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Partners’ Perspective: The thorny issue of channel credit schemes in MEA

Partners’ Perspective: The thorny issue of channel credit schemes in MEA

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Part of the Lynchpin Media team, Manda Banda has more than 20 years of experience working for channel publications. He shares the knowledge he has learnt during that time in this new monthly column for Intelligent Tech Channels, starting with his musings on channel credit schemes in MEA.

Can the partner community survive without the credit schemes that IT vendors and Value Added Distributors offer? The majority of IT distributors in the volume and value sector in the Middle East and Africa (MEA) IT industry extend credit terms to channel partners or have developed channel financing schemes as a way of mitigating cash flow challenges that resellers or solution providers encounter when financing big projects. However, developments that have happened over the past few years in the region have prompted distributors to reconsider how they extend credit facilities to their channel partners.

According to global credit insurance firms, the risk of non-payment by companies has not disappeared and caution is in order as the world continues to suffer from subdued growth and trade prospects due to the COVID-19 pandemic.

Let us take a look at the Gulf region, for example, the banks’ appetite for SMB lending has drastically reduced and credit insurers have reduced the credit limit due to certain resellers having either run away or exited the local channel and this has affected other players.

Most of the resellers, especially in the GCC, do not maintain a formal set of financial records that are regularly audited, and the lack of audited financials prevents IT vendors and distributors from providing direct credit to channel partners. Reseller ‘runaways’ – a trend where an IT reseller or trading company exits the market because it is failing to meet its debt obligations – is far too common in most Gulf markets, and this has temporarily affected the credit and business sentiment as lenders and, in particular, IT distributors have lost money through such malpractice. That said, it is important to point out that this may get adjusted over time and might also act as a catalyst to bring in certain best practices, such as transparency in prudent bookkeeping of resellers and getting them to regularly audit their books.

If one looks at the credit relationship between a vendor and a distributor, one quickly realises that it is a straightforward association built on business fundamentals. The vendor usually requires a letter of credit and a bank assurance which guarantees a smooth relationship where the vendor doesn’t have to wait for the distributor to transfer money each time but based on the bank guarantee the vendor can acknowledge and ship the goods.

In the case of distributor and reseller relationships, the volumes of business are much smaller. Some distributors would do full financial checks on the reseller if the relationship is a new one. They would take this due diligence even further and ask for audited financial statements for the previous years if the reseller has been in business for some time.

For an existing relationship, if the distributor has experienced no records of bounced cheques or defaulting payments and that payments are always made by the reseller within the credit period, then the distributor extends better credit terms to that partner. If anything fractures that relationship or mistrust develops, then distributors get cautious and moving forward, they start requesting for post-dated cheques and cash on delivery.

And while most channel stakeholders agree that credit schemes play a critical role in enabling partners to finance big IT projects, others have long argued that the regional channel can survive and operate effectively without the generous channel credit financing schemes that are normally offered to them.

Given the low margins that channel partners work with, I do believe that it’s impossible for the regional channel to survive and operate without proper credit schemes in place.

That being the case, it’s important to point out that the trust factor has vanished from the MEA channel and this has been worsened by recent cases where resellers with huge bad debts due have run away from the local channel for fear of being prosecuted. Huge inventory issues and slow sell-out have impacted cash flow of most resellers and IT distributors thereby defaulting on their account payables.

When it comes to the MEA market, the channel has not taken any action to investigate the downside risk caused by the current geo-political situation and global Coronavirus pandemic. For example, the currency deprecation in most African countries has exacerbated the issue of credit terms and insurance as no IT distributor or insurance firm is willing to extend terms in an uncertain market.

Credit insurers are now staying clear from insuring or enhancing credit limit for the reseller segment due to multiple runaway cases, especially in most Gulf markets.
Given the entrepreneurial spirit found in the Middle East IT market, to stay competitive and attract vendors to deal with local solution providers, resellers and IT dealers, local distributors have to move away from traditional box-shifting to full Value Add offerings, which opens up new revenue streams specifically with professional services and training to ease cash flow and retain customers.

To achieve this, vendors and distributors alike need to be transparent with each other, especially about their forecasts and cash flow, to ensure the correct expectations are set within the market so that the whole sales chain, from vendor to distributor to reseller is open to proper management scrutiny and business oversight.
In the long run, the channel will survive this period, which has been challenging as sales cycles have been longer, with cashflow impacted in some cases. Ethical resellers who run their business in a professional way, manage their finances and commitment well, don’t take undue financial risk, keep financial records and regularly audit their books, will have access to credit despite the prevailing market conditions.
It is clear that business will go on and continue to be done. The onus is on IT distributors, vendors, banks and finance companies to continue supporting good players in the market.

With the IT industry calling for broader business reforms in the channel and credit models to adapt quickly enough to the changing economic climate across the MEA region, experts contend that any delays will hamper progress of transforming the market.

It is undeniable that the IT sector is spearheading the changes happening in society today – be it personal, enterprise or government. The sheer potential the IT sector has in the coming years will ensure vendors, distributors, resellers and end-users work together and come up with credit solutions which work and push the MEA channel forward.

As this progress is happening, vendors and distributors have to change their business models from focusing so much on sell-in (just to grab market share) to sell-out-based models. Sales to consumers is action measurement of sales for any brand, contrary to the current business model in MEA which is based on how much inventory that can be sold into the channel with no efforts to enhance the sales to end-users. With a sell-out-based model, cash flow management will be enhanced, better control on days sales outstanding and inventory will help the cause to revive the channel industry.

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