Cutting credit

Channel developments that have happened in the last 12 months have prompted the industry’s key stakeholders to consider cutting credit facilities extended to resellers.

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Cutting credit
By  Manda Banda Published  April 29, 2012

Channel developments that have happened in the last 12 months have prompted the industry’s key stakeholders to consider cutting credit facilities extended to resellers. But can the regional channel survive without credit terms? How can the industry resolve the situation to boost confidence?

Reseller runaways especially IT traders in the channel have cast doubt on whether distributors should continue extending credit facilities to their reseller partners. Most distributors in the region offer credit terms to partners as a way of mitigating difficulties that reseller companies may encounter when financing big deals. However, this well intended business ingredient has in the past been abused, compelling IT distributors to consider whether they should abandon this business imperative and adopt a cash-on-delivery COD model with their channel partners. While there is no denying that credit forms a vital element of the whole value proposition that distributors bring to the table, it is one of the most controversial and divisive issues impacting the region’s channel.

What measures need to be put in place to curb abuse of credit facilities that distributors extend to resellers?

Dr Ali Baghdadi, president and CEO, Aptec Holdings, said because the credit that distributors offer to resellers is a form of finance which helps the reseller with financing requirements till they collect money from their customers, it’s vital that resellers are  transparent and provide information and copies of financial statements to the company extending them this credit service. “Many resellers, particularly small and medium ones, do not have the ability to finance huge transactions through banks alone and hence resellers tend to rely on some credit from distributors. Education, transparency and ethics all play a part in curbing abuse of credit terms. Effectively, credit is a loan, which has to be repaid in an agreed period of time,” he added.

Girish Kewalramani, deputy vice president at regional distributor FDC International agreed and said the game of IT selling is changing all over the world and the Middle East is not an exception. Kewalramani said in extending credit to partners, it is crucial that distributor have a comprehensive history of the companies they are doing business with under terms. “From the onset, partners need to be transparent and give a full disclosure of their financials and why they would like to do business on credit terms,” he said.

Kewalramani said as a regional distributor, FDC always looks at the ability of resellers to supply a mix of product and solutions and not give credit to partners that just focus on commodity products or fast moving entry level solutions. “Resellers have to invest in their business by paying cash for their transaction in the initial stages of their operations,” he said.

Ajay Singh Chauhan, CEO, ComGuard said, credit to resellers is crucial especially in developing countries. Chauhan said this becomes all the more important in the Middle East region, where most of partners are offering products to government backed projects, which have a longer lead time and payment is usually delayed.

Stephan Berner, managing director at regional system integrator help AG Middle East, added that: “Credit is very important to channel partners. In a fast growing market, financial services will be one of the most demanded value added offerings. Value added-distributors (VAD) might want to think of leasing services as part of financial services.”

Berner observed that this will take some time to materialise in the region but the sooner it happens the better. “It is all about transparency and communication. Credit terms can only be fixed based on facts and binding agreements. The more information you have from your business partners the better you can evaluate your risks.

He added that it’s also important to that resellers to decline orders or projects coming from the market if such deals will impact of their capability to finance them. “As an SI, we do focus on our core business with a very selective approach and not aiming for the mass market but identifying the right customers and prospects matching our services and solutions,” he said.

To limit the exposure on defaults which normally has a knock on effects in the form of reseller runaways, credit insurers advise distributors to not extend credit beyond the levels they recommend.

Anil Berry, CEO – GCC Markets of IT credit insurance firm Euler Hermes, recently told Channel in an interview that most distributors in the region extend credit facilities far beyond the levels that the company would recommend to certain buyers in the market.

Sam Tayan, managing director, VMware MENA, said there should be a combination between vendors, distributors and insurers when it comes to offering credit to partners. Tayan said vendors extend a certain profile in terms of the type of credit offered, while credit insurers have their own policies to follow. “There are three tools that could be used to facilitate the extension of credit to partners in the region. These are: credit information, normally through a credit bureau as is the norm in other parts of the world, credit insurance and transparency with all parties involved,” he said.

Aman Manzoor, channel sales manager, Kaspersky Lab Middle East & Turkey, agreed and said the channel ecosystem is a value chain where every level contributes to the fiscal worth of the entire industry. Manzoor pointed out that the role of the vendor is to provide value to its tier one [distribution] partners and assume the risk from that end. According to Manzoor, the tier one partners then extend the value to their resellers as a part of the value chain and finally the resellers add value to the end-user customer. “When it comes to credit, the pattern that we follow is similar where every level needs to add value to the system,” he said.

Jibu John, credit manager, WestconME Group, disagreed and said distributors and not vendors should be offering credit to channel partners. In extending these facilities to partners, distributors should be interacting more interacting with partners and ensure that they are well informed about their customers’ credit status. Proper credit assessment, reference checks, credit reports, financials information will avoid the sort of runaways that have happened in the channel in the past.

Chauhan concurred and said it’s the distributor’s responsibility to ensure that proper credit facilities are given to resellers. “It is a prime task to set up policies and procedures to ensure proper execution, so that everything is aligned as per agreed plans and guidelines,” he said.

He pointed out that the important measure which can be put in place is to ensure that part of the responsibility is undertaken by the Vendor who has a greater responsibility to absorb the losses. He added that extra margin needs to be given to distributors to cover the risk or losses associated with doing business on terms.

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