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Protecting your profits: Three key steps to avoid late payments and bad debts

A high number of logistics companies in MENA have experienced late payments and bad debt over this year. Learn more about the three key steps to avoid late payments and bad debts.

10/09/2023 · 4 minute read

One bad debt by a large customer can damage the cash flow of many small and midsize enterprises (SMEs) and even lead to insolvency. And for companies in South Africa, slower global economic growth and low to no growth in the economy, high energy prices, inflation, and soaring interest rates have made delayed payments or non-payment for goods and services more likely.

Is your industry at risk of delayed payments and defaults?

After a few years of low claims in South Africa, credit insurers like CGIC, Coface and Lombard are reporting an increase in the value of claims, while the number of claims is lower, indicating more catastrophic, high-impact insolvencies are on the rise. They note the sectors most affected are energy (fuel traders), retail, construction and agriculture. For the reasons mentioned above (high interest rates, inflation), consumer confidence is low and unemployment high, which affects retail spending.

Changing weather patterns and backlogs at our ports are affecting exporters in the agriculture sector, while low economic growth in combination with low government spending over recent years has severely impacted the construction sector. Suppliers to these sectors are reporting an upsurge in late payments.

What happens when customers fail to pay?

A company can face the following risks if a customer pays late or a debt is ultimately deemed unrecoverable:

  1. Cash flow issues — Late payments can result in a company not having enough cash to fund its immediate operational costs, such as wages. A logistics company, for example, may be unable to fund transportation expenses and fulfil existing contracts. For a manufacturing company, interrupted cash flow could hinder its ability to buy an adequate supply of raw materials, which could lead to production delays. Late payments can also tie up working capital that could otherwise be invested in growth — such as the purchase of additional vehicles or machinery. If a large customer defaults, the slim margins on which many companies are operating at present may put them at risk of becoming insolvent.
  2. Increased borrowing costs — Companies facing losses can ask a bank facility to help bridge the gap. However, current high interest rates — most central banks in the region have mirrored the rate increases of the US Federal Reserve — will boost operating costs significantly.
  3. Debt recovery and legal expenses — Companies may have to resort to legal action or use debt collection agencies in an attempt to recover outstanding amounts. These processes are almost always costly and time consuming and divert resources from the company’s core business operations. However, there are steps a company can take to avoid the risk of late payments and defaults.

Three steps to mitigate late- and non-payment risk

The impacts of bad debts and late payments can be far reaching, but there are several strategies companies can implement to reduce the risk of late payments and defaults:

  • Conduct customer screening and selection. First, the company should choose the right customer at the outset to avert bad debt. Companies can check the financial health of prospective customers by reviewing their financial statements, requesting references, purchasing business information (credit reports), and, where practical, carrying out a field visit to check their premises and staff.
  • Practice efficient debt-collection processes. Streamlined debt-collection procedures with well-timed pre-legal and legal steps to take in the event of a delayed payment will help a company collect overdue revenues. If attempts to recover debts internally are unsuccessful, a company can consider using a debt recovery service.
  • Purchase trade credit insurance. Trade credit insurance indemnifies a company in the event of payment delay or the insolvency of a customer insured under the policy. Trade credit insurance policies can also facilitate a company’s expansion into untested markets, improve access to capital and increase sales with existing customers. The benefits of this type of insurance go far beyond bad-debt protection. We will outline these in the next instalment of this series.

For more information on reducing your exposure to bad debt or late-payment risk, 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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