Dubai had witnessed a spate of runaways in the channel space over the last few years. After a relatively quiet period, the recent NSK runaway incident has brought to light the urgent need for constant evaluation of credit periods extended to partners. While extending credit is necessary for the business, Reseller ME explores in-depth, on how to prevent such cases.
Trading on credit basis is a risk most distributors have to undertake. It offers a competitive advantage compared to the conventional, time-consuming Letter of Credit and, at times, is necessary for the development of the business. However, Dubai has witnessed a number of runaways in the channel space, in the last five years, one of them as recent as earlier this year. How to avoid such a scenario is easier said than done because, “the nature of business makes IT a very risky industry,” says Gregory Le Henand, Country Manager, Coface Emirates.
And abandoning the credit system altogether is not an option. In fact, Schuyler D’Souza, Country Manager, Credit Insurance, Orient Insurance PJSC and, GCC Head of Atradius, believes credit facilities can also have a positive impact on trade, if put to proper use. “They can impact all stakeholders – resellers, distributors, vendors, credit insurers, banks and the financial ecosystem – in a very positive manner, as all stakeholders benefit from the trade,” he says.
However, D’Souza adds, at times, the priorities can shift, and credit facilities are used for a host of negative purposes. Elaborating, he says, “Negative purposes can range from dumping product or achieving sales targets to selling goods with traditionally longer payment cycles that encourage further delays or selling to challenging markets in search of higher yields without carrying out the necessary due diligence. We strongly believe that both, the reseller and the distributor bear equal responsibility for such actions that are damaging to the financial ecosystem and the trade at large.”
While both the distributor and the reseller are certainly accountable, Sundar Raj, Deputy MD, Almasa and Sainath Menon, Finance Manager, Asbis says, the vendors too, could play a role in controlling such a circumstance. “The vendor can intervene in the market as and when required by controlling product supply and supporting the distributor and reseller with price corrections,” Raj says.
Menon adds that vendors can support to work with distributors in tandem, keeping in mind, the market dynamics and setting realistic targets depending on the market scenario. “And having better supply control and price regulation will make a difference,” he says.
But at the end of the day, the distributor has to take precautions because after all, providing credit is like lending money to someone. Menon adds, “The tendency of misusing the credit extended is more probable than not, while in wrong hands. We can be swayed by situations and sales pressures but at the end, it would turn out to be disastrous if we do not collect our money. We need to understand that no organisation can survive long without making profits and distributors in their zest to sell more to accomplish targets, provide excessive credit and thereby lay a platform for customers to do anything to meet their requirement for a critical cash flow position.”
Resellers then might resort to selling their stocks below the market price for immediate cash and eventually they will owe more than what they will receive, leading to the crisis.
To avoid this situation, D’Souza from Orient Insurance says, it is important that distributors allow resellers practical credit limits. The market moves so quickly that resellers can be left with stock they cannot sell perhaps due to price or to changes in product. As a consequence, resellers can struggle to pay the distributor, which then, affects his cash flow.
“We have in the past experienced runaways, and these are cases that cause maximum damage to the financial ecosystem, as not only the distributors, but also credit insurers and banks have suffered as a consequence. This is where you have to watch how much credit is granted to the resellers and, manage the risk while enabling the trade,” D’Souza explains.
This brings to the forefront, one of the most challenging issues of the IT sector in the region, how to create a financial transparency? Sharing information and having regular communication is the undisputed answer.
According to Menon from Asbis, an element of mutual trust is necessary to be in a position to share critical information. “There needs to be a quality communication and interaction, sharing mutual concerns faced in the market among peers. The topic of discussion should include on which way the market is heading, the challenges we may face, credibility and customer payment behaviour,” he adds.
Raj from Almasa further emphasises that runaways can be avoided if simple points are considered by vendors and distributers. “For example, sharing information about unhealthy trade practices in the market, sharing payment default information with insurance companies on time and insurance companies should also work to give a clear idea to the vendor or distributor on the credit worthiness of the reseller. This can help prevent such incidents.”
