Cash Is King

In a slowdown should partners extend the credit limit to their customers
or should they reduce it? While the jury is still out on this one, partners feel
that contraction of the credit limit would ensure that only the serious players
prevail in the business

Many sub-distributors have gone ahead and extended the credit period to ease
the slowdown blues for resellers. But, the pressure is mounting on them from the
national distis and sooner or later they will have to squeeze back the limit.
Due to the credit crunch brought about by the slowdown, payment collection has
become the biggest task at hand. And there is a big debate in the market as to
what is better; increasing the credit limit to ease the pressure on resellers or
keep it on a tight leash to ensure regularity.

Players across the industry are implementing different checks and measures in
order to maintain a safe reserve of cash in times of slowdown. Sub-distis are
also adopting methods to maintain a constant flow of funds at their end and to
ensure timely payments, they are experimenting with the credit period so that
the inflow of cash is regulated moderately.

The Scenario

There is no secret recipe to evade the effects of the economic downturn, but
nevertheless, sub-distis are trying to take measures from their ends to at least
minimize them. One of them is to modify the credit limit.

One set of distis believe in expanding the credit period so that it becomes
easy for the resellers and partners to pay cash. However, another set of
partners feel strongly that in this scenario, sub-distis should rather squeeze
the credit limit. Sub-distis in metros like Delhi and upcountry have gone ahead
to stretch their credit limit from 20 to 40 days. Though the change in policy is
affecting their business returns, still they are hoping that this would get them
some releif.

Manish Mehrotra, a sub-distributor in Allahabad informed that the market has
been very slow for the past few months. “Considering the fear of credit crunch
in the market, some sub-distis have extended their credit limit from 20 to 40
days. Because of this the sub-distis are facing a delay in payments; but there
is no relief to them from the national distis. In fact, the national distis
would further the contract the credit limit.”

Swarajya Gupta of New Delhi-based Digitronics Infosolutions has also extended
the credit period from 20 to 40 days. Gupta informed that this is just a measure
to ensure smooth flow of cash. “Since everyone is facing a tight flow of funds,
we had to stretch the credit period so that partners are in a position to pay us
back,” he said.

Sharing his thoughts Vishak Raman from Fortinet said, “Fortinet is
considering working on ways to help its channel.

We will negotiate with our distributors to ease the credit term for some of
the partners when the customer delays payments. Based on channel'sperformance
and credit worthiness, we can work with the distributor to extend the credit
limit and time for our 28 partners, on selective case-to-case basis.”

To expand or not to

National distis like Ingram Micro and Redington are still following a credit
period of 15 to 20 days with no plan to extend it to use it as a tool to fight
the slowdown. Instead, they are planning to shorten the credit period so that
the process of cash collection is quick and stringent.

The market has become stagnant as customers are postponing their buying
decisions and resellers are facing difficulty in generating cash and this is
further hampering their deals with the sub-distributors.

“Resellers at certain stages are not able to do 70 percent of their business
as there are no buyers. In that case they request the sub-distributors to expand
the credit period so that they get some time to generate cash. To provide them
some ease, some sub-distributors are going ahead and becoming lenient in cash
collection,” opined one of the partners.

Good, bad or ugly

However, the situation is different at the level of national distis. Sub-distis
are predicting that in the coming days, national distis would become strict with
the credit period and they will further squeeze it from 15-20 days, depending on
the product line. However, when they shorten the credit collection period for
the sub-distributors, the latter is bound to feel the pinch and they would also
have to shorten their credit periods. The squeezed credit period at the end of
sub-distis would keep the corporate partners and retail partners on their toes
to do value business.

“At time of financial crisis, cash is the king and liquidity crunch sets an
alarm for the resellers and the channel partners to scan their financial status
and revise their business strategies. At this stage it would be advisable for
sub-distis to shorten the credit period so that it gives space to serious
players to prove their potential,” said Rohit Kohli of Kanpur-based Comexcell
Technologies.

Get disciplined

Sub-distributors opined that contraction in the credit period would refine
serious players from the non-serious ones.

“IT channel is one segment that runs on credit. In this business anybody can
enter and start his own venture on the basis of credit. This liberty gives space
to a number of non-serious players,” accorded a partner.

Recently, incidents have occurred in markets like Lucknow, Kanpur and down
South, especially Bengaluru where partners have absconded because of their
inability to repay the debts. The strategy of the national-distis to shorten the
credit period would separate the good from the bad and strong from the weak.

Amrita Tejasvi

amritat@cybermedia.co.in