What's credit all about then?

Eddie Pacey offers resellers a rundown on the world of trade credit

The question of credit and its availability to resellers has received considerable focus over the years, more so in times of recession and restricted credit insurance cover. One understands the importance of credit: without it, businesses cannot sell and growth is impaired.

Credit lines are constantly moving up or down as determined by factors such as business performance and profitability, payment trends, scorecards, ratings, payment terms and, occasionally, considered commercial business decisions.

With some suppliers, there is little flexibility to the credit line applied: hit it and even though you are not overdue, you will be asked to pay down some debt. Others, perhaps more commercially minded, may allow a temporary increase given the data and information held or a reasonable expectation of payment being just around the corner.

So-called “credit squeezes” received considerable press comment, but the reality was different - aside from a few cases where cover on significant buyers was cut or removed. This requires a quite separate explanation.

Improving support

Credit management responsibility includes provision of credit in line with policy, supporting and occasionally leading in providing sales with the opportunity to sell. Determining the risk in the buyer, country or market is one route. If, having granted opening credit, volumes increase, buyer risk improves and payment is spot on, the credit line will rise. If the converse happens, however, credit may be reduced or removed.

Given some sovereign debt issues of late or market risk, these may also lead to a negative review. So at one level, credit reviews are no different to those of an insurance underwriter.

I suspect that if one adds the combined credit line availability of all distribution credit traded accounts against the sum total owed, at any given time the ratio is likely to be 2:1. This can mean three things:

■ Too many unused credit accounts

■ Ample scope to increase business volumes

■ Credit line availability is not optimal for buyer or supplier

There have been various efforts to improve the overall support for growing businesses. For example, “accelerator” or “uplift” programmes may be designed to continually increase the credit line, subject to continued set monthly use, incremental business and guaranteed payment - usually a continuous increase until a fixed maximum value is reached over a set period.

While these can be useful, they are no different to standard day-to-day client review processes. The buyer may be forced to over-trade - precipitating cash flow constraints and business failure. And if a buyer fails to achieve the required continued percentage use or hits the determined maximum ceiling, he or she may find the line restricted or removed if payment is late or results are poor.

Credit fuels business. Most B2B transactions are conducted on open credit terms, so open debtor values will comprise 45 per cent of total assets or, in IT, even as much as 65 per cent. The security and growth of these arrangements remains crucial. Fear of bad debt or minimising bad debt severely inhibits business support and growth. Managing bad debt, on the other hand, is paramount.

Where distribution may fail in its provision is when clients need special support to manage larger contracts, when payment issues and negative financial data are not correctly interrogated or reviewed and there is no consultation, or when there are no direct client-credit personnel relationships. Knowledge, understanding and client relationships are key and this will never change.

Eddie Pacey is founder and MD at EP Credit Management & Consultancy