Digital and Financial Risks Facing SMEs in 2023

Mitigating the risk of a crisis

In a constrained economic environment uncertainty abounds, and how your business responds to that uncertainty is key. Most businesses will have insurance to mitigate such risks. While the focus for many small and medium businesses (SMBs) tends towards physical assets like buildings, equipment and stock, the need for risk cover from a cyber and financial perspective is more critical than ever. Our digital world is fraught with risks to the reputation, operations and bottom line of an SMB that can be crippling its ability to trade. Making better decisions about all aspects of the risks facing your SMB – both tangible and intangible – is key to sustaining your business through adversity so that it can recover and grow.

Having an insight into market trends that are shaping the business world is key in the process and a task best undertaken with the insights and support of a professional broker who understands the unique nuances of your specific industry. Aon South Africa, a leading global professional services firm and insurance brokerage, shares some insights on the financial and cyber risks that many SMBs face, that may not even be on your radar yet, but should be…

Tax Risk

“As SARS goes on a major drive to improve collections, efficiencies and compliance with tax laws, the frequency of tax audits has increased significantly in recent years. It means that it is no longer a matter of if, but when, your business will be audited by SARS. In many instances it is also not a simple case of only auditing your last financial year, but the audit can potentially span several years, which in itself is a mammoth task to undertake, having to delve into your business financials with a fine-tooth comb to verify and substantiate your position,” says Ann Cloete of Aon South Africa.

“If the matter escalates to a point where your business needs to dispute an unfair SARS audit outcome, the matter may become a legal battle that can drag out over weeks and months at an astronomical cost both in terms of time and money for specialised tax skills,” she adds.  

“There are various options available from Tax Risk Underwriting Managers (Pty) Limited, underwritten by Bryte Insurance Company Limited a licensed insurer and an authorised FSP17703 that will protect your small business if you are selected for a SARS tax audit or related dispute. The insurance policy will aid you by appointing and paying for a team of tax professionals to ensure a fair audit and dispute outcome on your behalf. To aid the process, your accountant will become a central part of the team and their fees will also be covered for as part of the claim. It is essential to consider the risks that a possible tax audit could pose to your business, and never assume that simply because you are fully compliant that you may not face an audit.  Even if everything is 100% in order, the onus remains on you to substantiate your position accordingly and defend the audit, which comes at significant cost,” explains Ann. 

E-Commerce

E-commerce has undergone a dramatic metamorphosis in recent years to the point where many of us cannot fathom a world without it. It also means that in today’s digital age, the risk of becoming a victim of cybercrime is fast becoming a reality.  If your business holds a bank account, transacts online and pays vendors or customers via EFT, your business account is at risk.  

“Funds Protect from Phishield UMA (Pty) Ltd and underwritten by Bryte Insurance Company Limited a licensed insurer and an authorised FSP17703, is an insurance solution specifically designed to cover your business for a loss of funds from an account in your business name, as a result of a funds transfer - whether authorised or unauthorised - due to fraudulent conduct of a third party which is irrecoverable from your financial institution or a third party,” Ann explains.

Some of the events covered include the likes of:

• Email interception fraud
• Transactions due to your Business stolen identity
• EFT/deposit scams
• Hacking /phishing/vishing attacks
• Demands for ransomware attacks, denial of service attacks, etc.
• Fraudulent invoices
• Sim Swap and EFT fraud
• Online banking fraud

“It is vital to contact your bank immediately if you suspect that your business has been a victim of an online banking scam or that someone has gained unauthorised access to your business banking profile, or if you have simply made a mistake and paid an amount into the wrong bank account. Speed is of the essence in these scenarios to allow your bank to help you recover the funds. If, however, there is nothing that can be done to recover such funds, Funds Protect is your solution,” says Ann.

Cyber Attack/Data Breach

A cyber breach has the potential to inflict enormous reputational damage, cause major interruption to normal business operations and income potential, and can also have legal ramifications if personal and financial information is compromised in context of the Consumer Protection Act (CPA), the Electronic Communications and Transactions Act (ECT) and the Protection of Personal Information Act (POPI),” says Zamani Ngidi, Cyber Solutions Client Manager at Aon South Africa.

To make matters worse, it’s not just data that hackers are targeting. There is an increasing risk of business interruption (BI), presenting new challenges for SMBs to contend with in terms of business continuity and security.

“Aon has developed a number of solutions to meet this evolving need that is geared for SMBs, such as our Cyber Impact Analysis, Cyber Threat Simulation/Tabletop and Cyber Quotient Evaluation (CyQu). Many of these tools are able to assist South African companies that may not have the requisite internal resources and data to conduct such exercises with any reasonable amount of certainty, understand where there are vulnerabilities, and put both security and insurance measures in place to protect them for such risks,” Zamani explains.

Trade Credit

While the economy remains a sombre rollercoaster ride, it is crucial for SMBs to make better decisions when it comes to providing goods and services on credit and protecting themselves from defaulting debtors. 

“Trade credit insurance answers an important question: Whether you are dealing with a potential bad debtor or not. Isn’t that worth knowing?” asks Maria Teixeira, Trade Credit Specialist at Aon South Africa.

Trade credit insurance indemnifies a seller against losses from non-payment of trade debt arising from slow payment, insolvency and political risk in the event of a cross border transaction.  Coverage is designed to prevent disruptive losses, reduce the risk of key account concentration levels and provide risk transfer of bad debt scenarios.

A common misconception is that credit insurance is expensive and complicated, and many companies never venture into the credit insurance space to their detriment, particularly small and medium sized businesses. “In the face of soaring liquidation numbers, it is important to note that 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. When this is coupled with a lack of payment or delayed payments from any other debtors, it creates a serious cash flow problem for any organisation navigating a volatile business landscape,” warns Maria.

The reality is that even small businesses can insure their debtors book from as little as R5 000 and up. “You furthermore have the option of insuring a single debtor or your debtors’ book for a percentage of the loss, meaning that if you insure your debtors for 80% of the loss, you agree to carry 20% of the loss if anything goes wrong.  These options make trade credit insurance flexible and affordable even for smaller companies. Small and medium businesses are certainly at greater risk if a major debtor defaults as their balance sheets usually cannot carry them through a major default.  It would also be foolhardy to believe that large businesses don’t default on payments as recent corporate failures have shown.  The question to ask is whether you are prepared to deal with a potential bad debtor and not know about it?” she adds.

There is no one-size-fits-all approach when it comes to managing the risks facing your business, especially when it comes to more intangible financial risks.  Each business has its own unique levels of exposure and industry specific nuances. Consulting with a professional broker who can provide you with valuable insights into the financial and cyber risks that may have a major impact on your business will help you to make better decisions when it comes to protecting your bottom line, and the sustainability of your business should you face a major loss.