Talk yourself out of a tight squeeze

Being honest with your supplier is the first step towards making sure that credit lines always stay open.

As a credit manager in distribution I am often asked what resellers can do in a 'credit squeeze'. The first questions are whether or not there is currently a credit squeeze and what it entails.

In good times, when an industry is in a high-growth phase, credit is more freely available and credit providers have more relaxed lending criteria.

In a slowdown, credit providers constantly review their criteria to reflect the increased risk of failure among their customer base.

The problem for resellers is that some sectors of the market are facing stern challenges while others are developing well, but the whole market may be tarred with the same brush by credit providers and their lending criteria.

So what can resellers do? First, recognise that a supplier providing you with a credit line is enabling you to acquire capital. To make this happen, the reseller needs to have its balance sheet in order and be prepared to share information on its financial performance with the supplier. In other words, it has to form a partnership with the supplier.

When placing or extending a credit line to one of our customers, I want to understand the fundamental aspects of its business, profitability, borrowing and cash flow. It is only when we are armed with this knowledge that we can make a serious investment in the customer.

Resellers also need to keep suppliers up to date with the direction and performance of their businesses. Firms that perform well will not see a credit squeeze from good credit providers.

Even if you enter a difficult period, early discussions with your suppliers and a strategy to overcome the problems will make all the difference.

Reputation and activity are just as important as financial information. We judge a business as a whole, not just on the last balance sheet it filed.

There are a variety of options to help customers obtain credit lines. Even if the supplier can extend only so far on open credit due to the customer's performance or its own lending criteria, third-party financing, insurance and other financial tools are available to ensure the reseller keeps the sale and the customer.

The key message is: talk to your suppliers, involve them in your business, and most credit problems can be solved.

Making use of a professional credit services team will help you to drive your business forward and pave the way for a mutually profitable trading partnership.

Nick Tiltman is general manager of credit services at Computer 2000.