SMEs must beware of defaulting customers – financier

In times of economic distress and the environment of frequent company liquidations, small and medium enterprises (SMEs) are in even more danger of being forced to fold if they fail to pay attention to the risks posed by defaulting customers.

A funder has warned that many SMEs lacked the necessary mechanism to detect a threat to their survival posed by would-be non-payers and it’s time for them to wake up and smell the coffee.

It’s universally accepted that SMEs are creators of most jobs and in South Africa the sector played a pivotal role in developing the country’s economy.

According to Kumaran Padayachee, CEO of SME financier, Spartan, many SMEs were already on their knees because they failed to check the blind spot that could knock them out of business.

According to Padayachee, it’s not only poorly performing SMEs that were in danger of falling victims to defaulters or the “client payment that’s never going to be received”.

Recent figures released by Statistics South Africa recorded 183 liquidations in July, representing a 24.5% rise from a year ago.

The total liquidations increased by 13.7% during the first seven months of 2019 compared to the same period in 2018.

Experts said it’s the survival of the fittest but the common denominator for SMEs’ survival in the current economic climate was the need to constantly evolve, navigate and pivot to meet the challenges of the day.

“One of the biggest misunderstandings is that default means late payment by a client or customer. This is not the case. We see SMEs increasingly suffering the consequences of not being paid at all for services or products rendered. This one seismic event could punch the lights out of your business forever,” said Padayachee.

“People enter business to make money but are not necessarily equipped with the skills to manage cash flowing in and out of the business at all levels.”

Spartan, as funders of hundreds of SMEs, had a critical lens on the problem areas experienced by the more established SMEs. This included advising them on the need for credit vetting customers their new clients.

“The answer looks simple, yet credit vetting is often overlooked in the rush to secure a new contract or client,” Padayachee said.

When the risks around the creditworthiness of the customer were higher, it was good practice to request an upfront payment.

The second aspect was to insure the debtors.

Despite impressive marketing messages and plush offices, SMEs needed to be aware of hidden cracks.

“Make sure your debtors are in a position to make good before you render your services because you can’t recover from a major financial knock where a default can topple everything you’ve built up in one big bad debt,” he said.

A third aspect, Padayachee said, was the habit to dwell on past glory days where people tended to rely on past successes while ignoring at the fast-changing business world.

“Be careful not to gauge new clients based on their past track record. Know your client’s industry, read between the lines, check the changing environment … and forecast if there are any troubles that lay ahead in the sector to manage future risks,” Padayachee said.

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