Voices

Debt isn’t the enemy: SA companies’ big shift in how they view volatility

2019-06-12 14:00

Traditionally, South African businesses have been quite conservative when it comes to debt and market volatility, but today many don’t have the luxury to be as conservative as they would like. From market instability, fluxes in currency exchange, impact on low foreign investment and contraction of customers, many are requiring debt to operate, rather than using cash on hand.

Business isn’t perfect

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 have certainly had their fair share of both.

What’s more, while the global economy has enjoyed seven 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 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.

Its not just about the numbers

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 move customers from competitors.

However, this requires businesses to be nimble enough to move quickly to take advantage when opportunity arises. Finding a funding partner and 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.

As a result, South African businesses are recognising that they need funding to kickstart and reignite growth, but because the cost of business has increased substantially, relying on cash alone is no longer an option.

Consequently, the view on 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 marketing programs or capitalise on trade conditions.

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.

And as we start to see this shift in sentiment, it’s critical that businesses find a finance partner that understands business is in a state of flux, it isn’t perfect and that traditional hard lines and rules of engagement need to change as businesses need it to take advantage where they can.

Marc Rosen is from Investec For Business

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August 18 2019