Taking the risk

IT distributors need to look beyond price and take a more measured view of credit insurance as a tool to move their business where they want it.

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By  Andrew Seymour Published  July 20, 2008

Last week's editorial leader on credit insurance in the distribution sector generated plenty of feedback from channel players that have watched the topic build steam in the past couple of years. For many, IT distributors need to look beyond price and take a more measured view of credit insurance as a tool that can help them get their business to where they want it to be.

I still firmly believe that credit insurers have a lot more to offer this region and I'm sure over time their portfolios will be fully tuned into what distributors want. The more informed they become on the regional industry, the more their services will reflect the kind of specifics that distributors are requesting.

At the same time, it is also clear that the IT distribution sector must disregard some of the enduring reservations it has about credit insurance if it is to realise the benefits of a tool that can aid cashflow and protect against payment defaults. I'm afraid to say that the perception of credit insurance as just another expense on the balance sheet is holding some players back.

Pricing will always be an issue as far as credit insurance is concerned, there is no disputing that. Distributors understandably want the most affordable option available, although affordable shouldn't be seen as a translation for cheapest. Whether we like it or not, credit insurers have a profit to make too. Distributors have to take some of the risk otherwise it potentially leaves them open to extending credit to customers they know to be dubious in the knowledge that the insurer will clean up any mess.

Interestingly, Middle East distributors that have invested in credit insurance admit that an acceptable balance of risk versus premium occurs at anything above an 80% rate. This would typically be enough to alleviate them from financial disaster if the market crashed, while still keeping the annual premiums manageable.

This also brings us onto the bigger picture. One of the major factors obscuring the perception of credit insurance is that the margins distributors are prepared to trade on fail to provide the conditions that make it economically appealing. Unfortunately for the channel, that is a challenge that distributors must sort out among themselves - and with their vendor partners - rather than with the insurers.

"I think the major issue with insurance here is simply that many distributors operate on unsustainable margins, and the extra 0.25% or so for credit insurance moves the business from profit to loss," said one Middle East distribution source that believes the price-driven market culture represents a serious burden to the adoption of responsible credit management policies.

Although distributors complain that they want better margins, they continue to trade at sub-optimal ones because the perception is that the immediate sale is more important than anything else. It is going to take a monumental change in mindset to overcome that, but it is the only way that the anxieties over credit insurance are going to be conquered.

This is not a subject that is influenced by the day-to-day pressures facing IT distributors. Distribution has always been about fighting for business and dealing with the constraints that come from being the middleman in the chain. It's simply the staunch trading mentality that is holding the channel back when it comes to embracing tools such as credit insurance that are taken for granted in other markets.

"What potential prospects don't realise in the IT sector is that when you have credit insurance it also safely allows you to expand your sales into different markets and improves your credibility in the market," argued one market source. "These sales that are then realised because of the benefits of credit insurance offset the premium that is paid to the insurer."

This editorial should not be construed as an advertisement for credit insurance. After all, it is vital to remember that credit insurance is just one of several different aspects that need to be considered when implementing a successful credit management strategy. What I will say is that credit insurance might prove more expensive over the longer term, but in an environment where no distributor can be certain if the next credit crisis is just around the corner it won't do any harm to evaluate it with an open mind.

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