File picture: James White
File picture: James White

OPINION: Indebtedness like house of cards - about to fall

By Eustace Mashimbye Time of article published Jul 19, 2019

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July is Savings Month. Much has been written about South Africans’ poor culture of saving, while the SA Reserve Bank recently announced that 72 percent of our household income goes to servicing debt.

The economic situation and high unemployment are contributing to the cycle of indebtedness.

As consumers face rising costs of living, they are forced to borrow for basic necessities. This puts pressure on businesses, which see declining revenue streams as consumers tighten their belts and learn to go without. Given the high unemployment rate, much is being done to encourage entrepreneurship for small business owners to create their own wealth, but in this climate many are battling their own balance of payments.

For companies doing business with the government, which has historically been regarded as a notoriously late payer, there was some good news out of the Budget Speech of the Department for Monitoring, Planning and Evaluation last week, when Minister Jackson Mthembu affirmed their commitment to the 30-day payment rule, telling businesses not to "suffer in silence" and that he is ready to "crack the whip" in favour of compliance. His department has reduced payment terms to seven days and he commended Gauteng for getting its own down to 15 days.

But in the private sector there is no one to enforce a company's payment terms. Late payment is endemic, and cash flow becomes a problem. I have a friend in the logistics sector whose major client agreed to much more favourable payment terms but on the condition that he gives them a 1.5percent early payment discount. As tempting as it might seem, his margins are already so tight that he would be cutting off his nose to spite his face, and so has had to decline and wait for the money to come in.

This is the case for many small businesses, which are being squeezed from all sides. I recall a talk by business guru Vusi Thembekwayo, where he admonished small business owners for going out and looking for loans which remain for years like a noose around the business’s neck, when all they need to do is to be more efficient about collecting amounts outstanding.

But this is easier said than done in a chain of payments that is bottlenecked. We are now seeing the creation of companies that are prepared to exploit this and who have seen a gap in the market for business finance based on your debtors’ book, or who pay your creditors for you keeping the wolves from the door, but a loan is a loan by any name and comes with terms, conditions and interest re-payments.

The growth of enterprise and supplier development programmes by a number of large companies has been a bonus for the SMMEs that they support, offering preferential payment terms that enable them to stay afloat. But not all SMMEs are lucky enough to be under the protection of such schemes and are left at the mercy of their clients to be paid, when and however they can.

We must make every effort to support our own local businesses with the limited spending that is still taking place and keep what wealth there is here in the country. And only buy what you can afford and honour your payments, because indebtedness is like a house of cards, which can fold so easily at any time.

Eustace Mashimbye is the chief executive of Proudly South African.


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