Credit, is it under used or overly prescribed?

Some 95% of B2B are transacted on open credit terms, a process of product or service supply with premise of payment at a future date.

Credit fuels business, not just simply in the provision of much needed channel finance but in oiling the wheels of business, allowing for growth and increased market reach.

Provision of a credit ‘line’, as opposed to the more commonly referred to ‘limit’ is always generally subject to status checks or pre-determined scorecards. It is then continuously reviewed and monitored during a business trading cycle to ensure the level set meets the requirement of risk appetite measured against growth. A business is therefore unlikely to have a credit line for life or one that remains at a constant level (or it shouldn’t).

A credit line infers one that is flexible and will move up or down based on review and trading history whereas credit limit, by the very nature of the word, implies a rigid fixed value that will not fluidly move up or down.

The result of open credit are trade receivables or trade debtors, a substantial liquid current asset that frequently accounts for more than 60% of a company’s total assets. A bi-product of credit provision is an invaluable and frequently under used resource, a massive database of clients, past and present with incredible volumes of data attached to each client. A criticism I levy is that business leaders rarely use these two significant assets (despite zealously guarding them) to the extent they should, and all too often, know very little about them.

Control, security, growth and management of these assets is crucial and yet too many do not afford the area charged with their responsibility the degree of importance it deserves; credit too often languishes in the bowels of finance, incorrectly viewed as a back office function or sales prevention unit. Used correctly, it is a proven profit centre and business driver.

The Channel has experienced highs and lows in terms of credit. The high in boom times between recessionary period and the low when words like ‘credit squeeze’ and the lack of credit insurance cover put some pressure on availability, but even then, only at the top end of the scale; Dixons was a classic example. Mid-market clients were relatively unscathed given the varying types of credit insurance held by suppliers.

A number of major distributors such as Ingram Micro, Westcoast and Tech Data market similar initiatives to accelerate a credit line, generally to small businesses; these are designed to offer an increased credit line to match growth and satisfactory payment (often by Direct Debit) and are marketed as special offers or “credit limit accelerators”.  Offered at lower levels and capped, they do offer some assistance for SME Resellers

In truth, these simply replicate a standard credit process for review in the general course of business trade but always closely worked with other risk factors. A concern is that such accelerator plans may be dangerous in that they insist a specified percentage use of the increased limit each month in order to remain part of the programme. This has the effect of forcing the Reseller to place more and more of their purchase requirements through the plan provider, a route perhaps to increase a distributors market share of what is termed “total available market” (TAM). This is loosely worked on judging how much product a client buys annually, its constitution and how much share a supplier holds or can strive for. This is common practice in many business and industry sectors and yet so often flawed from a commitment and risk perspective.

There is no guarantee of course that having built your credit line from 5K to 200K it will remain unchanged should you not pay on time, file negative financial results or provide interim management accounts that suggests the risk is too high to justify the 200K line. Give a business too much credit too quickly and there is a risk you may force it into difficulty. It’s a bit like giving an 18 year old a credit card with a limit of 2K guaranteeing increases subject to percentage use and payment on time. While they might abide by the rule for a few months, there will come a point where they cannot pay a debt that may now have risen to 10K.

In recent months, there has been talk and indeed surprise that Resellers are not taking advantage of the amount of credit offered by Distribution. In a March 2012 article, C2000 referred to1bn of credit availability but where only some 350-400m was used; it also suggested the potential growth the company could achieve if usage increased. The business therefore had existing credit lines to clients totalling well in excess of the sum owed by those clients. This is a common feature in distribution where clients are in their thousands.

Experience tells me management and constant review of your client base allows you to manage the level of credit you provide to match the level of growth you are achieving or hope to achieve. If one has several thousand accounts with credit lines that do not trade or do not fully use the level of credit provided then this suggests poor management of credit, diminishing or static sales or a lack of database research by credit/sales/marketing.

Credit lines of 1bn on average credit terms of even 60 days offers annual sales scope of 6bn, clearly well in excess of anything recorded and more than the combined sales of 7 of the top UK Distributers on the basis of last filed accounts (4.9bn). The total amount owed by Resellers across these 7 was in the region of 670m. Excess or unused credit does not therefore necessarily signify a level of growth potential.

Credit availability and use changes; account managers and buyers move on, vendor profiles change, relationships break down, online accounts are granted credit and not progressed and Resellers (not unsurprisingly) modify their business practice and offerings continuously without being followed.  A growing number that were predominantly hardware/software Resellers have placed greater emphasis of managed services, negating the need for historically high credit lines.

Correctly managed, a database can resurrect sales, create new sales, increase margin and far more importantly, strengthen the client relationship leading to repeat business; this is crucial and yet so often neglected. With correct training and skills, Credit Management is perfectly placed to deliver as a business development tool with sales and marketing and yet sadly this opportunity is missed.

Credit is a selling process, very much part of the initial and ongoing client review through to payment and closure of the sale. It must be instrumental in helping to shape direction, repeat business and growth and not be seen as merely a risk or debt collection function. Astute and forward thinking companies are those that see clients as clients all the way through a business life cycle and not simply as debtors once an invoice is cut.

If you offer credit lines that are unused or under used, you need identify the reason, work on them and where there is no opportunity, remove them or reduce them. It’s pointless offering a client a 100K credit line when the most they will or can now spend with you is 5K.

If you have too much unused, you’re not managing it correctly or not selling enough. If you have too little to offer or only offer what you have credit insured, you’re being restrictive. An ideal benchmark for Distribution should be a debt to active account credit line ratio of between 65 - 70%. This offers ample scope for growth and ensures continual review of your client database to guarantee freshness and optimised use.