SA ECONOMY online

So, why should any business worry about payment??

 

Well, if the truth be told, the world is teetering on the verge of an economic meltdown. The ‘cherry on the top’ must surely be the financial market turmoil in the United States brought about by the sub-prime crisis; bailout of Freddie Mac and Fannie Mae, the collapse of Lehman Brothers and the near-demise of the world’s single largest insurance company – AIG!

 

But hold on for a moment – this is only the tip of the iceberg! And talking about icebergs, who could have imagined that a bank in Iceland would go to the wall in the first place and in doing so, have caused so much disruption in the United Kingdom?? Who could have foreseen a $700bn bailout for US banks? To put this into perspective – that is about R63 trillion, depending on the rate of exchange you use.

 

And talking about the UK, at least the Prime Minister did not dally about when implementing a rescue strategy for British banks. I suppose the greatest surprise came when many other European finance ministers quickly followed suit. Perhaps what is most disconcerting in this entire crisis is the attitudes of the banks – literally clamming up and withholding further borrowings even between themselves.

 

It seems that very few countries have been immune to this contagion, not even Japan. There are, however, many other worrying factors that are denting world economic confidence: talks abound about a new ‘Cold War’ era between Russia and the West and let’s face it, Dimitri Medvedev has proved to be somewhat of an enigma, one that quite frankly was grossly underestimated by the Western powers; North Korea is again proving to be bellicose; Thailand and Cambodia; India and Pakistan; Pakistan and Afghanistan all displaying regional aggression; while most of Africa is either drought-stricken, plagued by civil strife, economically downtrodden or forever begging for relief.  And let us not dwell too long on that denizen of African dictatorship just north of our borders. The groundswell of socialism in South America is another niggling dilemma. Fuel, energy and water reserves look likely to fast become the bargaining chips of a new global political poker game, with potentially extreme consequences.

 

So what is there to worry about, when exporting from the southernmost tip of Africa?  Getting paid ……. surely not??

 

The communication media of the 21^st century have certainly closed the gap between buyers and sellers around the globe, but there can be no doubt that there is probably even greater concern about payment now than there ever was when we only depended upon the trusty old telex! And, whether it is an evolutionary process or not, putting South Africa aside for a moment, there has been a global corruption of business morals and ethics that make reneging on payment seem like a trifling matter.  Well not for the exporter of course!

 

So again, what is there to worry about??

 

Most exporters are blithely unaware that even confirming banks in foreign countries renege on paying Letters of Credit (LCs)!  That’s a fact, we won’t even go into the rate at which LCs are rejected by banks on first presentation; nor will we delve into the costs associated with rectifications et al. Now just quickly recall the observation that I made about the attitudes of the banks to the present crisis. What likelihood is there now of foreign banks defaulting on payment to some poor exporter down here in South Africa?  I would be most concerned not only about the ability of the foreign collecting banks to pay, but also their willingness to do so. And what chance does the exporter have of successfully suing an illiquid financial institution? 

 

Now, compound the problems that non-payment could lay at the hapless exporter’s door when trying to recover either his goods or payment from the debtor company in a country thousands of kilometres away….

 

How adept are you at debt collection in the importing country; how well do you know the law when pursuing debt through the courts; do you know a reliable attorney in the country; can you provide ‘security for costs’; do you understand the ‘solicitation of favours’ in some countries when proceeding legally??  Many of these and other questions need to be carefully considered when exporting.

 

One must  wonder how many companies that export do so just for a love of the challenge??  Probably not many, if any at all! So, it must be because of a profit motive, directly or indirectly. But the problem with making a profit depends very much on getting paid what you are owed. This is ultimately the missing ‘Fifth P’ in the marketing mix and it keeps coming back around to this most vital of aspects for any exporter.

 

The key is, how do you secure that all elusive payment? There are many mechanisms out there, but one of the simplest and probably the most comprehensive, is to insure against ‘non-payment’. Like any exporter makes sure that the marine risks are fully covered before shipment, so too should the payment risk be considered.   A ‘credit insurance’ policy is so much more than just a remedy against not getting paid - it is an invaluable aid to the export manager, especially when trying to determine whether the foreign importer is creditworthy in the first place; and secondly whether there are unfathomable risks in the importer’s country.

 

This global credit crisis has highlighted one thing very clearly: nothing is what it seems. It was literally only months ago that ‘Business SA’, along with the rest of the business world, rode a tsunami-like wave of optimism, believing that the boom was likely to last and last and……. But, like the saying goes – “nothing lasts forever”. Unfortunately, the downturn happened at a speed that caught many companies, banks and even countries, napping! With a credit insurance policy in place, the exporter is able to leave the payment risk aspect in the hands of a professional underwriter whose sole reason for existence is identifying every element that could prejudice that payment.

 

This delves into the creditworthiness of the foreign debtor in sometimes intimate detail; assessing and rating the debtor’s country from a myriad of aspects, much of which is information that the exporter would never be able to reasonably compile.   And, when all is said and done, the credit insurer must be bold and honourable enough to stand behind the exporter when or if something does go wrong and assist with the legal process; navigating through those issues espoused above, championing the cause and ultimately indemnifying the exporter against the loss.

 

What is perhaps most notable at this juncture of the global financial turmoil is that the Credit Guarantee export policy does offer cover against default of the collecting bank – a unique and often overlooked addition to the insurance offering; overlooked only because of that past warm and fuzzy feeling that nothing could go wrong, go wrong……

 

Of course, the fallout of global economics will not kindly sidestep South Africa. We have already seen an uptick in the number and value of corporate liquidations and if our numbers are anything to go by, this is not likely to subside anytime soon. This does imply that many supplier companies to many other debtor companies are going to be faced with that very unpleasant scenario of having to write off substantial amounts due to ‘bad debts’.  Again however, the simplest remedy against bad debt is to ensure that you are paid in cash before you conclude any sale, however unlikely this is. And bearing in mind the crime situation in SA right now, accepting huge amounts in cash is just inviting problems that you or your company can just as well do without! 

 

Like insuring your vehicle; building and life against some calamity that could take you out of the game completely, why would you not consider insuring your debtors against non-payment?  After all, this is a risk that could virtually destroy you, your company and every employee that works for you. It is good corporate governance and may reduce the liability that directors could face by not considering all business risks.

 

[by Roger Munitich, General Manager Marketing and R & D, at Credit Guarantee Insurance Corporation]