News Column

Credit protection

February 18, 2014 Staff

Can the regional channel survive without the generous credit facilities and terms that distributors offer? Channel Middle East looks at one of the most controversial and divisive issues, its impact on the regional channel and why distributors need to work closely with credit insurance firms to overcome the financing schemes challenges they face.

Most IT distributors in the Middle East region offer credit terms to partners or have developed channel financing schemes as a way of mitigating challenges that reseller companies may encounter when financing big technology projects.

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 Euler Hermes, that offers a range of bonding, guarantees and collections services for the management of business-to-business trade receivables, the global economy will this year witness a modest recovery.

"Euler Hermes forecasts a modest global economic recovery in 2014 at 3%, with brighter prospects in all regions," said Ludovic Subran, chief economist at Euler Hermes. "As a consequence, most countries should see a drop in the number of insolvencies, although the decline will nevertheless remain limited at -1%, as measured by our Global Insolvency Index."

For IT distributors in the Middle East region though, they are concerned by the fallout from the Arab Spring of 2011 and the continued internal conflict in countries like Syria, Egypt and Iraq.

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/Middle East at Euler Hermes GCC, said there are a number of reasons why financial institutions might change their lending activities, therefore the availability of credit will be affected automatically.

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 Middle East region especially with the attractive demographics supporting the growth of this sector. However, Bolourchi pointed out that some of the main challenges restricting credit are transparency of financial information when it comes to privately held companies and quality of available audited financials. "At Euler Hermes, we provide credit for the IT channel once we have looked at their audited financial statements and business structures," he said.

Bolourchi explained that in case the quality of financial statements affects the credit worthiness of a company, Euler Hermes takes it up to investigate with the in-house specialist credit analysts through a direct dialogue with the company or organisations involved.

Stephan Berner, managing director, at systems integration company Help AG, said the main hurdle when it comes to accessing credit is the unwillingness of banks and financial institutions to play an active role in channel financing. Berner added that in the Middle East region, channel economics are still very much value-added distributor (VAD) driven and resellers are especially dependent on their VADs for financing large deals. "This will only change once banks in the region become accustomed to IT leasing and financing. However, this will depend on resellers providing transparent financials and banks developing greater trust on channel businesses," he said.

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 Dikran Tchablakian believes the availability of credit is an important element of how a channel partner can effectively operate. Tchablakian said there is no impact far worse than having a distributor or vendor who is greedy in selling more goods than they can handle, which leads to exercising sales through unsolicited channels. "One negative impact resulting from such actions is that trading flow from the country that has the official channel will get the heat or would be blamed for over supplying goods," he said.

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 Middle East that are experiencing internal conflict. So solid financing schemes from the distributors help drive IT investments and give resellers the ability to pursue ambitious projects.

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 Euler Hermes."Newly created firms are the engines of growth in many countries, however, these firms often face difficulties in raising the required capital to implement their ideas," he noted. "In general banks increasingly rely on external credit reports when judging the creditworthiness of their prospective borrowers. Second, the banking industry has experienced a strong consolidation process, leading to fewer banks, which are now more diversified with respect to the industry composition of their credit portfolio."

He said for instance, in Germany the number of banks reduced by 53% between 1990 and 2010, and in the process this reduced the ability and willingness of banks to lend to start-ups.

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.

Osama AlHaj-Eisa, channel director, Middle East and Turkey at Aruba Networks, said over the past two years there has been a definite improvement in the financial climate. AlHaj-Eisa said business is now back to growth and while certain countries remain in turmoil, the region as a whole is no longer in recession.

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 Middle East, as a market, is primarily driven by supplier credit. He said the ability of a supplier or distributor to offer credit to its partners influences their revenue growth to a large extent. As a result, he said the distributor's ability to offer credit and collect payments in time determines the cash flow and liquidity of the business. "The IT industry has been heavily impacted with delayed collections and significant bad and doubtful debts impacting profitability in the past. There has been quite a few channel partners forced to exit the business due to cash flow challenges in the recent past," he said. "Consequently, suppliers were forced to explore alternatives to the open credit models to ensure the risk is protected and business is not impacted due to delayed collections or bad debts.

Euler Hermes' Bolourchi reiterated that commercial credit is a business tool that should be used to increase sales, maximise customer loyalty, enter and expand into new markets. "We insure companies against the risk of payment default by their customers as a result of commercial and or political risks," he said.

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 Europe or US and the terms of credit terms offered are different from the credit model being adopted in the region. "Distributors find it difficult if they are to use the terms of vendors and at the same time accommodate the needs of partners and the broader regional channel requirements in terms of credit management," he said.

Help AG's Berner added that in order for a reseller to convince their distributor and vendor partners that they should be considered for credit, they should commit to visibility and transparency. "Once a reseller tarnishes its image by gaining a bad credit rating, it's hard if not impossible to re-establish trust. Keeping this in mind, sometimes it may in fact be better for a reseller to say no instead of trying to accept each and every orderor IT project coming from the market," he said.

"In the Middle East region, there is currently a fresh wave of infrastructure investment taking place especially in mobility. If funding was to suddenly dry out, it would severely impact all this progress. Today, mobility has become one of the highest priorities for businesses, whether they are government or private sector and they are increasingly dependent on mobile systems. And because of this, we expect credit models to be better than they were before, which is good for the whole industry," said Aruba Networks' AlHaj-Eisa.

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Source: (United Arab Emirates)

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