This industry is built on credit. Few resellers are able to say, hand on heart, they are entirely self-funded. It is hard enough generating cash to meet everyday working capital requirements, let alone funding a big deal when it comes in. Borrowing, for most resellers, is the order of the day.
Credit is always an issue as far as individual resellers are concerned.
But collectively there is more than enough cash to go around. The UK is littered with banks and finance companies which have plenty of money to lend to firms that want to borrow. But this finance can come at a hefty price.
UK banks are the traditional suppliers of first-line credit. Overdrafts are a useful cushion, but one would need a very understanding bank manager to pump up the limits tenfold to fund a one-off big contract. Banks can call in an overdraft whenever they want - a power which shamefully resulted in the collapse of components distributor Sydec in the early 90s.
The bank loan is another staple credit offering, but is not exactly flexible.
Invoice factoring is a lifeline to many resellers, as the finance houses provide up to 80 per cent of the value of the deal upfront, in return for ownership of the invoice. But it can be an expensive option. And there is always venture finance for ambitious resellers looking for a one-time injection of working capital.
Perhaps the most reliable - and certainly the cheapest - source of credit to the industry is supplied by the big distributors. The broadline distributors have expanded enormously in the past few years. This growth has been accompanied by an expansion in the role of their credit managers, who have to balance the risk of losing unsecured debt against the opportunity of adding turnover.
Senior credit managers at Northamber, Ingram and Merisel are aware of the same themes. No longer do they see their function as simply to guard the company's money against the salesforce's excessive enthusiasm. Instead they argue credit is a dynamic marketing tool, designed to foster sales. Flexibility and creativity are the buzz-words of today's credit manager.
Northamber set up its own financial services arm at the beginning of May. The Chessington distributor is not the first in the industry to run its own financial services division - Merisel Financial Services has been in existence for two years. But Steve Kendall, Northamber director of credit services, says the firm has assembled a collection of services which he boasts are at least a year ahead of the competition.
'We have used our expertise and our experience to find the best finance deals around,' he says. 'And we are using our status as a large plc turning over u250 million to negotiate competitive rates, which we are passing on to our customers at no extra charge.'
Options include payment terms extended to 45 days to accounts that pay by direct debit; credit ballooning to fund big corporate deals; and user agreements, also known as invoice assignments, where Northamber invoices the customer direct on behalf of the reseller. Northamber says this lets dealers manage cash flow and avoid expensive and complicated factoring and invoice discounting arrangements.
It is offering finance leasing through Lombard for dealers to offer to consumers, as well as to corporates. Leasing finance is available to fund the entire deal - software, maintenance, services, as well as hardware, Kendall says.
Northamber has also struck a 'floor planning' deal with Transamerica Commercial Finance, which will supply customers with an independent credit line intended to deliver extra working capital on 60-day terms at High Street rates.
The distributor has introduced a range of highly discounted credit-checking and debt collection services through Graydon. It is also offering export finance.
'Finance is a costly function, and few dealers have in-house expertise,' Kendall says. 'It is expensive to have a good credit control system and a good credit controller. Yet poor or inadequate credit checking is the reason why many dealers go bust. We are providing the back office function to the dealers - we have the best credit control and assessment in the industry, and we can make decisions immediately. There is no escalation to the States or Germany. The buck stops here.'
Northamber marketing director Loay Lawrence says: 'Too often the needs of small dealers are ignored. Finance packages are usually geared toward the top end. But our credit services are designed for the whole channel.
We can tailor credit needs from small dealers supplying the one-off home users to the companies winning the big corporate deals.'
The distributor's financial services are available to any dealer holding a trade account with the company. By the end of its first week of operation, more than 100 resellers had either signed up with Northamber Financial Services or indicated their firm intention to do so.
Ingram Micro also offers extended credit lines through Transamerica Commercial Finance. The Milton Keynes distributor is rolling out the scheme to 160 dealers, all currently bumping up against their credit limits, after the successful completion of a pilot programme.
Hilary Wragg, Ingram Micro credit manager, expresses great enthusiasm about the possibilities of this additional source of finance - known as flooring or floor planning because it was invented to fund cars in US auto-dealer showrooms.
'We have arrangements in the US with five or six companies,' she says.
'We have been discussing the possibility of offering a similar service in the UK for four years.'
The banks proved to be the sticking point - until now. US companies offering flooring finance safeguard their investment by taking a charge on stock.
