SMES warned about the effects of junk status

SMALL businesses have been warned of the ripple effects of the Fitch and Standard & Poor’s credit ratings agencies downgrading South Africa to junk status.

Business Partners International chief operating officer Mark Paper said small and medium enterprises (SMES) would feel the effects of the downgrade with an increased burden placed on domestic banks, including their ability to service foreign currency obligations, as a result of the recent downgrades.

“The South African banks are directly affected by South Africa’s sovereign credit rating and, as a result of the downgrade to junk status, S&P also downgraded South African banks to junk status.

“Thus, an increase in borrowing costs by the domestic banks will, over time, put pressure on shareholder returns. To bolster returns, banks will be forced to increase the cost of funds while reducing operating expenses – both affecting the ability of SMES to obtain and service loans,” Paper said.

Paper says these factors can be expected to have a knock-on effect on consumers, who in view of increased interest rates, and rising prices, will have less disposable income.

“These are all factors that influence the health of a small business in terms of cash flow at the end of the day,” he says.

Despite the country being deemed riskier today than it was before the downgrades more than a week ago, Paper said SMES should not be deterred from investing in their business as this would contribute positively to the country’s economic recovery.

“While we’re faced with uncertain times, it doesn’t mean SMES should suspend activity or stop moving forward. Borrowing money, in good or bad times, can make a lot of business sense for well-managed companies.

“SMES need to ensure that they understand the funding options that exist, as well as what type of funding is best suited to their needs – be it equity, long-term debt for fixed assets or shorter-term working capital – as this will determine who to approach, the term and price to pay, and what impact this will have on the cash flow of a business.

“Speaking to a financier who not only offers the right type of funding, but who also understands the business and the challenges likely to be faced in tough times will enable the business owner to be realistic about short- and long-term cash flow projections,” Paper said.

SMES should place emphasis on handling debtors more professionally and promptly to ensure cash flow is not affected.

“Every business has its share of slow-paying and non-paying customers.

“Bad debt is a problem for businesses of all sizes.

“This position is made even worse during difficult economic times, especially for a small business where one non-paying customer may be the difference between survival and failure.”

And the Business Partners organisation has said it would not be changing its approach towards financing SMES despite the downgrades.

“We remain committed to serving SMES, through the good and the bad times, regardless of the economic environment.”