What's the blindspot event bringing SMEs to their knees?
Even profitable businesses in the small business sector are at risk of going bust. Kumaran Padayachee, CEO of Spartan SME Finance, warns that managing the greatest threat to your business means facing the word ‘default’ squarely on the jaw.
One of the biggest misunderstandings is in thinking 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,” says Padayachee.
People enter a business to make money but are not necessarily equipped with the skills to manage cash flow in and out of the business at all levels. As a funder of hundreds of SMEs, Spartan has a critical lens on the problem areas experienced by the more established SMEs and there are three things businesses can do to safeguard their sustainability.
Credit vet your customer’s financial bite
SMEs, particularly in this economic climate, are often so grateful to secure the work that they don’t consider the importance of credit vetting their new client. What could possibly be worse - paying a small fee for a professionally outsourced company to make a few credit enquiries (if you don’t have the internal expertise to create the vetting process yourself)- or writing off a significant amount of bad debt?
“The answer looks simple, yet credit vetting is often overlooked in the rush to secure a new contract or client, “ says Padayachee.
For instance, he advises that when the risks around the creditworthiness of a customer are higher, it is good practice to request an upfront payment.
Ensure debtors despite a rose-coloured outlook
No matter how taken you are about the plush offices and the impressive marketing around a new client, you need to be aware of hidden cracks. Even JSE-listed companies can go through hard times. We’ve seen it in retail, construction, financial services with some of the biggest corporate brands going into business rescue or liquidation.
“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,” warns Padayachee.
Don’t dwell on past glory days
Past successes are incredibly important in building a reputation and a brand, but in the fast-changing business world, keep looking future-forward. This is the approach Spartan encourages.
“Be careful not only to gauge new clients based on their past track record. Know your client’s industry, read between the lines, check the changing environment – particularly now in a contracted economy – and forecast if there are any troubles that lay ahead in the sector to manage future risk,” says Padayachee.