funding lines as small business funding dries up amid high interest rates and risk-off sentiment from banks.”
Frank Knight, CEO at Debtsource, says companies now rely more heavily on supplier credit facilities as their prime form of business lending due to the decrease in available bank funding.
“Longer supply chain delays in shipping, harbour and rail networks have placed added strain on company cash flows, forcing businesses to access second-tier financing options such as invoice discounting or supply chain finance,” he says.
“However, these are typically at much higher rates than traditional bank funding, adding further pressure to profitability and cash flows.”
The financial stress these factors place on businesses is evident in the rising rate of delinquencies, with Debtsource statistics showing a 33% increase since the start of the current interest rate hiking cycle.
“There is a direct correlation between higher interest rates and increased delinquencies in trade credit because more companies go out of business when interest rates increase.”
While the latest liquidation data released by Statistics SA on November 27 2023 paints a different picture, with the total number of liquidations decreasing by 13.4% between October 2022 and 2023, Knight says these statistics overlook a crucial trend.
“The conventional focus on liquidation statistics as a bellwether for the business sector’s overall health does not account for the fact that companies are increasingly opting for business rescue instead of succumbing to outright liquidation.”
While providing a lifeline to struggling businesses, Knight says this shift in strategy conceals the gravity of the financial distress in the market, with Debtsource witnessing a 26% year-on-year increase in business rescues.
“Our records indicate companies that go into business rescue remain there for longer, which simply means liquidation stats have a lag effect.”