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The International Monetary Fund (IMF) recently updated its global economic growth projections. The latest IMF World Economic Outlook anticipates a stronger recovery for the global economy this year.
Global growth is now projected to reach 6% in 2021 and 4.4% in 2022 following the estimated historic -3.3% contraction in 2020. The group’s updated forecast includes upwardly revised projections for South Africa, with growth expected to reach 3.1% in 2021 and 2% in 2022.
However, business activity will largely determine whether the country achieves these growth projections. Many businesses are still reeling from the lockdown's impact on cash flow and the sustained dip in consumer spending. Consumer confidence and household incomes remain at historically low levels due to the pandemic's economic impact, while record unemployment continues to rise.
Businesses that survived stringent lockdowns need to continually adapt to the shifting conditions and altered business cycles amid the 'new normal' as trading conditions, while substantially improved, continue to remain unpredictable and volatile. The knock-on effect means reduced consumption expenditure, which is a vital contributor to gross domestic product (GDP) growth, and continued constraints on cash flow, liquidity and working capital.
Debt and alternative funding
Businesses need access to capital to sustain them through this atypical business cycle, whether that is to improve cash flow, position them for growth during the recovery or buy inventory to meet rising consumer demand. Companies also need to de-risk their operations amid the potential for third and fourth infection waves and a subsequent escalation in lockdown restrictions.
In these scenarios, certain industries will continue to struggle more than others due to the uneven recovery and sector-specific lockdown regulations. Without higher revenue and improved cash flow, the economic downturns will heap additional pressure on the cash conversion cycle.
As such, businesses must look for alternative sources of capital because they can no longer rely on internally generated cash. For most, external funding remains the only viable option to support and sustain their operations amid the pandemic.
Debt and alternative funding can be incredibly powerful tools to help businesses weather economic downturns. And accessing funding lines from a lending partner that understands the business and can offer guidance and advice provides businesses with a critical lifeline.
Debt and alternative funding can be incredibly powerful tools to help businesses weather economic downturns.
Why now is the right time to access funding
The right lending partner will ensure your business accesses the appropriate quantum of debt for the right purposes and will closely align fund flows and facilities to the working capital cycles in your business.
Yet, taking on debt amid the challenging operating environment may seem daunting. And business owners are often hesitant to approach their banks during challenging times. But it is generally beneficial to be forthright with your financial services partner.
Businesses don't only want or need, a fair-weather bank. A trusted banking provider should help businesses through the tough times and the good.
And funding your company's working capital cycle through various forms of 'good' debt can provide the liquidity needed to generate additional revenue, unlock new growth or capitalise on evolving trading conditions. In fact, managed debt can be one of the most cost-effective forms of financing available to a business.
The ideal solution is finding the right financial services partner – one that takes the time to understand your business and can right-size lending solutions and credit facilities or customises the products your business needs.
In this regard, many lenders are adapting their credit and risk models in response to these unprecedented market conditions to broaden funding accessibility, while doing so in a responsible manner.
Banks need to understand your business
While banks will scrutinise businesses more closely in this challenging economic environment, those that are still around after the last 12 months should consider themselves as strong candidates for business finance.
Banks will need to understand a business operation before, during and after the lockdown before granting credit. Lenders must also work with owners and management to understand forecasts and future growth prospects.
When assessing risk in this environment, lenders need to differentiate between the financial bump experienced during the pandemic and a structural deterioration in the financial viability of a business beyond the current situation.
These qualitative business insights can support the quantitative analysis of the company's financial statements relative to the basic underlying credit risk criteria regarding solvency and debt serviceability. This approach creates opportunities to provide tailored lending solutions for clients that address unique business challenges or cater to specific requirements based on their current position in their capital lifecycle.
And the ability to adapt lending solutions in line with a business's needs and requirements is critical. Understanding the changing landscape that customers face and having the agility and nimbleness to accommodate these shifting factors makes finding the appropriate lending partner in hard times extremely relevant.
Supporting South Africa's economic recovery
However, providing access to funding and credit is only the first step in the bank-client-customer relationship. Leveraging these funding lines effectively is the other important element. The right banking partner will offer guidance and advice about how to deploy this capital into the business to realise the best return.
Most institutional lenders also recognise the important role they play in rebuilding the economy and are working with their business clients during this challenging period to support the country's recovery efforts.
Allowing companies to access the right funding structures to access capital at the right stage in the pandemic-influenced business cycle will help them weather the current challenging operating environment and provide the support needed to grow in step with the post-pandemic economic recovery.
And access to affordable capital instils confidence in business leaders, which is vital for future business success. Business owners who remain positive through the tough times will have an advantage over their competitors during the recovery and will likely leap-frog businesses that remain mired in stagnant operations due to lack of funding.
Working with a lending partner will also help business owners to position their businesses favourably to meet pent-up consumer demand. Sentiment is everything and as vaccine rollouts and economic growth boost consumer confidence, people will start spending more.
Three questions business owners must ask
However, business owners must start their planning now to gear the business for these market changes. Therefore, questions every business owner should ask themselves today include:
- What business challenges do I face outside the pandemic and how can I better prepare to mitigate these risks?
- Am I sufficiently geared to respond to the structural changes in the economy and sustain my business in the new normal?
- How will my business pivot in response to new trends around remote working, e-commerce and the threat of future pandemics or other crises?
Now is the time to revisit and interrogate your capital structures and position the business for accelerated growth during the recovery. Work with your banking partner and take time out now to reflect. Use the opportunity to consider the next phase in your business and how the right-sized funding solution can support this growth.
Ultimately, businesses that deploy the right funding at optimal points in their business cycle can generate better turnover and, in turn, boost profitability. This will support growth, sustain and create jobs and contribute to increased GDP for the South African economy. And that, at the end of the day, benefits everyone.
This article first appeared in Black Business Quarterly.
About the Author
Head of Sales: Investec For Business
Currently the Head of Sales for Investec For Business, Itumeleng started his career as a retail treasury consultant at Investec, servicing individuals and small corporates. He joined the Treasury Structuring team in 2011 as a consultant and was appointed as head of the team in 2015. Itumeleng holds a BCom in Economics and Investment management, has completed the Finance Executive Development Programme at Cass Business School, holds an ACI dealing certificate, and a Masters in the management of finance and investments.