Runners and Riders

Runners and riders continue to give credit managers sleepless nights as distributors attempt to inject more capital into the regional IT channel

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By  Stuart Wilson Published  July 24, 2005

Credit limits|~|creditcham200.jpg|~|Ayman Mousleh, president at Syrian distribution powerhouse Cham Data|~|Who would want to be credit manager at a distributor? The unsung heroes of the IT channel are under constant pressure to increase credit lines for resellers to help the sales team hit targets. Yet the only time the work of the credit department really hits the headlines is when a reseller does a runner and leaves the distributor with a big bad debt to deal with. Behind the scenes, it is a different picture, with credit teams also playing an important role in the growth of the IT channel in the Middle East. Credit is the lifeblood of channel activity in the Middle East. As the overall market size grows and financial transparency improves, the ability of distributors to provide credit to resellers remains one of the few areas where they can really differentiate themselves from the competition. From Dubai to Damascus, the basic procedures that a distributor goes through to evaluate the size of a credit line that a reseller deserves are startlingly similar. Ayman Mousleh, president at Syrian distribution powerhouse Cham Data, explained: “We estimate the credit limits we can give to each reseller using various measures. We look at how long he has been operating in the market and the reputation he has for paying other distributors on time. We start with a low limit and if he pays correctly and dealings are smooth we increase the amount gradually. We hold cheques from him for the maximum credit amount in our safebox as an insurance policy.” Back in Dubai, distributors request a variety of financial documents to assess the credit worthiness of each and every reseller. “We ask for credit references, trade licence and chamber of commerce licence copies, a copy of the sponsor’s passport and financial statements for the last two years,” said Ahmed Al-Azzawi, director at SourceIT. ||**||Information sharing|~|creditkhalil200.jpg|~|George Khalil, credit services manager at Tech Data|~|In this region, defining a maximum credit limit for a reseller is still not a purely scientific endeavour. It is not all about numbers and the importance of really getting to know the customers and understand their business models remains an important part of the process. George Khalil, credit services manager at Tech Data, commented: “We use a combination of qualitative and quantitative measures — professional judgement and our internal guidelines help us arrive at credit levels. These include field visits, assessing the quality of a reseller’s operations, their market sector, their client base and also their financial statements as well.” Resellers are hungry for more credit and increasingly want longer payment terms. While distributors are keen to extend credit lines they are also anxious to point out that there must be a sound business rationale for doing so. Last year was a watershed year for the regional IT channel with a glut of resellers running away from the market leaving behind bad debts. There have already been a few isolated cases this year and no one wants to see a repetition of last year’s events as we enter into the slow summer months — a prime time for resellers to make their move and do a runner. To keep tabs on market conditions and understand the credit exposure of individual resellers, distributors are increasingly turning to one another and sharing information about their customers. The credit departments of five of Dubai’s big distributors — Almasa, Aptec, Emitac, Redington and Tech Data — already share information on an informal basis, and many credit managers are keen to see the exchange of data on resellers become more structured. However, no one wants to be excluded from this information sharing process. “Distributors do share information,” admitted Suren Vedantham, managing director at StorIT. “But it is not always done earnestly considering that fact that they are often competitors trying to woo a common reseller channel.” In the broadline space, the information flow between power distributors is becoming more reliable as each party starts to understand that it is for the greater good of the market and individual company agendas need to be put aside. “Distributors speak to each other now,” said A.P. Rao, assistant credit manager at Emitac. “If resellers try and play us off against each other we will communicate. Some resellers will try every trick in the book to get more credit off everyone.” ||**||Dubai risks|~|creditehsan200.jpg|~|Ehsan Hashemi, regional sales manager GCC at Golden Systems|~|When it comes to credit, it is not just the amount that matters, but also the days the reseller has to pay back the distributor. “Credit is not just about avoiding the runners,” explained Sajid Sarwar, finance controller at Aptec. “It is about how long it takes to get the money. We have schemes in place to promote speedy collection. We don’t want to give more than 30 days where practical but there needs to be flexibility. Certain deals and certain products can have extended credit terms as long as 90 