Traditionally, South African companies are quite conservative when it comes to debt, as the economy toughens and companies need to take a hard look at their working capital, many are looking at lending options to help them ride out the volatility.
ESI Africa caught up with Marc Rosen from Investec for Business to get an understanding of the South African business landscape amid the recent negative economic performance, which indicates a decline in GDP growth rate for 2019 from 1.4% to 1.2%.
Q: How are companies viewing currency volatility and debt? Positive or negative?
A: Traditionally, South African businesses have been quite conservative in using debt to address market volatility, but today many don’t have that luxury. From market instability, fluxes in currency exchange, impacts from low foreign investment and contraction of customers, many require debt to operate in the normal course, rather than using cash on hand.
Local and global market challenges continue to have a ripple effect and impact on operations. Locally, political instability and corruption is the premise for most business volatility, while load-shedding has driven every day operational risk. Both impact market growth, business sentiment and the opportunity to expand and South African businesses certainly have had their fair share of both.
What’s more, while the global economy has enjoyed 7 to 10 years of a vibrant bull market, given our local challenges, South Africa hasn’t been able to jump on the wave – stuck in the starting blocks if you will. And now that the tide is hopefully turning, the global economy seems to be plateauing.
Of course, some South African businesses tried to diversify from Rand only earnings, with many expanding offshore. However, many haven’t fully understood the nature of the offshore beast and the outcomes haven’t always been too favourable.
Currency volatility often negatively impacts the earnings of a business and doesn’t allow for the ability of a company to forecast and plan accordingly. Debt can allow a company to manage its working capital cycle (stock, debtors, creditors) and reduce the short-term volatility created from turbulent currency movements.
Q: Impact of business volatility on the mid-market?
A: Political and economic uncertainty are limiting the growth potential of organisations in the mid-market. Volatility limits a company’s ability to plan in the longer term and position their business for sustainable growth. It leads to reactive, short-term decision making which may not be in the best interest of the business.
So, even though these companies need to be capitalising on growth opportunities, they are hamstrung by a lack of access to working capital. The most recent GDP decline is evident in the performance of mid-market companies.
However, despite how economies perform, businesses need to strategise and find ways to negate the current turbulent landscape and possibly grow, therefore finding the right funding partner may be the only way to survive, and thrive, through tough times in the mid-market sector.
Q: How can debt be used positively?
A: The view around debt has changed. Previously, seen as a negative aspect, businesses are now realising that stretching a company’s working capital through various forms of ‘good’ debt can be the source of just enough extra cash to fund revenue-generating programs or capitalise on favourable trade terms.
In fact, managed debt can be one of the most cost-effective forms of financing available to a growing business. A company that is stable and well-established and has both assets to borrow against and the cash flow to service the loans, can utilise this form of debt strategically.
Managed debt should not be feared, but instead viewed as a tool that can help grow a business. Debt can be the tool that allows a business to jump-start slowing earnings growth.
Q: What funding options are available for companies looking to grow their business in a tough economy?
A: Organic growth is hardest to come by in a tough economy. With a defined customer base that is not expanding – the only way to grow is to take market share from competitors. However, this requires businesses to be nimble enough to move quickly to take advantage when the
Finding a funding partner, an option that allows businesses to take advantage of trade situations, where there is opportunistic buying, is critical. Being able to take advantage of a discount for early settlement or higher volumes, for example, could mean being able to outprice a competitor and gain market share in a stagnant market. Further, the ability to provide terms to customers who themselves have cash flow pressure can also allow a company to differentiate from their competitors.
Relying on cash alone to cater for these strategies is not an option. Below are some funding options that companies can look at for growth opportunities:
Trade and import finance: this is funding for the purchase of stock and services on terms that closely align with your working capital cycle.
Borrowing based lending: This funding will allow you to utilise your balance sheet (debtors, stock and other assets) to give you access to the funding that the business needs.
Asset and rental finance: this option alleviates the requirement for upfront capital investment in the productive assets you need to run and grow your business, by funding the purchase of these for repayment on an instalment basis.