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.