WITH the junk status in South Africa still looming, questions are on the rise about how the junk status will affect small businesses, and just how big the impact will be.
Let’s investigate the situation and maybe offer some tips to owners.
SMEs are likely to feel the impact of the downgrade to junk status. It is expected that interest rates will hike further, the costs to keep businesses afloat will increase, there will be increased pressure on the rand and rising inflation will all further stretch small business owners’ already strained budgets.
SMEs with loans linked to the prime lending rate will have to cough up more to service their existing debts, and those with business property bonds will have to pay higher monthly instalments.
One of the consequences that SMEs should not overlook is how the downgrade will affect consumers and how spending trends will be affected. With this in mind, as a business owner, what are some of the important factors that will affect your customers?
Interest rates will most likely rise, which will result in an increase in the monthly cost of debt, including home loans, vehicle finance, credit cards and other repayments, which will put further strain on consumers’ individual disposable income.
Jobs at risk: the downgrade will result in SMEs having to tighten their belts. In an environment where doing business becomes tougher, businesses will be less likely to hire more staff and may even have to cut down on the number of employees on the payroll to ease spending.
Inflation: economists predict the downgrade will have an ‘adverse’ impact on both the rand and inflation, local and international investment funds may withdraw from the country. This will have an impact on the value of the rand, the cost to import goods will increase.
The devaluing of the currency will further drive up the cost of petrol, which means that the cost for transport and food will increase, putting further pressure on the consumer’s household finances and the country’s inflation.
Consumer confidence: with the increasing interest rates and higher inflation, consumer confidence about the state of the economy will also suffer, resulting in lower spending.
Low levels of consumer confidence mean consumers expect South Africa’s economy to deteriorate further and they will start to believe it is not a good time to buy durable goods. Lower spending will, in turn, place more pressure on economic growth.
The implications for SMEs of the looming junk status does seem gloomy. However, there are steps that small businesses can take to protect themselves. Small business owners have to exercise caution for the coming years to ensure their survival.
SMEs shouldn’t suspend activity or stop moving forward. Small business owners won’t have to stop taking out debt altogether but they need to be more vigilant in the management of their loans.
Small business owners should consider consulting financiers and also extensively research funding options. Small businesses should also look to review their business plans in the light of a tougher economy. This includes cutting down on unnecessary spending.
Small business owners should consider using the services of tax consultants to help them discover what tax incentives and exceptions are allowed for SMEs, to help ease their burdens.
Contact any one of Nexia SAB&T branches nationally for assistance in your tax affairs.
Please note that the above is for information purposes only and does not constitute tax advice. As each individual’s personal circumstances vary, we recommend they seek advice on the matter.
Please note that while every effort is made to ensure accuracy, Nexia SAB&T does not accept responsibility for any inaccuracies or errors contained herein. If you are in doubt about any information in this article or require advice on the topical matter, please do not hesitate to contact any Nexia SAB&T office.
Article prepared by: Aysha Osman
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