Although, taking credit insurance is one way to safeguard against a runaway situation, how easy is it to work with insurance firms? “It is all a matter of due diligence—if the financials are strong, then the faster the approval for credit insurance accompanied by a credit insurance limit,” says Dantees KP, Finance Director, Tecbuy.
Also, sharing market information, both good and bad, will build a strong foundation for a good working relationship with insurance companies, says Menon. “They draw the comfort that you are equally bearing the concern of the credit decision taken by them. If we are capable in building a good rapport with them, there is every possibility they will value your knowledge and consider you as a very good reference in their decision making,” he adds.
Sharing payment default and market information goes a long way in assessing the credit worthiness, agrees, Massimo Falcioni, CEO, Gulf Cooperation Council, Euler Hermes. “The more transparent you are, the more credit worthiness you get,” he says.
Euler Hermes, a trade credit insurance firm, gauges a distributor’s credit worthiness based on a methodology that analyses hundreds of economic indicators, both quantitative and qualitative, to provide the best understanding of the economic, political, business environment, commercial and financing risks. To assess the risk of a company, Euler Hermes needs to retrieve information from that company such as financials and strategic plans. The more detailed this information, the better the insurance firm can perform the rating of the company and its buyers, says Falcioni.
Le Henand from Coface says that the insurance firm follows four steps in order to assess the credit worthiness. First, the firm confirms the year of establishment. The longer the business has been running, the more number of people know the company in the market and the more difficult it is to leave without a trace. Then, the firm analyses the type of products being traded. He says, “We would advise to deal with companies that have a diversified and structured offer.” At this stage, the company also checks who the signatory is and who the shareholders are. “Also we see how recent is the trade license? Often what happens is, a signatory is assigned, but in reality, the real culprits are people behind the signatory. So then without the knowledge of those people, there is a chance that they might come back with the intention of doing fraud under a different signatory,” he says. Then, on-site visit is conducted to analyse the stock and number of employees, after which, the firm goes through the financial statements of the company.
But the situation is not so grim today, as most resellers release their financials to distributors or directly to credit insurers. “There is far more financial information available today than in 2008, but there is a clear need for resellers to engage the services of Class A or B auditors, and participate in open discussions with distributors and credit insurers where details of both financial and non-financial information are discussed in a transparent manner. This will result in a higher level of financial and operational transparency,” D’Souza explains.
Apart from that, bodies such as Dubai Computer Group (DCG) are putting in efforts to avoid resellers exiting the market leaving behind huge debts. Some instances could be genuine too, like in the case of Fabis Traders. Four years ago, DCG played a huge role in enabling the trader to return when it had exited the market due to unmanageable debts. This was done by liquefying its assets. Today, it is back and doing good business, says Shailendra Rughwani, MD, Expert Computers and President, DCG.
Over the last few years, the situation has been controlled to a large extent, he adds.
“There used to be a time where almost every month, we had a runaway situation and we didn’t know whom to trust. This has been reduced to one or two cases in long periods of time,” he says.
“To further avoid this, we have been encouraging our members to identify and deal with the right people, don’t try to over sell and to be within the limits,” he adds. Also, he points out that the day everybody decides to unite and follow strict policies, then perhaps we will witness even fewer cases with time. Policies such as ensuring that if there is a new person in the market, then one should only deal on cash basis with them. “Unless, they are established in the market for over two years, credit should not be extended. And here is where DCG can play a role,” he says.
However, he admits, the new player could find somebody or the other who will extend credit to them as the market is widespread. Although, he is hopeful that as DCG increases its membership, better and more awareness is created.
In the end, it’s a responsibility all stakeholders carry. Sharing regular information about market trends and partners should be a common practice, perhaps, one, that the industry should look at formally. And, one can never be too cautious, while offering credit, as it is the cornerstone of business continuity.