Channel credit

Credit is the lifeblood of channel activity, but it is also the single biggest area of financial risk. A lack of financial transparency in the Middle East IT channel has so far hampered the development of credit facilities.

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By  Stuart Wilson Published  March 2, 2004

Getting credit|~|creditArulRaj3.gif|~|Arul Raj, finance and operations director, Al Masa Distribution|~|Distributors are wary of giving credit and this is one of the main reasons why the Middle East channel continues to support a layer of wholesale resellers and sub-distributors. Many of these players owe their very existence to their ability to offer credit to the resellers that major distributors fear to touch. Channel Middle East (Cme) asked Arul Raj, finance and operations director at Al Masa Distribution; Vivek Gupta, finance and operations manager at Emitac; Tarun Nandi at Bluebell Computers; and Mustafa Shalibi at Teeba Computers, to lift the lid on channel credit.

Cme: Credit availability is still an important part of a reseller’s relationship with its distributors. How do you feel the credit situation is developing in the Middle East?

ARUL RAJ: This market is predominantly working on credit and resellers expect a very large amount. Vendors in the EMEA region have been sceptical about providing credit in the Middle East for various reasons including company structures. There is also not enough information available for credit insurers to take any risks here, leaving distributors to do their own assessments. Much depends on the credibility of the reseller and this involves more than just financial information.

TARUN NANDI: As a large reseller in the Middle East it is better to spread your credit. I have a choice whereby I can obtain credit from Tech Data and then go out and get the same terms and conditions with Al Massa, Emitac or Aptec.

VIVEK GUPTA: Credit in the channel is divided between two business segments: one is credit for the channel catering to the UAE market, and the other is channel credit for the re-export market. The ones in the UAE are the customers on Computer Street and this is [where we have more visibility of the client’s financial position]. We have more confidence in these people than the re-export market, because after it is moved out of Jebel Ali we don’t see the products. The [re-exporters] have small offices with minimal infrastructure and request large volumes. You have to be very focused on the risk of these customers.

MUSTAFA SHALIBI: Distributors don’t give resellers enough credit limit to start with in the region. But as a reseller needing credit, you have to take it. For this reason, as a wholesaler, I have started to give credit to my customers as well.

Cme: What are the issues around credit?

RAJ: Firstly it is the high risk involved, secondly it is the investment. The longer the line of credit you give, the more investment you’re putting in. The margins of distribution don’t usually justify high investment.

NANDI: For the last two years many distributors have changed the selection of dealers they decide to partner with in regards to credit. They’ve cut down the [number of] partners and are supplying only to strong resellers. They are then saying [to the channel] that if you have a small requirement go buy from [one of the bigger] resellers.

GUPTA: The main issue today confronting all distributors is that if a customer is worth US$100,000, then every distributor is offering the same amount. So a customer who should have a portfolio of $100,000 actually ends up having one worth $500,000 spread over five distributors, which is five times his capacity. If that [reseller] ends up with a bad debt it reflects badly on all the distributors and not just one.

SHALIBI: There are resellers in this channel who get credit without even writing cheques, and these people are taking six months to one year to pay. Because the law will not push them to pay on time, it becomes the distributors’ problem. If these guys don’t pay, it can sometimes take up to two years to bring them to court.

Cme: What credit facilities do you offer or use?

RAJ: We offer 30 days from the invoice date but it depends on the products. If it is a hard drive, the credit period is less because the margins are lower. There are special circumstances where, if it is a large project where the margin is high or where the government is putting out a tender, then we do extend credit.

NANDI: I have a credit line with everybody. It varies from US$150,000 to US$1,000,000. And I’m dealing with [major names like] Jumbo, Al Futtaim, Al Ghurair, Alpha Data and so on. 95% of my purchases are 30 days credit. But 15 and 45 days are also offered. I also offer credit on the same basis to my customers, but I will make sure that their number of credit days is slightly less.

GUPTA: We have an evaluation model in place based on how many years the reseller has been in this country, and what collateral they can provide in the form of bank guarantees or a letter of credit. For a small number of resellers we work with them on post-dated cheques (PDC) but a PDC is no guarantee

SHALIBI: The credit terms I offer my customers start between US$15,000 and US$20,000. Payment is within 30 days, which is a standard credit term, but certain products with low margins such as CPUs have to be paid back in less time than 30 days.

||**||Competitive terms|~|creditTarunNandi2.gif|~|Tarun Nandi, Bluebell Computers|~|Cme: How important are credit facilities for doing business with the reseller channel?