But it is almost impossible to do this in the UK because the banks have got there first. Banks will typically secure their loans with fixed and floating charges on the borrower's assets.
Transamerica has decided it will take a risk in offering unsecured credit lines to the UK channel. 'This is superb news,' Wragg says. 'Transamerica will assess customers independently, and on that basis will offer extended payment terms. So the dealer may pay a third on 30 days, a third on 60 days and a third on 90 days.'
Ingram Micro is a fairly conservative company, Wragg says. 'We want to grow, but with minimal bad debt. As an organisation we are very active in finding credit for our customers.'
The company is happy to temporarily increase dealer credit lines to fund one-off deals. It is less keen on invoice assignment, says Wragg. 'We don't really like these arrangements. We need to be separate from the users.' Resellers can also lose out on a invoice-assigned deal because only profit, and no turnover, goes through the books.
Ingram will also agree to one-off escrow finance arrangements on large deals - those worth more than u100,000. The involvement of the distributor in managing the credit risk is hidden from the customer. Payment is made into a bank account held jointly between the distributor and reseller, but controlled by a merchant bank. Wragg is not fond of escrow finance, mainly because of the paperwork that is involved in setting up an account for a one-off deal.
So what does Ingram look for when assessing credit limits? 'There are no black and whites, no magic formula to apply when assessing credit limits,' Wragg says. 'We have skilful in-house analysts. Their assessment of how creditworthy a company is combines faith, trust and judgement, as well as hard information.'
Ingram backs its assessments with information supplied by Graydon, Infocheck and Dun & Bradstreet, and it insures against 'catastrophe' through a policy with Trade Indemnity.
'Companies are happy to supply a tremendous amount of information, including very personal details, to banks, which make lots of charges,' says Wragg.
'Then they get upset with us, because we want their company financials.
But we are a free bank. For 30 to 40 days we are prepared to offer free financing. All we ask for is two things: for resellers to pay on time and to supply us with up-to-date monthly management accounts.'
Merisel first wrapped its credit offerings into a financial services division two years ago. Financial services manager Damien Applegarth says: 'We have freely advertised our package of services for some time. Some of the large distributors are playing catch-up - they are adopting our more flexible approach and becoming more creative in offering credit.'
Merisel is able to open up a standard 30-day credit facility to a reseller 'within two hours of the customer faxing us with their financial information', Applegarth says. It also balloons credit to fund big deals.
The company also operates an invoice assignment facility, which is organised in such a way that resellers can show the turnover running through their books. Applegarth says this service is under-used by resellers - there were just over 100 transactions during the past year. 'It is difficult to launch new financial offerings in the UK,' he says.
'Businesses are very focused, very one-track, on bank overdraft as their traditional source of credit. It is hard to sell other methods of finance.'
Resellers tend to be uncomfortable with invoice assignment, Applegarth says, because Merisel's involvement in funding the credit risk is clearly disclosed on the invoice. 'They do not want the customer to know they are not big enough to handle business by themselves.'
Escrow finance neatly solves this objection, because the relationship is hidden from the customer. Merisel has offered escrow financing in the UK for the past 18 months and is prepared to offer the service for deals worth more than u50,000. Setting up an escrow account can be cumbersome and the reseller is charged a standard u250 by the merchant bank. UK resellers remain suspicious of this financial instrument, in contrast with their US counterparts, which use escrow widely, according to Applegarth. But he is convinced escrow will gain in popularity in the UK for very large transactions. It is just a question of selling.
Merisel has so far avoided leasing, in favour of dealing with the resellers' preferred finance companies. 'We deal with everyone from HP Finance to Lombard,' Applegarth says. The company has examined floor planning finance, but is in no hurry to take the plunge in the UK. 'You have to understand that there is cost involved to the distributor with floor planning. We are determining the most cost-effective solution.'
For large accounts, Merisel supplies dedicated managers who provide a focal point for purchase orders, invoices and stock returns. It will also provide credit checking for every reseller that asks, says Applegarth.
'It is in our interest. Any deal that could damage the reseller could also damage us.'
The next time you are refused a bigger credit limit, just remember that it is nothing personal. Almost every order placed with a broadline distributor has a credit line attached to it, and every credit line is underwritten by the credit department. As Applegarth says: 'That means we say yes an awful lot of times.'
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