Credit Crunch

Distributors are tightening up their credit facilities in the face of more demand for finance from the reseller channel, forcing resellers to change the way they are paid by their customers.

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By  Colin Browne Published  March 12, 2001

The ghost of MegaPlus|~||~||~|Few Middle East-based distributors, vendors, or resellers will have forgotten the calamity of the MegaPlus collapse in August 1997. MegaPlus rapidly became a significant PC assembler in the UAE before its equally rapid demise, and when its management upped stakes and left Dubai, they left behind debts which were reported to be in the region of 40 million UAE Dirhams. Suppliers such as Samsung, Computer 2000 (now TechData), Mindware, and ProSystems all found themselves out of pocket and reconsidering their future credit terms to resellers.

Tighter restrictions and lower limits became the order of the day, and for the most part, that is a trend that has carried over the past four years.

The down side of this better financial management on the part of distributors of course, is that resellers are finding it harder day by day, to find sources of finance.

Today, according to Aptec’s Middle East regional manager Bahaa Salah, there is as much as 10-15% less credit available to resellers than there was 12 months ago, as distributors seek to lessen the risk they carry.

Servex too has cut certain resellers credit limits in recent times, when they have defaulted on repayments. The question is, what is a reseller to do?

Aptec’s Salah told CRN recently that communication between the major distributors has “been really improved recently, so we check with each other on the credibility of a [reseller] and accordingly we take the decision of granting this reseller a certain initial amount of credit limit.”
||**||Maximum limits|~||~||~|In awarding a credit limit Salah says that there needs to be a track record of two or three cash deals before a reseller can apply for credit, and that initially, it would be a small amount. Not that it need remain that way; the maximum open credit that a reseller can get from Aptec—open credit being that which carries no bank guarantee—is one million Dirhams. Extending that further requires a bank guarantee.

Still, Aptec is unimpressed with those resellers, that according to Salah, “want to use our money to finance their operations.”

The problem, he says is the way in which the reseller/customer relationship has evolved with regards to payment. “I have been in this business a long time, and I remember when an end user used to pay 50-70% up front—and on final delivery he paid the remaining amount. Things have been developing ever since to the point where end users are putting [a lot of] pressure on a number of resellers that has nothing to do with reality or common business sense. And unfortunately resellers are trying to be part of this market one way or another without calculating the risk; without [calculating] clearly how much they end up losing. They quote aggressively, and they end up getting their money after three or four months,” he says.

“I believe together, these resellers, if we start implementing certain rules and regulations, the time will come whereby end users are able to understand that they will end up paying an extra 2-3%, but they are getting better service out of those two or three resellers. And it should be for a value,” says Salah.
||**||Slashing the cost|~||~||~|That misunderstanding of value amongst Middle East customers is amply demonstrated in a tale related to CRN through email from a high-end solutions seller in Saudi Arabia recently. “Just today, a very reputable corporate organisation, which had us working out a solution for them [for which] we even set-up a total evaluation environment, started cutting down the price from 450,000 Saudi Arabian Riyals, and ended up at about 190,000 Riyals. We have spent days with them to [help them] understand, define and then test a solution. Now they have cut out a number of our services as well,” he said.

UAE-based integrator, ISD, told CRN that the way it handles customers to ensure payment is no problem, is to get 50% up front. “What we have done is this: we have had a couple of bad apples and we have followed it up, but if the customer has no money left to pay, what are you going to do? Just write it off and be more careful next time. Well, this did happen to us in a couple of instances in 1999, so from now on, any job that we undertake, we take 50% in advance, and we do a proper credit check on the customer before we go ahead with it,” Navneet Tandon, sales director for ISD said.

Still, organisations such as ISD aside, a large proportion of the traders and smaller assemblers in the region are struggling to raise cash to grow their businesses, and continue to rely on distributors to fund them. According to Rahul Gupta, general manager of Servex, that places a strain on the working capital distributors have at their disposal, which makes it necessary for them to tow a tighter line when it comes to granting credit terms.