days.” Offering credit to a reseller means that a distributor is inevitably taking a chance. While credit insurance schemes offer some protection, they are not a foolproof policy that allows distributors to take crazy risks. A premium has to be paid to the credit insurer and distributors have to follow strict guidelines to ensure that they receive a payout should they be unfortunate enough to take a hit. At present, both Almasa and Tech Data have credit insurance while Emitac is also mulling over the possibility of taking out a policy. Amer Khreino, general manager at Emitac, explains the pros and cons of taking out a credit insurance policy: “It can definitely enhance the ability of a distributor to take slightly larger credit risks with smaller resellers and gives you some peace of mind in what remains a volatile market. But you do have to pay a premium for this and the credit insurers have an inability to provide cover in certain high risk countries — the places where it is most needed.” The UAE remains one of the riskiest countries in the Middle East and some distributors are taking note of this fact and working hard to build up reseller breadth in hard to reach countries. This effort not only creates safer credit lines but also erodes the role of the sub-distributors operating out of the UAE. These very same sub-distributors are also one of the riskiest channel segments to extend credit to. It seems like a win-win situation for distributors but for some, the lure of the easy sale in the UAE still seems more appealing that making a concerted in-country channel development effort elsewhere. One distributor that is pushing hard to work closely with resellers based outside the UAE is Golden Systems. “Even though there are opportunities to make sales in Dubai we will sometimes avoid that if the risk is too high,” commented Ehsan Hashemi, regional sales manager GCC at Golden Systems. “We focus on the in-country channels instead. If a reseller is in Jordan and is run by Jordanians, then they have nowhere else to go. In contrast, 80% of resellers in the UAE are run by expats that have no real ties to the country.” “In some cases it has been easier for us to extend credit in Iraq than it has been in Dubai,” he continued. “These companies may have ups and downs but they come and tell you and warn you of the difficulties they face. You feel that they are honest and transparent. These companies do not go out and sell below cost just to generate cash to pay you back.” ||**||Here to help|~|creditnuno200.jpg|~|Loai Al Nuno, credit manager at Almasa|~|The biggest dilemma facing credit managers is what action to take when a reseller hits financial difficulties. Pulling a credit line immediately and taking legal action will tip a reseller over the edge and can result in receiving only a tiny fraction of the monies owed. Understanding the difference between resellers that are preparing to do a runner and those that are committed to trading their way out of a hole is a key skill for credit managers. It is vital to draw a distinction between those that set out to hit distributors from day one (runners) and those that are forced into it through a few bad deals and spiralling credit debts that they just cannot service (riders). “I believe that less than 5% of resellers enter the market planning to run away from day one,” said Loai Al Nuno, credit manager at Almasa. “Some people start their business in Dubai on a cash basis and then try to get credit. After some time, they find themselves working with big credit lines in a fiercely competitive market and need to clear stock to pay back what they owe the distributor. So they sell below cost to try and cover the cheque that the distributor is holding because if it bounces their credit line will be stopped immediately. Resellers sell below cost to achieve this and end up losing bigger and bigger amounts. Resellers are then faced with two options: tell the distributor and risk being put in jail or liquidate the assets they have and run away.” When a reseller is in a precarious financial position, distributors need to show their caring side or else risk losing every single dollar that they are owed. “If I am worried about a reseller, we try and do as much as we can to help them resolve their problems,” added Al Nuno. “This could mean giving them special cash prices on products to help them out. It is the ones where we only find out late that are the most difficult to solve. These are the ones where you have to take legal action.” “Those that face financial difficulties need to be more open with their distributors and seek advice,” reiterated Khreino. “Every reseller faces difficulties from time to time, so try and find a resolution with your supplier. Don’t just apply for bankruptcy or run away from the market with the money.” So far this year the amount of runners has been minimal in the Middle East, but credit managers at major distributors report that there are several resellers currently selling below cost in the market. While some do this to qualify for vendor rebates and incentives or simply to generate cash for other business activities, it is also a common sign that financial troubles may be afoot. ||**||The vendor role|~|creditkhreino200.jpg|~|Amer Khreino, general manager at Emitac IT Distribution|~|“If someone is