When IT's 'Credit'able

Every
business needs investment and IT is no different. Every player in the
supply chain needs to invest in the business from vendor, to partner
to customer. Vendors need to be understanding towards distributors
and partners on the credit risk, cost of money and payment delays.
Partners need to impress customer to make payment on time as per
agreed terms. It is not sustainable on the long run to manage a
growing business without necessary investments. Over the period of 15
months, the cost of money has gone up drastically. RBI has revised
interest rates 10 times making interest rates very high and liquidity
low. Hence, it is natural for the credit policy to undergo changes in
line with the market. All changes to the credit policy are towards
making working capital really work hard with more number of rotations
so that the impact due to high cost of money is reduced. In the IT
business, the credit limit/period varies from partner to partner
based on partner's credentials, experience during transactions,
volume of business, focus and investment by partners in offerings
etc.

VENDORS'
AND DISTRIBUTORS' CREDIT POLICY

size="4">Typically,
a distributor extends credit to its partner for a period of 30 days
and the distributor waits for the payments due from partners. On the
due date, the distributor approaches partner for his payment but the
partner requests the distributor not only to extend his credit period
but also asks for more goods so that he can recover both his margin
and the rate at which the partner had agreed to pay back. Again, when
one approaches this partner for the third time he is being informed
that the payments will get delayed or in a worst scenario, the cheque
that the partner has issued has bounced. This is not an unusual
situation. Payment defaults and its repercussion can be felt by the
entire IT chain as it creates a huge cash/liquidity crunch in the
market. While informing about Redington's credit policy, PS Neogi,
president, IT division, Redington India explained, “Our credit
policy is designed to suit the products and the customersegment where
the products are getting sold. The period varies with the product.
For eg, components like CPU and HDD would be on 15-21 days,
consumable on 15 days, printers on 21-30 days, PCs/laptops/servers on
30 days. For deal business, credit may be extended to 45 days on a
case-to-case basis.”

size="4">Nevertheless,
Redington has a consistent credit policy which is same for all the
channel partners including large retailers. “We ask our partners to
pay us on the due date. We also ask for a post-dated-cheque to
transact any business with channel partners,” added Neogi. In the
words of Sridharan Mani, director and CEO, American Mega trends
India, the company with a strong focus on embedded, sto rage and GPS
tracking solutions, “We sell our products predominantly through our
distributor and some valued part ners. Hence in cases where the
distributor is there, the channel credit terms are handled by the
distributor directly. Else, the credit terms are extended to the
relevant partner after under standing the financial history and
status of the partner along with past business dealings.” Sharing
about Antec's credit policy, Kevan Li, regional sales manager,
Antec added, “Most resellers and dealers pre fer to have credit
terms from distributors to let them have more flexibility in their
cash flow while stocking the products. Antec distributors also offer
credit flexibility for 14-60 days and above, depending on various
situa tion about the dea lers and resellers.” Sriram S CEO, iValue
InfoSolutions said, “We have partner's registration as the first
step for extending credit. Based on the credentials submitted, we fix
credit limit and period. Credit limit and period are revised every
quarter based on the volume and payment
cycle.”

CREDIT
POLICY CHALLENGES

size="4">Several
industries are witnessing delay in payments and increase in the
number of defaulters. The story of IT industry is no different and
keeping the same in mind, vendors have started exercising caution.
Majority of the channel partners feel there is a need for a
definitive credit rating policy to be put in place and followed
rigorously so that a healthy business environment is maintained.
Hence, there is a definitive need for a credit policy that not only
ensures timely payments but also a smooth business cycle. Talking
about the current scenario, Deepak Sharda, secretary, href="http://www.dqweek.com/Rajasthan-assn-blacklists-Computer-Element-and-Sudarshan-Infotech">Rajasthan
Computers
Traders Association (RCTA) said. “The IT credit policy is
unlike the mobile sector as this sector follows only cash and carry
policy. On the flip side, IT business is driven by credit policy
without any entry barrier. Therefore, we are prone to defaulters and
cheating instances.” Advance cheques are issued to the vendors and
distributors. Therefore, it becomes imperative for the partner to
collect money from customers on time. However, the market situation
is so bad that most of the times customers are unable to pay on time.
This creates a liquidity crunch for both the vendor and the partner.
“Although this fact is true, the rising fear of this situation is
putting partners to emphasize a lot more on cash collection. It has
become a priority with everyone these days,” said Askok Taneja, MD,
Softech Computers. Indrajit Sabharwal, MD, Simmtronics Semiconductor
said, “A lot of resources have to be put to collect the pending
payments. The fear of having bad debts in one's account is driving
all of us to become more cautious with future dealings and aggressive
about the past and the present ones. I think 50% of our resources go
in collection of money on time. Every order is tracked by us
aggressively and we ensure that the payment terms are fulfilled.
Department heads of different verticals track the order.”

