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How trade credit insurance boosts business resilience in South Africa

Small non-financial firms in the region are forecast to remain under high liquidity stress in the medium term — putting large shares of their debt at risk of default.

10/09/2023 · 4 minute read

The credit landscape in South Africa is changing. During the lockdowns of the early COVID years, it was expected that many companies would fail, but due to swift government intervention and resourcefulness of businesses and financiers, a tsunami of insolvencies was averted. Surprisingly, the level of insolvencies remained very low in South Africa and the rest of the world through 2023.

In South Africa, credit insurers such as CGIC, Coface and Lombard are reporting that claim payments are now back to the levels seen before COVID. However, although the number of claims is lower than in 2023, the total value is higher, indicating that larger companies are getting into financial distress — in 2024 alone, we’ve seen some big industry names hitting the newspaper headlines. The same insurers are also reporting a decline in declarable turnovers by their policyholders, confirming the South African economy is under pressure.

Although there are some notable green shoots, with the new coalition government (GNU) and with load-shedding becoming something of the past, corporate South Africa is expected to face difficult times ahead in the short to medium term, with increased levels of insolvencies and business rescue cases.

To help navigate this challenging landscape, companies can take out trade credit insurance. Although these policies primarily protect a company against the risk of non-payment for goods and services delivered on credit, they also provide spinoff benefits that are perhaps less well known, such as facilitating a company’s expansion into new markets, improving access to working capital and increasing sales with existing customers.

Key benefits of trade credit insurance

Under a trade credit insurance policy, an insurer covers a company’s nonpayment exposure. This will help the company in several ways:

  1. Reduce risk of cash flow issues and insolvency. In short, under a trade credit policy, an insurer will compensate a company in the event of a late payment or non-payment of an invoice, up to a pre-agreed limit, helping it avert financial hardship or insolvency.
    These policies are of particular relevance to companies in the African region at present. In overpopulated sectors such as fast-moving consumer goods, commodity trading, agriculture, construction materials, consumer electronics and mining, some companies face bad debts after extending credit to customers with weaker credit profiles to secure much-needed sales. However, companies across the board and their insurers are reporting issues with late payments or non-payments.
  2. Explore new markets. A company that wants to start selling its goods or services to new customers or in a country where it has no direct presence usually engages in cash sales in which the buyer’s payment obligation is settled straightaway. With credit insurance, a company can offer a credit line to a new customer at the outset and is therefore more likely to win their business.
  3. Increase sales volumes with existing customers. A credit insurance policy covers the sales of a supplier during the 60- to 90-day period a company is typically given to settle an invoice. A company is more likely to place an order with a supplier if a grace period is granted than if bills are settled in cash as, during this time, goods can be sold, cash recovered and potentially more orders placed with the supplier.
  4. Access funding. International and local banks are generally more willing to grant facilities to companies that insure their customers’ debt with a well-rated insurer. The insurance is also likely to reduce the cost of facilities, allow for larger sums to be borrowed and limit the recourse the financial institution will seek to impose on the funds provided.
  5. Improve cash flow. A company utilising a trade credit policy must regularly review its customers, collect payments on time and, if required, extend set payment terms or stop shipping to customers that are overdue on their payments. By doing so, the company shortens its cash-collection cycle and ultimately improves its liquidity.

Buying the right cover

Amid slower global economic growth, high energy prices, inflation and higher interest rates, companies in the African region are increasingly at risk of delayed payment or non-payment by customers based either in the region or in the UK, Europe, the US and Asia, the main export markets for locally produced goods, where late payments have spiralled out of control in some sectors. In the UK, for instance, 52% of small businesses experienced late payments in 2022, and the Netherlands is reporting record growth in company liquidations in 2024.

To protect against bad debts, information is key. Companies should lean on their insurers and relevant information providers, such as credit information bureaus, trade associations and professional bodies, to perform due diligence on partners ahead of providing them with goods and services. As a broker specialising in trade credit insurance, Marsh runs risk workshops, providing insights and guidance on credit management best practices. Companies should also closely follow shifts in risks in the countries and sectors in which they do business.

Companies should consult a broker to make sure they have the most suitable insurance coverage in place and are taking all available measures to mitigate their trade credit risks.

For more information on trade credit insurance, please contact your Marsh adviser.

Our people

Milind Jain

Milind Jain

Credit Speciality Leader, Middle East and North Africa

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Pieter Dingemans

Credit Speciality Leader, India, Middle East and North Africa

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