Can the regional channel survive without the generous credit facilities and terms that distributors offer? Channel
Most IT distributors in the
However, developments that have happened over the past few years in the region have prompted distributors to reconsider how they extend credit facilities to channel partners.
According to global credit insurance company
For IT distributors in the
Many say the continued upheaval has made it difficult and in most cases, impossible for them to offer credit terms to partners that serve markets in conflict countries.
Mahan Bolourchi, head of Risk, Information & Claims – GCC/
Bolourchi said for instance, inadequate information about the financial position of borrowers can lead to a boom in lending when financial institutions overestimate creditworthiness, while full disclosure of information suggesting that borrowers are less creditworthy can lead to a sudden contraction of credit.
He pointed out that access to credit for IT companies is not a major issue in the
Bolourchi explained that in case the quality of financial statements affects the credit worthiness of a company,
V Ramakrishnan, chief financial officer at regional VAD FVC agreed and said the financial strength, business model, credit worthiness, cash flows and credit appetite of channel partners plays a significant role when evaluating the availability of credit limits.
Ramakrishnan said credit limits are also significantly impacted when partners explore business-to-business deals where the end-user expects open credit and demands extended payment terms that the channel is unable to match especially if they lack bank facilities. "Quite often these partners expect the distributors to support them by offering extended terms, but the support and contribution of credit insurance firms in this scenario is very limited as they are particular about the financial/business model and overall credit exposure to be extended to channel partners," he said.
At consumer electronics retailer tecbuy, CEO
Tchablakian explained that presently, there is no efficiency in how vendors and distributors have approached changes in the channel. "In fact, at the rate things are going, we should change the terminology of distributor and vendor to logistic company and credit insurance company respectively," he said.
Bolourchi added that usually large multinationals in the region follow the credit risk management strategies of their parent company, whereas the GCC has traditionally been a market where late payment was accepted. However, Bolourchi noted that post-credit crunch, even local companies have become far more stringent about when they will get paid and are less likely to accept long delays in the payment process. "This will subsequently result in local companies having permanent monitoring against customers who are not able to meet their obligations," he said.
Ask reseller partners where they want their distributors to be focusing and credit schemes are top of the agenda. While banks and financial institutions in the GCC now extend greater financial support to resellers, the same is not true in other parts of the
Bolourchi said one of the main changes in the financial sector is the implementation of Basel III requirements impacting banks' operations in financing receivables. Companies nowadays realise the importance of having their key financial assets insured with credit insurance companies such as
He said for instance, in
At FVC, the company says resellers play a vital and active role in shaping up credit and finance schemes. Ramakrishnan said the decision on which model to emulate is crucial in the IT industry. "Vendors have limited scope to amend the credit policies and in this scenario, distributors are compelled to work towards emulating the role of a vendor with channel partners," he said.
Consequently, Ramakrishnan said resellers need to respect and understand this model so that the distributor is not disrupted by cash flow constraints and in turn fail to honour commitments to vendors. They need to get their financial statements in place so that credit insurance support can be obtained. This would help distributors to offer partners extended credit terms and allow them to explore other channel financing schemes. Distributors also need to work with resellers to explore other alternative financing models that accommodate the end user requirements.
With new regulations on how banks and insurance firms can extend terms to the channel now in place, new forms of credit facilities have emerged in the IT market.
As a result, AlHaj-Eisa said there is more investment in IT and resellers now have more projects that they can bid for especially in mobility. "There are also new forms of credit that have appeared in the market and financial institutions have begun to play an active role in the market. This influx of funding is positively impacting credit models," he said.
FVC's Ramakrishnan concurred and said the
He said today, the company is seeing long-established businesses in the region credit insure their trade debts and outsource their credit checking. "We will not only underwrite this trade debt but will also minimise risk through offering advice on who to offer credit to. We also assist with collection in the event of non-payment," he added.
While it's clear that credit facilities play a crucial role in facilitating the growth of resellers, these schemes need to be open, transparent and prudent.
Bolourchi said as credit management is now being taken more seriously, the sales team and credit team decide together which buyer can be given credit. He said in the current global economic outlook, trading history on its own has become only one of the reliable guides to determine creditworthiness. "Businesses are increasingly outsourcing their credit management in order to gain expert advice," he said.
Bolourchi warned that there is a long list of consequences for the IT sector in the region if financial and credit models don't adapt quickly. He singled out liquidity and working capital related issues which lead to supply shortfall as some of the hurdles that will emerge if the issue of credit is not addressed quickly.
FVC's Ramakrishnan said as a distributor in the MEA region, the company deals with vendors that are primarily based out of
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