Analysis, Features

Your Voice: Combating credit crunch

Your Voice: Combating credit crunch
(L-R) Amer Khreino, Raqmiyat; Massimo Falcioni, Coface; Shailendra Rughwani, Nirsun Technologies; Vijay Peter, Westcon-Comstor; Shukri Halima, Howden Insurance Brokers; Mario Veljovic, VAD Technologies; Garreth Scott, Credence Security; and Dharmendra Sawlani, Smile Computers and Dubai Computer Group

The Middle East IT channel firms continue to battle with credit challenges, while it is also the pillar on which business happens in the region. Reseller Middle East, as part of Tahawul Tech’s Your Voice series, gathered experts across distribution, reselling, systems integration and insurance firms to discuss how channel players can arrive at a solution to this problem and define the responsibilities of each stakeholder.

Credit, is unquestionably a crucial aspect of the channel business. Distributors provide credit to partners who don’t have enough financial means to roll out IT projects, and many resellers opt for disties who have the capabilities to deliver comprehensive credit and financing terms.

However, in the recent past, the regional market has been plagued by credit issues, which have adversely impacted various segments of the channel ecosystem. Faced with overwhelmingly heavy and bad debts, several channel firms have fled the market, over the last few years.

“Currently the IT channel market is experiencing a stable growth,” said Shukri Halima, head of Risk and Operations, Financial Risk, Howden Insurance Brokers. “There has been a significant difference in terms of players fleeing the market as compared to five or six years ago.”

Halima added that upcoming events like the Expo 2020, have opened up more opportunities for businesses in the region.

Although the market is growing, credit issues continue to exist. Because of the volatility of the market, banks have recently slashed the credit terms.  “The biggest problem, in my opinion, is the lack of credit understanding and discipline of partners in the IT channel ecosystem,” said Dharmendra Sawlani, managing director, Smile Computers and president, Dubai Computer Group.

He further said that there are also no specific regulations governing channel credit transactions. “Ideally, we should have a Federal Credit Insurance Authority in the region, but at the moment it is something that we lack.”

Another issue Sawlani shed light on is the long credit payment periods. “I believe that our industry is fast-moving enough and we do not need huge credit limits,” he said. “If you give over 60-days credit terms to anyone then you’re basically financing the whole chain. We should be focusing on financing our own businesses, not our partners’ business or our customers’ business.”

When credit systems collapse, every segment of the channel is impacted. But who really is responsible?

Shailendra Rughwani, managing director, Nirsun Technologies, said, “From the vendor, all the way to the reseller – everyone plays a role in either effectiveness or failure of a credit transaction.”

According to him, vendors often push the goods down to the distributor and place unnecessary pressure on the latter who then passes it on to the resellers. “At a certain point, resellers will be unable to handle the pressures and workloads, which results in them pursuing risky operations or asking for too much credit.”

Garreth Scott, sales director, Credence Security, agreed but added that apart from vendors, disties, resellers and systems integrators, one key segment is also at fault for credit failures. “The end-users,” he said.

He added. “We can always push back the vendors and make them realise how or why it will be difficult to move the products at a certain point. But the reality is end-users more often than not play a big role in the disruption in the credit cycle.”

Scott recalled that there have been times when even some of the biggest companies across major industries from the region have not kept up with their credit terms. “They would only give 20 to 40 percent upfront payments, which is completely fine,” he said. “However, the problem occurs when the 120-days payment period is extended because of several reasons such as unavailability of signatories or delays in cash flows.”

Before a reseller or a distributor begin doing business with any party, it is imperative that they check their credit worthiness. Just by taking the efforts to know their partners or customers a bit more, can help in avoiding credit issues. It is important to check on the company’s market reputation and try to do a risk assessment.

Mario Veljovic, general manager, VAD Technologies, said, “You should try building your own risk assessments. At VAD, we have actually gone to a great extent to ensure that we have everything we need to know about a customer before offering them credit.”

He added organisations should think outside the box and find new ways to improve the credit systems. “Today I spend 50 percent of my time on just gathering as much information as I can about a partner or a customer, prior to granting them credit. In addition, we have introduced a new system wherein we ask a company for an attested document supporting the signatory’s authority. We believe this is necessary because if anything goes wrong, we’ll have hard proof to support us.”

Veljovic said that ultimately, transparency is key in having good credit transactions and he hopes that the implementation of VAT will help drive more discipline in the market.

From a credit insurers perspective, Massimo Falcioni, CEO, Coface, shared Veljovic’s sentiments explaining that at the end of the day, the more information an insurer has, the more they can underwrite. “There is a common misconception that banks and insurers function the same way,” he said. “At a certain level, that is not true. When you get a loan from a bank, you provide them with a guarantee or collateral that’s of the same value of the funding expected to get.”

Insurers don’t ask for these guarantees because they rely on their capability to assess their customer, he said. “We ask for the right documentations such as financial reports. We then assess their businesses’ operations and their behaviour in the market. The more detailed this information, the better the insurance firm can perform the rating of the company and its buyers. So, for us information is key.”

However, channel players should not be solely reliant on assessments from organisations like Coface. Vijay K. Peter, area finance director, Westcon-Comstor, “When I joined the company, initially we had a policy with a trade credit insurance provider, so whatever credit limit they set, we would usually go with it. We became reliant on them for so long that we don’t even do our own assessments anymore,” he said. “But we wanted to do more business and, of course, a part of this is reaching out to more customers. So, we decided that it would be ideal to create an internal team to perform risk assessments. Upon doing so, we learned more about the customers, which is as it should be, and we found that, more often than not, they are credit worthy.”

He added that while TCIs are important assets, having a proactive approach within the channel is also ideal.

Managing credit is another big area that customers tend to overlook. “Credit management is both an art and science,” said Amer Khreino, CEO, Raqmiyat. “It is not something that can simply be defined or fared by processes and regulations. The distribution channel needs to be creative in terms finding news ideas on how they can extend or manage their credit limits.”

In addition, Khreino said that banks should also provide innovative funding programmes. “In the past, banks have hesitated from providing ample funding because of the issues in the market. Resellers or businesses then resulted to the use of post-dated cheques, which is a system that has been abused in the market for a long time. Therefore, the financial sector should also evolve to offer new financing options for channel players.”

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