Small businesses are often the first ones to be hardest hit during difficult times.
However, there are ways business owners can take control – starting with building a strong credit reputation, explains Keith Wardell, Head of Commercial Strategy at Experian South Africa.
The tension is evident in Experian South Africa’s latest Business Debt Index (BDI) for the second quarter of 2016. According to the latest data, the outstanding debtors’ days shot up to 63.65 in Q2, from 57.96 in Q1. Compared to their large business counterparts, small businesses face a troubled road ahead.
However, more worrying are the far-reaching implications to the South African economy. Small businesses tend to employ the highest number of workers in any economy and if the current macro-environment trends continue, the country’s employment sector may continue to reflect declining numbers.
Building a solid foundation
According to Global Entrepreneurship Monitor’s South African Report 2015/16, challenges for accessing finance were significantly higher for entrepreneurs in 2015 compared to 2014 and has resulted in more than a quarter of entrepreneurs exiting their businesses for this reason.
Furthermore, the report showed that almost a third of South African entrepreneurs discontinued their businesses due to lack of access to finance, compared to the average for Africa.
Supporting these findings is the National Small Business Chamber’s ‘2015 National Small Business’ survey which found that 57% of respondents identified lack of funding and insufficient cash flow as the biggest obstacles to their growth.
While there may be very valid reasons for this, including the age-old challenges of poor payments cycles and high spending – where ‘it takes money to make money’ – are often the cause of difficulties in maintaining a healthy cash flow, keeping afloat and accessing the capital required to expand.
In these cases, maintaining a good credit reputation is often overlooked. Understanding what this involves and how it can impact a business is essential for any entrepreneur needing to prove their integrity and trustworthiness to financial institutions, suppliers and customers.
As a small business owner, it is equally important to know your customer’s business health. Credit ratings are an important background check that helps small businesses owners to ensure customers – particularly those who are they about to embark on business with – are able to make timely and regular payments. This ultimately helps to safeguard small businesses against risks, such as bad debt, that could threaten the business’s financial stability.
Taking control
Properly utilising business credit reports can give small business owners the edge and agility to respond and react to issues well in advance, and plan for worst case scenarios. Understanding your own personal as well as your business credit report serves to ensure a proactive management of one’s business wellness – and is a welcome tool in an entrepreneur’s toolkit.
The old adage of ‘prevention is better than a cure’ always rings true for good credit health. This often involves taking pre-emptive measures such as budgeting for credit, understanding the exact payback amount and keeping debt repayments between 20% and 30% of monthly expenses.
Keith Wardell | Head of Commercial Strategy, Experian South Africa | http://www.experian.com/ | keith.wardell@experian.com |
