Channel credit: a bump in the road

Credit is still a thorny issue for the regional IT channel

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Channel credit: a bump in the road
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By  Piers Ford Published  September 7, 2013

Credit and financing models have been a thorn in the channel’s side throughout the rise of enterprise IT in the Middle East. In relative terms, it is still a young industry.

Financial institutions are wary of servicing deals where there are lingering doubts about the longevity of suppliers who, as start-ups and newcomers, cannot always prove their pedigree and expertise.

At the same time, those same suppliers – resellers and dealers – depend on fluid financing to get established and sustain them through complex buying cycles. And every time a blip occurs and somebody in the supply chain fails to get paid, it sends a ripple all the way through the channel, adding to the caution of distributors and vendors, and the banks themselves.

“In the region, channel economics are such that resellers are very dependent on value-added distributors to help them finance large deals,” said Stephan Berner, managing director at IT security and services company help AG.

“This is because unlike in the West, banks and financial lending institutions in the Middle East are still quite reluctant to finance IT deals. This is due to their lack of confidence, which is largely because the expertise in this area is missing. In mature markets, IT leasing and financing is the norm and both banks and the channel benefit from well-established procedures. In this region, however, the banking sector has yet to come of age in this respect.”

The problem for resellers at the customer face is that increasingly, enterprise buyers favour suppliers who can offer flexible costing packages. If the banks will not underwrite an upgrade project, somebody else has to – and that means the entire channel is under pressure to innovate new models. According to IDC, for example, 70% of organisations will choose an IT supplier based on its ability to offer leasing and financial solutions – everything from subscription-based financing to end-to-end packages which might include a complex range of third-party products and services.

Khwaja Saifuddin, senior sales director, Middle East, Africa and Asia at Western Digital, said there is still adequate credit and finance available to players in the regional channel – they just have to get to grips with more stringent and in-depth checks on compliance and past performance.

“Before tackling credit availability issues, it’s worth understanding how one builds credit in the first place,” said Saifuddin. “As a business you can only build credit by first building up your own credibility – and that takes dedication and time, and requires that your business performance be strong and consistent. Working diligently quarter after quarter will ensure solid business results and as a result, credibility, which then puts you in a favourable position when negotiating credit.

“The issue today is that credit is sought ahead of those consistent business results that give those issuing the credit the confidence to take the risk. There are also external pressures that can sometimes affect the availability of credit but if you can demonstrate that you present a minimal risk and that you can be given, and repay, the credit, then in most cases you won’t have a problem. It can’t just be given on a whim – if you’re issuing the credit, you have to weigh the risk so you don’t end up in a tough spot later on.”

One significant complicating factor is the regional channel’s dependence on the global channel for its health and ability to scale. This puts it at the mercy of global economic pressures, which of course have been negative rather than positive during the last six years.

“The economic conditions of many vendors globally are affecting the supply chain infrastructure for the IT channel the world over,” said Meera Kaul, managing director at value-added distributor Optimus Technology and Telecommunications.
Kaul said issues affecting the availability of credit are generated by a range of factors: vendor strategy, confidence that vendors invoke in their technology, a vendor’s capability to sustain the market, the potential volume of business for its product portfolio, its financial strength, its channel credit policies, the financial strengths of it distributors and resellers as aligned to the product sales cycle – and of course, end-customer aspirations and influences. It’s a complex picture.

“Finally,” Kaul said, “the availability of credit also depends on the risk perception of the financial partners of the channel players. The global financial shutdown was the most significant economic impact on credit and financing, followed by the compliance measures that have been enacted to regulate the credit economy, which have further affected the business models of the channel and its financing.”

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