“Every year I have to commit to how much working capital I am going to require, and I have to restrict my business plan to work within that working capital. If I say I am going to do $150million, and $15 million is going to be my working capital, then that is what I have to stick to. But if I go [to the financial department] every week and try to stretch that working capital, then the entire business plan goes haywire,” Gupta explained.
||**||Increased demand for credit|~||~||~|“I don’t think there is any change in the amount of credit that is out there, but there is an increasing demand for that credit,” he said.

The working capital that Gupta refers to is the cost of inventory, plus accounts receivable, minus accounts payable—a sensitive amount on a day-by-day basis, considering the margins on individual products.

“And it is not taken for granted that if I gave $200,000 this year that I am going to give it again next. If the situation with that customer has changed, then so will my credit terms. There have been several cases where I have cut the credit limit to half. There have been cases where I have stopped the credit limit when a couple of cheques have bounced, and where I have got information that the customer is going down or whatever,” Gupta told CRN.

“I think the situation is [getting] worse, and in that case, I am initiating another practice, which is that even to an accredited customer, I am trying to offer it a cash discount. I am making it more attractive to him to pay me early,” said Gupta.

At the same time, Servex has no upper limit on the amount of credit it will extend to a customer, each case being evaluated as unique. The general rule however, is that the limit is based on the level of business which Servex believes a reseller will be able to push its way, and can then be extended dynamically, as long as appropriate bank guarantees are presented also.

“Let’s take a special case where a reseller was normally doing $200,000 per month in business, but has been able to secure an order for half a million dollars—and he wants to buy something like $200,000 worth of goods from us over and above his normal business. So now he is asking for a special credit limit from us for a fixed term period of time, for a fixed amount. [When that happens], we would reassess, going deep into what is the order that he has got, what his payment collection is going to be, and what kind of risk he is carrying in collecting his payment. Because even if I assume that his intentions are good, if he gets in trouble then he isn’t going to be able to pay me,” said Gupta.

Servex also operates a policy where some products—such as memory—are cash only, and, where delayed payments are allowed, it is the product type and not the reseller, which determines that.
||**||No checks and balances|~||~||~|A major problem that K.S. Vasudevan, general manager of SMB highlighted is that in assessing good and bad credit risks, distributors are largely on their own. In the absence of independent agencies along the lines of the UK’s Dun and Bradstreet which runs credit checks for businesses, there is no solid way to guard against those bad apples that ISD’s Tandon refers to. “We always are connected to the other distributors. We always call each other. That is the only way. There aren’t any credit rating companies in the UAE, there isn’t even anybody to give insurance and so on. The maximum a bank says is that they are satisfactory, but that document means nothing. Even the banks are not helpful,” Vasudevan told CRN.

“Of course, we have to keep our eyes and ears open always. On the street if you see a new business coming up, that doesn’t mean that it is a new business. It was somebody else there, and they vanished, and now there is somebody new turning up. So we watch for the growth of the company. If somebody suddenly shoots up, then this is something which we need to [be wary of],” he added.

In the final analysis, resellers are going to have to be firmer with their customers, and work their deals such that enough profit is built in to enable growth within the company. A delayed payment is estimated to cost a percentage point per month—and if resellers are selling on hardware margins alone, it isn’t hard to see where a profitable deal could turn into a loss maker, unless customers pay their bills more quickly. In the mean time, ensuring that your credit rating with distributors is good poses another challenge.

According to K.U. Shankri at Dubai-based reseller Lucky Star Computers, the secret is in rigidly sticking to the terms of the contract. “Whatever we are committing, we are fulfilling. We send cheques on time. We have open credit from Mindware, but we are not taking that much liberty from them. So it is 30 days or 45 days; whatever the credit terms, but we meet those limits,” CRN was told.
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