The level of risk a reseller runs when it lets a customer trade on credit does not remain static.
A number of factors can affect the trading relationship over time, not least the changing circumstances of customers. An example is when the ownership of a company you trade with changes after
a management buyout (MBO).
Statistics from the Centre for MBO Research at Nottingham University Business School reveal that the private equity market has picked up steam after a slow start to 2007. The first-half total was £13.9bn, up 31 per cent year on year. The current ‘credit crunch’ is likely to have an impact, but MBOs will remain a significant part of the business landscape.
The transition of a customer from a long-standing client to an indebted organisation such as an MBO should, on the surface, make no difference to a trading
relationship. Underneath, though, the differences can be many and the trade credit risk can rise.
For example, the new business will have more debt and may want to stretch trading terms to help it service that debt. Payments should be monitored very closely as slower payment could be indicative of problems, particularly as lenders and investors might themselves be paying closer attention to their risks in the context of the sub-prime lending crisis.
A successful company is not just about the product or service it sells, but also about the management team that run the business. There are different challenges in being the owner of the business as opposed to working for it.
For example, if a buyout brings a new management team into the business, how well do they know the business? What are their business plans and are they realistic? Are the departing owners selling a successful business or are there problems around the corner? It’s not uncommon for new group structures to emerge
as a result of a buyout.
However, the opportunities of trading with MBOs outweigh any impressions of risk - provided resellers take the right credit management actions to ensure they are paid for what they sell on credit.
Resellers should establish a good relationship and dialogue with the subject of the MBO and consider the credit risk. Information on the MBO can be obtained through a business information report.
If a VAR is credit insured, it should ask its insurer if cover is available. If not credit insured, VARs should consider being so. If the MBO is seeking extended credit terms, resellers should consider receivables finance to maintain their cashflow.
Finally, resellers should make sure they manage their debts. If this is done in-house it needs to
be effective.
Alternatively, consider outsourcing the management of the sales ledger to ensure you are paid on time, or to collect the money owed, with minimum disruption to the relationship with the customer.
Grant Williams is senior manager of risk at Coface.