RAJ: Very important. You don’t get the business if you don’t have the credit. The competition between distributors plays a part. Some distributors are willing to stretch [their limits] because there are options for resellers [to shop around]. Distributors and [wholesale] resellers not giving credit will lose out.

GUPTA: If we do not provide credit facilities to the channel [resellers] they will not be able to support the business levels and volumes they need to sell in order to make a living.

SHALIBI: It is essential, but distributors have to understand who they are dealing with, and who deserves better credit terms. If they understand who the better credit risks are, they should start opening up to them, because this will only grow their business.

Cme: Does the type of credit offered signify a competitive edge among distributors?

RAJ: Yes, but price and stock availability are still the major factors. If both these criteria are met then [for the reseller] it comes down to the credit available.

NANDI: With the channel it is normally 30 days credit, but some customers [particularly the re-exporters] will be given 60 days or 90 days just to win the business.

GUPTA: The more that distributors are willing to offer in credit the better they bond with the resellers they’re working with.

SHALIBI: Price is still the main area of competitive edge between distributors. Resellers don’t barter over credit terms.

Cme: Do distributors operate on a general consensus over what credit the channel can be offered?

RAJ: There is no agreement between distributors, but there should be information sharing. It is important, because if the distributors get stuffed because of too much risk, then where does that leave the vendors?

NANDI: They don’t share customer information because they feel it may affect their business by giving away too much information. Quite frankly this is not correct.

GUPTA: There is no written agreement between distributors as to how far we are allowed to offer credit. Every distributor is allowed to make their own call as far as credit is concerned. But we have informally met other distributors a couple of times just to determine the overall exposure of certain resellers in the market. Many resellers go to the distributors and tell them they can get better terms from one of their competitors. With me, if anybody comes and says they got a better set of terms from another distributor, I ask them: ‘If it is that good why are you coming back to me?’.

SHALIBI: It’s almost the same, distributor to distributor. The only difference you’ll get is through personal relationships with the distributor and that’s not healthy for business.
We need a shared database to establish who the good risks are because resellers don’t only work with one distributor. The problem is the distributors are competitors so they don’t want to open up their records for this.

Cme: Is there much abuse of credit within the channel?

RAJ: To some extent yes, and credit may end up getting used elsewhere. You’re never really certain how the reseller will use the credit if you give them a 60-day term. Resellers [have been known to] buy a product from you, sell it for cash and invest the proceeds elsewhere. It is always possible to take money out [of the business] and divert it elsewhere. But we don’t have 100% concrete information about this.

NANDI: It does happen, but you’d have to ask the distributors because it is not something that I will put up with in my business. There are customers who will go into a wholesale reseller and start dealing with them on a cash basis for two purchases. The third time they do business they will make out a current dated cheque. By the fourth time the customer will try to make a play and on the fifth dealing they [establish a credit line and] run away.

GUPTA: Yes. One reason is the HP cash generating project, whereby if the reseller is in a negative position on their cash flow, they will sell product $1 below cost just to get the cash flow straight. The reseller’s not making any money on the deal and will sit on the cash for a month before paying Emitac. The reseller sees this as a way of continuing his business but doesn’t see the bottom line loss he’s making on these deals. They may be marginally losing money, but they see [taking credit from Emitac] as a better way of doing business than going to a bank. Because of the continuity of orders [we assume] they are a good credit risk.

SHALIBI: 2003 was a big year for people abusing the credit system. This has been because [as a wholesale reseller] you don’t know whom you’re giving credit to. And the people who end up with the problems are the resellers. Distributors don’t lose. Most distributors deal with resellers — not the assemblers or people who abuse credit. I’m not saying they never get hurt. But if you want to compare I’d say 20% of the total risk is with the distributor and 80% is with the reseller. Most distributors are covered by insurance.

||**||Assessing risk|~|creditVivekGupta6.gif|~|Vivek Gupta, finance and operations manager, Emitac|~|Cme: Are there ways that a reseller can ensure they get a better line of credit?

RAJ: Share information and work closely with your distributor to make them more aware of the [reseller] business [and they will see us pass on the benefits to them].

NANDI: Well first of all, don’t force your demands. I’ll give you an example. I started with Jumbo nine years ago with a credit line of Dhs50,000 and have built it up year-on-year until now I have a credit limit of Dhs2,000,000. I have earned trust and that allows me to maintain a decent credit line.

GUPTA: They need to streamline [their businesses], make themselves more accountable, make their books more transparent, and enlist the help of an independent professional accountant to give their figures some kind of validity.

