By Frank Knight.
Why trade terms can make or break your business.
South Africa’s credit ecosystem is far more interconnected than it often appears. Trade credit runs through almost every part of it.
Trade credit is one of the largest and least appreciated sources of finance in South Africa. Every day, businesses extend billions of rands in credit to their customers without thinking of themselves as lenders. Yet every invoice issued on 30-, 60- or 90-day terms is, in effect, a financing decision.
That reality matters now more than ever. When the South African Reserve Bank (SARB) adjusts interest rates, when inflation erodes purchasing power or when currency volatility pushes up costs, the effects are not confined to the banking sector. They flow through supply chains, into customer payment behaviour and, ultimately, onto businesses’ debtor books.
The question is not whether a business extends credit. Most do. The more important question is whether they are managing that credit with the same discipline as any other strategic asset. In a low-growth, high-risk economy, trade credit can be a powerful enabler of growth and customer relationships. Managed poorly, it can become one of the greatest threats to liquidity and profitability.
South African businesses have traditionally looked to banks as the country’s primary providers of credit. Corporate bank lending totals around R5-trillion at any given time – a staggering figure. Yet when one considers the receivables sitting on the balance sheets of suppliers across the economy – goods sold and services rendered that have yet to be paid for – trade credit likely rivals, and may even exceed, that amount.
In other words, one of South Africa’s largest sources of working capital may not be the banking sector at all, but ordinary businesses extending payment terms to their customers.
The implications are significant. When customers cannot access bank finance, or prefer not to use it, they frequently turn to suppliers. Requests to move from 30-day terms to 60, 90 or even 120 days are commonplace. At that point, suppliers cease to be merely vendors; they become lenders of first resort.
Because no loan agreement is signed and no headline interest rate appears on the invoice, the cost of providing that credit is often overlooked. Economically, however, the transaction is no different. Credit has a cost, whether or not it is explicitly recognised.
Every additional 30 days of credit carries a real economic cost. That cost is driven by several factors: prevailing interest rates, inflation, the opportunity cost of capital and any alternative uses for the cash tied up in receivables. Could that cash have reduced an overdraft facility? Could it have secured an early settlement discount from a supplier? Could it have been invested elsewhere in the business?
Viewed collectively, the cost of carrying a debtor book can easily amount to a high-teens annual percentage. A receivable of R100,000 outstanding for 12 months could therefore represent an economic cost of approximately R18,000. When multiplied across debtor books worth tens or hundreds of millions of rands, the implications for cash flow and profitability become substantial.
This is why monetary policy matters: interest rate decisions are not abstract economic events; they influence the cost of funding every rand tied up in receivables. When rates remain elevated to contain inflation, businesses are effectively paying more to finance their debtor books. When rates begin to fall, some of that pressure eases.
While the impact is rarely visible as a separate line item in financial statements, it manifests itself through tighter liquidity, squeezed margins and deteriorating payment behaviour.
The relationship between interest rate cycles and delinquency is equally important. As debt servicing costs rise, businesses and consumers inevitably make difficult choices about which obligations to prioritise. Some defer discretionary spending. Others delay statutory payments. Suppliers are frequently among the first to feel the effects of mounting financial pressure.
For businesses extending generous credit terms without disciplined credit management practices, the consequences can be severe. Decisions by SARB are informed by inflation forecasts, global economic developments, exchange rate movements and domestic growth prospects – not the payment profile of any particular industry or customer base.
That places the responsibility for managing trade credit squarely on businesses themselves. The macroeconomic conditions will always influence payment behaviour, but they do not determine outcomes entirely. For instance, one company may extend credit indiscriminately, with limited due diligence or ongoing monitoring. Another applies disciplined credit assessment, carefully manages limits and actively monitors early warning signals. Over time, their liquidity positions and profitability will diverge dramatically. The quality of a company’s debtor book remains one of the most reliable indicators of its financial strength.
The rise of fintech solutions has added further complexity to the credit landscape. Invoice discounting platforms, supply chain finance arrangements and alternative lenders targeting small and medium-sized enterprises have created new opportunities to unlock working capital. But they also introduce new risks. Customers may increasingly rely on expensive short-term funding to meet immediate obligations, potentially creating greater financial strain further down the line.
There are reasons for optimism. South Africa’s economic growth has been disappointing over the past decade and a half, but even modest improvements in growth rates would materially improve trading conditions, business confidence and credit quality across the economy. Businesses that have built robust credit management practices will be best positioned to benefit when those conditions improve.
Companies that sell on terms are not simply in the business of manufacturing products or delivering services – they are also in the business of extending credit. Every additional 30 days granted to a customer is a financing decision that deserves careful consideration.
Trade credit should therefore be managed with the same strategic intent as any other significant business asset. That means investing in sound credit policies, robust information and analytics, continuous monitoring and disciplined collections processes.
Frank Knight is the CEO of Debtsource.