dumping stock it is a sure sign they are having to make fast decisions to pay people off quickly,” explained Sarwar. “We get to know when product is being dumped below cost and the resellers that look like they are preparing to run.” The problem is that not everyone selling below cost is a potential runner. There are wider issues that need to be considered. Some resellers will buy kit at US$100 per unit on 30 days credit and sell at US$99 just to generate cash for that month. Losing US$1 on the sale is seen as cheap method of raising cash for that month. This is a risky model, and if these resellers are investing the cash in other sectors such as real estate, the reality is that the financing is leaving the IT sector. This financing, that is intended to grow the IT channel, is actually transformed into a negative cash drain. The demands being placed on distributors to increase the amount of credit they inject into the channel also has an impact on their own internal financing. It is something that IT vendors employing aggressive push sales policies with first tier distribution partners need to understand. “Distributors do need help from vendors as they boost the credit available in the channel,” said Khreino. “This could mean more credit from vendors or extending the period when distributors qualify for a cash discount from 15 days to 30 or 45. As the days sales outstanding climbs in the channel, vendors need to extend more credit or else distributors will face a cash crunch. To cover this they need to request more funds from shareholders or larger banking facilities to cover the difference in cash flow. Vendors have no interest in breaking distributors but they need to know when to stop pushing.” When it comes to looking at the wider channel credit landscape in the Middle East it is vital to remember that Dubai is an exception to the norm. In Syria, Mousleh at Cham Data reckons that resellers leaving behind bad debts are extremely rare and companies selling below cost are also unusual. ||**||Credit agency|~|creditsarwar200.jpg|~|Sajid Sarwar, finance controller at Aptec|~|“It is too easy for resellers to set up business in Dubai and then run away leaving bad debts for distributors,” said Al-Azzawi at SourceIT. “There needs to be audited financial records for resellers. The governments of the region need to take action to create credit reference agencies as well.” “The lack of credit ratings by a local bureau remains the major operational issue,” agreed Khalil at Tech Data. “There should also be a formal and structured process of exchanging information with other distributors. The structural issues [at a reseller level] are a widespread deficiency in determined cash flow management and a lack of will to address profitability issues.” While resellers must ultimately take responsibility for their actions, distributors that are hit by bad debts should also look closely at their own internal procedures. “If distribution margins are 4%, it is easier to increase net profits by US$1 by avoiding a bad debt of US$1 than it is to do the same by increasing sales US$25. That is what all distributors have to realise,” said Sarwar. Credit remains one of the most complex areas of the IT channel. Risk will always exist when it comes to extending credit and it remains a balancing act between driving top line sales growth and not taking stupid risks. Distributors do not want resellers forced into bankruptcy or driven into a situation where they have no alternative other than to liquidate their stock and flee the market. In that particular scenario, no one wins. So pick up the phone and talk to the credit department. The moneymen at the big distributors are nicer than you think. ||**||Top 5 credit capers|~|7credit200.jpg|~|Credit controllers are constantly on the lookout for potential runners|~|1. Fake Bank: One Iranian reseller, looking to secure a large credit line, created his own bank for the day. The distributor went to the ‘fake’ bank with the reseller and was told the client was good for the money and he could collect it the next day. The next day there was no bank! 2. Selling Below Cost: When a reseller starts selling IT kit below the price that he paid for it, alarm bells start ringing in the distributor credit departments. Used as a tactic to convert credit into cash, selling below cost is a sure sign that a reseller is in serious financial difficulty. 3. Here Today, Gone Tomorrow: Has the reseller really gone on holiday? Most of Dubai’s IT resellers originate from other countries and retain the ability to pack up and leave the UAE in the blink of an eye. Hire cars and rented villas mean no real ties. Taxi to the airport anyone? 4. Dirty Documents: A fake passport and some false statements claiming that other distributors give you massive credit lines can go a long way. Dupe the distributor to believe you are worthy of credit, give them a fake passport for security, sell the kit for cash and hail a taxi to the airport. 5. Friends and Family: New resellers that want credit from a distributor may use other resellers to vouch for their credit worthiness. This scam works when the distributors do not check carefully and fail to spot that the reseller vouching for them is actually a friend or family member. ||**||

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