“ size="4">While,
most of our partners understand and appreciate the requirement of
honoring payments on the due date, we do still face considerable
challenges on the collection front,” added Neogi. According to
Neogi, “Redington has tight monetary policy by banks which put
pressure on working capital availability with partners. However, some
partners may require more prudence while structuring their business
and credit offering to their own customers; delinquency on the part
of actual end-users; purchases by partners in excess of their
capacity to rotate capital-all this may lead to challenges to a
distributor in maintaining his credit cycle. However,
if the policies are absolutely clear, unambiguous and the processes
are robust, then, the control can be healthy.”

NEED FOR
BEST PRACTICES

size="4">A
credit policy usually differs for the kind of products that you sell
in the market. For eg, for a HP PC there is a credit policy for 30
days, whereas the same for an Intel processor is about 14 days. There
are times when a dealer is unable to sell the product owing to the
lack of demand in the market. Hence, there is a need for the credit
policy to be flexible. This is the time when the credit rating system
needs to be revised. Neogi said, “At Redington, we have a prudent
practice and we take care of total transparency, equitable terms
irrespective of extent of business and keep minimal room for any
communication gap. Redington believes that each partner, big or small
is an entrepreneur and deserves equal respect for not only earning
his/her own living, but also providing livelihood opportunity for
people working with him. Our terms are based on 'nature' of a
partner's business and not the 'extent' of his business.”
Mani said, “Our credit policy is flexible to a certain extent to
help any channel partner win a business especially when competition
would be thick. We understand that many customers have their own
internally defined credit policy and a vendor should be in a position
to stand within those policy terms and make a sale. Such sales
dealings definitely expect a product supplier/manufacturer to be able
to accommodate such adjustments in credit policies at least on a
temporary note.” “Antec treats each level of distribution channel
equally, while having good margin for distributors, resellers and
dealers, at the same time ensuring value for the end-users.
Distributors HDigital Lifestyle and Devraj Computers offer credit
terms to all resellers ensuring the partners have stable cash flow.
Antec does not appoint as many resellers as possible to cover a city,
instead the company go on a selective manner. Each resellers has an
area to cover to ensure availability of products to the end-
customers, at the same time decrease conflicts among the resellers
that may affect the margin and after service of the resellers,”
said Li.

size="4">On
the caution note, Sriram said, “We have been in the
value-added-distribution business for close to a decade now. Majority
of the partners with whom we deal regularly are like our extended
family, who have been with us through thick and thin. Hence, it
becomes easy to manage exceptions with both parties' interest in
mind.” “Yes we do come across exceptions in the market, who spoil
the reputation and confidence of the family which is a part of
business. With very high interest rates, the fear is that default and
delay will increase in near future as many of the non serious
partners who don't have investment in the business will end up
working on others money to manage their business. The IT community
has to be watchful with such players as they bring bad name to all
of us,” added Sriram. While dealing with credit, it is imperative
for channel partners to maintain right inventory. According to
Taneja, “Some of the best practices in such times would be not to
sell below cost, reduce turnover, and exposure. One should also
improve relationship with the customer for future. Besides, have an
optimistic approach and try to do value-adds more than ever.

CREDIT
POLICY V/S CASH 'N CARRY

size="4">Distribution
and reselling have become pretty competitive for any IT related
products, and distributors try their best to offer as many benefits
as possible to the resellers to maintain a long lasting business. But
on the other hand, it is not easy to be risk free while providing
credits to all the resellers and dealers. As some resellers may
suddenly be facing financial problems due to intense competition and
some other reasons and hence may affect the payment to the
distributors or vendors. In spite of the risk, distributors still
proceed with offering credit to the resellers. “One of the key
advantages of a credit policy is a scenario where by merely extending
the credit policy, a business deal can be won. There is a level of
confidence with few partners when the vendor is willing to give them
the benefit of a credit policy towards a business deal. Parallel to
this, there are also disadvantages like credit policy being unwanted
extended due to unacceptable reasons by the partner. This might lead
to time and energy being spent on regular follow-ups adding to
additional costs,” pointed out Mani. According to Neogi, “There
can not be any disadvantage of a cash in carry policy. The issue is
that the expectation of the extent of cash discount from a
distributor is not in line with the actual cost of funds.
Distribution margins do not allow for cash discount disproportionate
to the cost of funds. Hence, Redington very rarely transacts business
on cash discount. A cash n carry policy would offer security with
very thin margins. A credit policy retains much better margins at a
high risk.” In view of Sriram, “Credit policy help partners to
manage his cash flow better which is critical for his core business
to sustain and grow, wherein cash n carry policy definitely helps
partners for one of the deals bought to fulfill their customer needs.

size="4">Hence,
it is critical for partners to pay as per agreed credit terms and
build his credibility in the market, since it is not feasible to
expect advance payment from every customer for every deal. This will
help in getting better terms on the long run which will help partners
to grow the business.”

CONCLUSION

size="4">As
it is rightly said that with experience one learns to master the
tricks of the trade. Going by the past experience, it is advisable to
exercise caution at the time of formulating credit policies as the
credit rating system is indeed the mantra to survive and pursue
healthy business.