Taking advantage of a revived credit climate

Attitudes to credit management are improving and insurers are restoring faith in the channel again.

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By  Andrew Seymour Published  May 31, 2007

One year after the first tremors of the Dubai ‘runaway resellers' episode were felt in the market, there is a feeling that attitudes to credit management are improving and credit insurers are restoring faith in the channel again.

Now is the time for the distribution sector to responsibly build on this current climate of positive change for the sake of healthy business.

The relationship between credit insurers and IT distributors in this region isn't exactly renowned for its intimacy for a number of reasons. On the one hand, an unwillingness to take risk and a limited understanding of the idiosyncrasies of doing business in the regional IT sector has left insurers wary, while on the other hand a lack of choice and high cost has led to reticence among distributors. Many wholesalers in this region also continue to operate without any form of comprehensive credit insurance because of the unwavering belief in their ability to manage risk independently of third parties. They have built trusting relationships with their customers over a period of years, instilling in them a sense of self-assurance that they can spot a defaulting reseller a mile off.

This approach has its flaws, however. Last summer's credit crisis resulted in several distributors getting stung in the pocket when fleeing resellers vanished into thin air.

I genuinely believe that any distributor with serious aspirations to grow their business to a meaningful size must develop a coherent and responsible credit management policy. Furthermore, they truly have to view it as a business enabler, not an inhibitor.

Reputed credit insurers such as Atradius and Euler Hermes have experienced their ups and downs with the IT channel over the years and consequently they no longer trade with just anyone. These guys want to engage with distributors that have the processes and controls in place to manage their credit in a consistent way, instead of taking an irrational scattergun approach.

What is also becoming clear from distributors that are engaging with insurers of this nature is that an increasing emphasis is being placed on customer breadth. Who you extend credit to, and exactly how much you extend, counts for everything when it comes to risk assessment. Those distributors guilty of overtrading with some of the resellers that went AWOL last year bear the financial scars to prove it. You have got to ensure that too much exposure is not concentrated into the hands of one customer. Credit insurers want to see distributors splitting the risk and demonstrating their customer breadth. A reliance on just a few big-spending customers is seen as undesirable.

If tales of credit insurers showing more confidence in the Middle East distribution sector persist then it should be welcomed because the chances of business being conducted in a healthy, and ultimately less risky, manner will increase tremendously. Not only does credit insurance have an important role to play in protecting cashflow and profit, but it can strengthen the business relationship a wholesaler enjoys with suppliers, customers and partners.

A study carried out in Europe last year revealed that in terms of credit operating costs as a percentage of sales, an average of 1.38% of a firm's turnover could be saved by the existence of a credit insurance policy.

Let's assume for a moment that this figure is relevant to the Middle East. On the basis that the average revenue of the 15 largest UAE-based distributors in 2006 was US$200m, the saving from having credit insurance equates to US$2.76m a year - not exactly a sum to be sniffed at when you consider the challenges of operating in this sector.

What's more, research shows that credit insured firms generally enjoy healthier relationships with their banks, leading to such advantages as better access to short-term finance and capital. Now is as good a time as any for distributors and sub-distributors to decide if adequate credit insurance is an unnecessary luxury or a vital tool for growth.

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