Leveraging the 5 C’s of credit management for sustainable growth


How CFOs can change their businesses using credit in a new world under the spotlight during TransUnion webinar.

Inflation in South Africa edged upward in October to 7.6 percent, countering economist and analyst expectations of prices coming down for the month, said Sharon Naidoo, CFO at TransUnion, at a Finance Indaba Network webinar on 24 November.

Sharon said South Africans should brace themselves for an even more difficult year in 2023 as the country’s economic perspective shows signs of slowing down further.

“From an economic perspective, we are not growing as much as we should relative to other emerging markets, and our economy has not fully recovered post-pandemic, further exacerbated by a full 100 days of loadshedding by the end of October and the devastation that resulted from the floods in KZN earlier this year. Although annual inflation slowed to about seven and half percent earlier in September, it is still edging on the highest it has been in 13 years.”

This comes after StatsSA announced last week that South Africa’s inflation quickened for the first time in three months. The prime rate is now 10.5 percent.

Last week, the SA Reserve Bank's Monetary Policy Committee (MPC) increased the repo rate by a further 75 basis points to 7 percent. This becomes the seventh consecutive hike, and interest rates are now at their highest level since 2016.

Sharon added that South Africa’s negative economic outlook impacts the credit outlook of the country as the current official unemployment rate sits at 32.9 percent with the highest unemployment being our youth (aged 15 to 24) followed by the 25 to 34 aged category, which negatively impacts the growth of the credit active population as well.

She mentioned that there is a significant opportunity for growth in the small and medium-sized enterprises (SMEs) but fewer companies have a successful credit file.

“SMEs have 2.6 million active businesses in the country, yet only 4,000 have a full underwriting credit file and while the credit active population may be around 40 million, the underserved is 6.9 million and the unserved is 20.6 million. This presents a significant opportunity to use credit as a strategic lever for growth,” she said.

She emphasised that lenders should embed the five Cs of credit management within their credit decision-making committees to mitigate risk in a challenged economy and thus not limit growth to safe, comfortable markets as these opportunities are shrinking and limited.

Five-Cs of strong credit management
Sharon added that as a CFO, she uses the five Cs as a real-life framework to assess the creditworthiness of her customer bases to strategically create opportunities for growth, while mitigating risk.

It all starts with a customer or consumer’s capacity or cash Flow to service the debt undertaken.

“If a business is borrowing money to repay their creditors in the business-as-usual activities, that should be a red flag,” she said, “as a healthy, solid, growing business should create enough cash flow after tax to service its net working capital requirements at an absolute minimum within SME at a ratio of 1.2. Borrowings should be utilissed purely into investment in incremental new opportunities i.e., diversification into new geographies, accessing new markets, new product innovation or expansion of manufacturing capabilities or capacities,” she added.

She mentioned that the second consideration is quality of the capital on the balance sheet. The owners must have significant/sufficient equity to navigate headwinds that may challenge cash flows and it shows their commitment or skin in the game to ensure sustainable business growth and not just sell and run when times get challenging. Debt to equity ratios benchmark at two to three times.

“Collateral is crucial for lenders, and they are generally interested in only certain classes of assets,” she added. “Easily liquidated assets classes are the focus, i.e., accounts receivables, inventory, property investment and equipment.”

Sharon said these first three Cs are the traditional credit risk assessment levers – numerical, factual, and black and white, with no mess nor fuss. The real evolution of credit strategy comes in the next two. The next two Cs are comfort breakers and real, sustainable growth comes from discomfort.

The fourth C according to Sharon is the character of the business [the borrower]. Character is intangible, it is partly gut intuition – the feelings of your interactions. She asserts that lenders should know who they lend to, having a deeper and real relationship with their customers. “This will prevent being implicated by association. Rreputational risk has severe long term consequences” she added.

She said this advantage helps lenders (including business to business lenders) to take calculated risks: “You must get to know your customers, as their growth is your growth.”

Sharon mentioned that the final C – conditions – is becoming critical to the debt appetite especially in unknown previously credit averse markets and consumers. Conditions include economic outlook, the risk/credit strategy of the company that is borrowing, what the nature of their customer relationships are, their industry challenges, and their supply risks.

In summary, Sharon emphasised credit management is no longer a desktop numerical exercise based on historical trends. Instead, credit functions must partner, collaborate and integrate with their sales organisations and unapologetically intrusive partners to our customers.

Supporting Sharon’s view point, Mandy Pretorius, principal data acquisition at TransUnion said that TransUnion has learnt to look at the indicators before offering credit.

“Every business has a history: we know the signs, so we know what to expect and that helps us to assess our lending risk. When something looks too good to be true, it is, and that is a hunch you develop over years,” she said.

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