Dealer Credit Squeeze Part 2
There have been a number of scathing comments made particularly about ETI, the dominant supplier of credit insurance to the UK channel and some have also pointed that there needs to be more effective communication between the insurers and their policyholders.
In ETI's defence it has continued to support the sector by providing insurance when others have not been as supportive. From a communications perspective they have worked closely with distributors to assist where possible and communicate with many to ensure an effective flow of information. This doesn't mean that they will always see eye to eye and provide cover where a distributor believes there is a sound business opportunity.
These decisions also affect the distributor, without insurance or with a reduced level of insurance this directly affects their ability to trade effectively with the customer. Also in the event that a distributor approaches their insurer for a limit they may well find that the level of trade they wish to do will not be underwritten, the insurer may not be prepared to increase their exposure to a business given the trading levels of its other policyholders.
As a result the power and influence of the credit insurance industry remains instrumental in determining which organisations grow. Admittedly this does not stop distributors sticking their necks out and taking on the risk themselves and in many cases that's what they've had to do. But, given the reasons for employing credit insurance such action will require serious justification, confidence and trust.
Unfortunately the situation with credit insurance is unlikely to change. Increased competition amongst insurers would bring benefits and reduce the polarisation and reliance on one player but you're hardly likely to enter a market where the risk outweighs the rewards.
As a result the credit insurers are taking a position whereby they are pricing their offerings at a premium in view of the market conditions and attempting to select their customers carefully so as not to become over-exposed to one segment of the market.
The terms of their policies are being tightened requiring more information and control of their policyholder's processes and offering smaller discretionary limits which restricts the element of trade that can be facilitated without their knowledge and the ability of distributors to initially grow their customers within a credit framework.
From a commercial perspective one can only agree that this should be expected and it certainly hasn't dissuaded a number of insurers from remaining active in the sector.
But the reality is that it impedes the distributors ability to function and its customers ability to gain credit. Distributors may have to swallow the costs of increased premiums and accept a reduction in their scope for progressing their business.
The channel has always had to be clever in finding ways to support business. Most distributors have taken a consistently flexible approach to providing alternatives to credit where restrictions exist.
Distributors have ballooned credit facilities to support particularly sizeable transactions, opened escrow accounts where the end user pays for products and services into a transparent account with a third party bank. Once consummated the bank then pays the distributor and their customer. They may agree to invoice the end user direct or have the invoice assigned to them paying their customer on a commission basis.
Some distributors have taken action to replace some of the lost credit capacity in the channel via agreements with lenders extending unsecured, revolving credit lines and working capital finance.
Deutsche Financial Services, IBM Financial Services and Transamerica Commercial Services are amongst options which have been made available to the channel and can provide a mixture of financial offerings.
They include credit terms to match cash cycles and additional credit lines in excess of those offered by the distributor, inventory financing, accounts receivable financing and asset-based revolving loans. However there are cost elements associated with these facilities and these cannot be absorbed within distribution. (cont'd)
Less Credit/More Squeeze
Brian Burke is a manager at Dun & Bradstreet's Computer and Communications Market Intelligence Centre.
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