SHALIBI: The only way I see is through the creation of a society where everybody knows what [the channel is capable of] and they have easy [access to that information]. So if the reseller is doing well that is recognised, and if the reseller is not and doing things like under costing to cover their cheques, or has problems with other distributors, these guys can be spotted easily as well.

Cme: Who comes off worse from the credit fraud that actually happens?

RAJ: The distributor. Most vendor’s credit lines are secured, and most of the vendors have this cash discount policy that the distributors will pass on to the channel. If there’s a credit fraud, the distributor gets hit.

NANDI: The resellers. Because if some need to sell at cost to recover the money and they do not intend to pay the distributor, the overall market is affected.

GUPTA: It is the distributors who get hurt, not the vendors. If there is a single default [on payment] all the vendors are clean, because their contract with the distributor specifies settlement on time or no more contract. It is only the distributor who really suffers.

SHALIBI: It is the reseller who cannot get credit that suffers. People who abuse the credit are the ones who disturb the credit facility between the distributor and the reseller. At the same time the distributor’s finance department are often afraid to give a big enough credit limit.

Cme: How is the credit picture changing?

RAJ: There have been some really positive signs in the past couple of years. Credit insurers are now active in the region. I’m also hoping that with Dubai’s Financial Markets starting up, the regulations and laws will mean streamlined information about the companies is published in a structured and accessible way.

NANDI: It is changing. It is quite fair now. The channel is looking at bank references and analysing credit properly. Some systems are in place to make sure credit is paid off in time.

GUPTA: I see no major improvement on the credit evaluation process in the Middle East, because we are a long way behind other markets, which have credit control, insurance, and other processes that are not formally organised here. If you go to an international credit insurer, they will only agree with you on a level that you could have given to that reseller ‘with your eyes closed’, like Dhs100,000.

SHALIBI: Lately yes. Everybody is afraid and credit has now reduced by at least 30% because of the abuse. Distributors are only competing on price and not on credit facilities because they don’t want to take the risk.

Cme: Are we expecting to see significant changes in the credit model over the next year or will it stay the same?

RAJ: For the time being it will stay the same. Any changes take time in this part of the world.

GUPTA: I have heard of developments happening from the Dubai Chamber of Commerce and Industry, such as systematic credit bureaus, but I see it remaining the same. For the meantime you just have a system that [puts people in jail for bouncing cheques] for years. They will never be able to pay you even after they are released. So there is [no system in place here] that will get you your money back when someone defaults.

SHALIBI: It will be the same and maybe even become worse if everybody is afraid. There are still so many issues with people abusing credit.

Cme: What needs to improve in terms of the credit model in place?

NANDI: The people giving the credit should at least visit the big resellers every four or five months and see what they are doing. There’s a need for better control to reduce bad debts.

GUPTA: I think the overall transparency between distributors needs to improve to keep the resellers in check so that they cannot organise a fraud. At this moment in time distributors are not talking to one another, and everybody is exposed to the possibility of fraud. There should be some kind of formal semi-transparency level, so that you don’t jeopardise your business or give away any trade secrets, but you still have an accurate overview. We’re acting like venture capitalists at the moment, when [in fact] we are actually an IT product distribution company. We don’t need to be holding up every reseller who comes to us with a good business plan. But we do need to analyse the strength and background of every reseller, because there may be some that have been pushed out [of the channel in another country] and are now trying to set up here.

SHALIBI: If there is good communication between resellers and distributors we’ll see better credit facilities.

Cme: What are the ‘dos’ and ‘don’ts’ of the credit trade in the channel?

RAJ: Do be transparent and build credit up over a period of time, but don’t expect too much too soon and be prompt in paying. If there are special circumstances, make the distributor aware so they can help. You have to understand the human angle as well and realise when somebody is genuine.

NANDI: Before giving credit, distributors should check what the [reseller’s] activity is, what they are selling, and how they are selling. Regular customers should make a point of paying on time, with no delay, and without giving false reasons.

GUPTA: As distributors, we must find a better way of communicating between ourselves in order to re-evaluate the reseller channel as a whole. Secondly, we should push our resellers to provide annually audited balance sheets. This way we would understand better who their creditors and debtors are. Thirdly, banks should be checked with to see what services they are providing the resellers. As for the don’ts, we should never exceed the limits we set at the beginning of the year. Unless we get some commitment of what the deals are from the resellers then there’s no basis to up the credit to ten times the set amount.

SHALIBI: Do be honest and straight. Don’t abuse a product by underselling it just to increase customer relations. Even if you are financially strong, you’re destroying the relationship between you and the distributor just to show off your strength in one product.
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