Give resellers credit for their work
Vendors may be passing too much of their credit risks onto distributors and resellers. But there are ways in which even the smallest VARs can improve their own chances of a healthy credit rating. James Sherwood finds out how
Credit is the life-blood of every reseller, and the process of obtaining and repaying it is as common as vendor partner programmes.
But as IT vendors continue to multiply their turnover on a quarterly basis, are some unfairly shirking their credit risks, and passing them on to channel partners? How can resellers make use of advances in technology to both maintain and enhance their credit rating, while at the same time limiting their exposure to the potential business damages of credit risk?
When Granville Technology, the holding company of Time Computers, went into administration earlier this year (CRN, 15 August), the collapse left numerous companies and individuals in the sales chain out of pocket.
While large retail outlets reselling the Time brand, such as Woolworth’s, may have felt the pinch of the vendor’s demise, resellers without the financial might to withstand the blow may have been hard-placed to recover their losses, which in turn could have led to damaged credit ratings.
Speaking of the plight of companies at the other end of the chain at the time of the collapse, Simon Rothchild, a representative at administrators Grant Thornton, said: “There are suppliers that will be affected, and which potentially would lose out to the tune of £35m.”
Kevin Drew, managing director of ISV Triangle, said that the fundamental problem with the credit process is that too many vendors offload financial risk onto their resellers.
“Over time, the more successful a reseller becomes then the more of a squeeze it can experience with its lines of credit, be that directly from a vendor or distributor. In order to grow, a reseller needs to obtain either more lines of credit or a single but larger line of credit. However, still essentially being an SME means that this is not always possible,” he said.
However, vendors are beginning to see the light and help their channel cope with credit.
“Vendors are beginning to improve their credit obligations and many now offer special credit terms for a one-off large order, which will help resellers to grow their business,” said Paul Renucci, managing director of communications integrator Damovo.
“A customer not paying can be a big risk and it may damage credit lines, but, by receiving help from vendors on credit control, resellers can help ensure they are better secured against risk and can then focus more of their time and energy on higher revenue generating opportunities, such as services,” he said.
Trade credit is a risk for distributors as well as resellers. Some have begun to develop new credit allocation practices to ensure that credit is obtainable by the “right” reseller under the correct terms and conditions.
Last year, audio visual distributor Steljes signed up with credit checking agency Credit Assist to launch an online reporting service for VARs. The intention was to provide resellers with instant credit reports on potential customers, and which it claimed could also be used to help resellers increase their own credit lines.
Distributors such as Steljes receive numerous requests for credit lines from new resellers on a frequent basis. However, some may only be accompanied by vague financial information, such as the managing director’s bank statements or trading history. Neil Munroe, external affairs director at Equifax, said this often results in “safe” negative decisions.
“The operating structures of SMEs are very different from larger businesses and this can mean that a trading history is difficult to obtain. In many situations SME credit may even be decided on the basis of directors’ private financial history, if little other information is available,” he said.
To develop a fairer and more universal method of assessing resellers’ credit worth, Eddie Pacey, director of credit services at Bell Microproducts, told CRN that use of scorecard systems based on specific information groupings has become a more common feature of the credit application process (see page 33).
“Credit changes have been driven primarily by the cost of credit insurance policies, which in turn have led to a change in the way we assess credit lines. A scorecard credit system
usually gives resellers an instant decision and is often used at the lower levels of credit and works for nine out of 10 applicants.
“The scorecard has settings that trigger both positive and negative responses based on, for example, a reseller’s financial filings,” said Pacey.
Stewart Dickey, policy director at independent trade body the British Bankers Association, agreed: “scorecard systems are becoming increasingly common after gaining recognition from their widespread use by major high-street lenders. It’s ultimately better and safer to rely on a scorecard system than it is to rely on human assessment,” he said.
Vendors and distributors may still be some distance away from devoting similar levels of time and effort into improving the credit process and in limiting the credit risk for resellers as they currently spend on turnover-generating operations.
Trevor Byrne, marketing manager at Coface, said resellers could also be doing more to increase their own chances of credit application success.
“SMEs are making progress with credit but they should still ensure they pay promptly and according to the lenders’ terms or not borrow excessively because exorbitant numbers of credit lines can be viewed quite negatively,” said Byrne.
Resellers could also employ the techniques they use with customers to their internal credit application process. If resellers do not ensure their business has enough credit available when it needs it, a potential business-building situation could be put at risk.
“We would like to see more understanding from large vendors and distributors because if they want us to move their equipment, then they have to help us, and credit is an essential part of that,” said Renucci.
Technology can also assist resellers with credit management, and VARs need to follow three simple rules to maximise their chances of a favourable credit application.
First, Pacey said that resellers could make use of direct debits or internet banking facilities to ensure creditors are paid on time, as this will build confidence with existing lenders and improve the probability that credit lines will be increased when required.
“Direct debit is often used by resellers that find it difficult making regular payments and the distributor will simply notify them when money is to be deducted from their account and how much, allowing the reseller to treat the direct debit as a standard invoice,” he said.
Second, Pacey said resellers could take the time to train staff on the importance of managing credit risk. For example, when closing a deal, resellers’ sales-people can ensure that customers are aware of payment terms and invoice dates, so that customers can then adhere to them.
“Creditors have a statutory right to claim late payment interest. Failure to pay on time will make it difficult for lenders to look favourably on resellers in the future,” said Byrne.
Third, Paddy Lawton, vice-president of Verticalnet Europe, said that new or small resellers should
consider a single line of credit as opposed to hedging their bets with all possible lenders. “If you build up a good credit history with one distributor, you will find it easier than getting a handful of credit limits from a handful of distributors. Speaking to one distributor little and often builds up a good rapport with them,” he said.
As the credit process slowly begins to move with the times and embrace new technologies, one thing remains unchanged. The closer financial providers work with resellers, the better for all concerned because, as the old saying goes, your business could be at risk if you fail to keep up loans secured against it.