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INSURANCE: Credit Insurance Paramount As Business Rescues Surge

 





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The looming fallout of the Eurozone, growing corporate insolvencies and extended payment delays are exerting massive pressure on businesses and their long term sustainability. Considering the potential contagion from such business failures and volatility, payment protection in the form of credit insurance has become an absolute imperative for all businesses trading in these conditions, regardless of their size or turnover. This is according to Maria Teixeira, Manager: Trade Credit, Surety and Political Risks at Aon South Africa.

“Bleak economic reports coming out of credit insurers are on the mark. Creditors and all suppliers should not underestimate the dire implications for their business if major debtors default. Job losses and retrenchments are on the up again as business struggle to maintain high sales volumes. Drastic cost reduction programmes seem the order of the day as companies seek to avoid compromising their long term sustainability. The lack of spending and extended non-payment of accounts by government is also exacerbating already volatile markets” says Maria.

“Under these conditions, credit Insurance is becoming a survival necessity rather than a luxury for many companies. Despite tight cash flow controls and working capital, companies would be foolhardy not to have payment protection in place given the tough trading conditions. Business rescues are becoming commonplace, with the most recent application filed by Sanyati after their shares were suspended. Sanyati is owed long outstanding payments from three provincial governments totalling R79 million.

“Statistics indicate a sharp rise in voluntary applications for business rescue from companies. Business rescue claims to various insurers average around R30 million in total, with well over 140 companies applying for business rescue in a short space of time. Business rescue is affecting all industries and companies of all sizes, and lately the trend is that the bigger the company, the harder they fall. There is no longer a ‘safe’ company to deal with in today’s economic climate,” warns Maria.

The rise in the number of business rescue applications should be of serious concern to all suppliers. When a company is placed under business rescue, payments to suppliers and creditors are put on hold, usually for months until a plan is approved by all stakeholders. This creates serious cash flow problems for suppliers. Couple this with lack of payment or delayed payments by any other debtors and one has the makings of a vicious circle.

“Suppliers or creditors with credit insurance will benefit in such situations from their insurance pay outs that occur promptly after a debtor has gone into business rescue. They also benefit from the insurer’s expertise in handling the business rescue proceedings, including attending all the creditors meetings. This becomes vitally important as there are a few companies that successfully exit business rescue and avoid ending up in liquidation,” says Maria.

“In addition, many businesses are looking to the rest of Africa for growth which is hardly surprising in light of our sluggish growth, which is hovering around 2.8% versus 5% for the rest of the Sub-Saharan African economies. For any business considering trade with Africa, export insurance is an absolute must along with complementary products such as guarantees. Exporters will need to do some serious homework and select markets and sectors where they are most likely to get paid.

“Payment protection through properly scoped credit insurance is a non-negotiable given such volatility and threats to business sustainability,” concludes Maria.


 
 
 
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