Channel faces tougher credit terms

Australian resellers are facing a clamp down on credit conditions and limits as the leading insurance companies tighten their policies and terms to defend against the global downturn.

Last month, credit insurer, Coface, cut select customer limits across high-risk industries, including IT, by 30 per cent. Australia’s three other main credit insurers, QBE, Euler Hermes and Atradius, have also been reviewing customer accounts and terms in a bid to minimise and contain risk.

Coface’s decision saw reseller credit limits slashed across several distributors, including Melbourne-based Multimedia Technology, by 30 per cent. Multimedia has about 700-800 resellers on its books, and up to 60 of them were affected immediately by the changes, general manager, John Hassall, said.

“What it means is if we have a customer with a $100,000 credit limit, and their balance is at $90,000, they’re now on credit hold,” he said. “We can’t do anything about it – we have to deal with it and reduce limits by 30 per cent.”

Although confident of getting past the issue, Hassall flagged the credit crunch as another blow from the global economic downturn. ARN has confirmed another local distributor, who declined to comment for this story, is also negotiating with Coface to avoid similar repercussions.

National marketing and relationship manager for brokerage firm National Credit Insurance (NCI), Terry Duffy, cited an increase in the number of insurance claims lodged since January 2008, with IT consistently representing a larger portion overall. NCI customers come from a range of industries including IT. It received the highest ever number of claims in February. Although Coface had taken a more wholesale approach to avoid further risk, other insurers are asking organisations to voluntarily surrender credit limits not being used, or subjecting customers to more scrutiny, regulation and frequent reviews.

“All have done different things – Atradius moved in November, and provided us with a list of 1400 customers where we had to provide financials and profit and loss statements, or their limits would be severely reduced,” Duffy said. “QBE is by far the largest player in Australia with about 65 per cent marketshare. They have been more tempered in their approach and are looking on a case-by-case basis.

“It’s all about reducing their risk exposure.”

The impact of the global credit crunch, and massive losses from claims across Europe and the US, are being blamed for the tougher conditions.

“As QBE is largely only in Australia and New Zealand, it is more sensitive to the local market and hasn’t been as hit as the other insurers, who are large global players,” Duffy said.

Page Break

Several distributors claim they haven’t yet been affected by the crack down, but all agree the insurance issue is top of mind. itX general manager, Greg Newham, hadn’t seen any changes to its policies but wasn’t surprised insurers were getting tough. Alloys CEO, Paul Harman, said the imaging and printing distributor was managing its credit facilities tightly and kept limits low.

“In 2009, we’ve seen an extension of partner payments by seven to 10 days. That’s having a cashflow impact on distributors and therefore increasing risk for insurers,” he said. “I wouldn’t be surprised if we see more scrutiny from insurers. If they are smarting from the US and Europe, they’re going to clamp down regardless of what is happening in Australia.

“It will be interesting to see how the channel overall handles credit restrictions.”

Simms International managing director, Danny Moore, said it was imperative distributors stayed close to their insurers and remained open and honest with suppliers. The Sydney-based distributor has been using QBE insurance for most of the past 10 years.

“We are staying close to customers, and there’s definitely pressure there, but we’ve not experienced any wholesale cuts so far,” he said. “You don’t want to be making claims on insurance at the moment – you want to be prudent in this environment.

“Giving up limits not being used, is one way to help things across the board.”

However, Distribution Central marketing director, Nick Verykios, argued insurers were continually reviewing limits, and claimed the recent changes were not directly related to the global credit crunch.

“Insurers also track seasonality and peak buying periods, for example,” he said. “Resellers also don’t just shop around for the best price – they also shop around for credit.”

To combat any fluctuations, Distribution Central said it occasionally extended credit to resellers out of its own pocket, as well as offered customer financing options such as leasing and rental terms.

“We have seven different instruments we use – we can mitigate the risk, but also make sure the transaction occurs, which is a good thing,” Verykios said.

NCI’s Duffy said it was hard to predict whether insurers would instigate more credit cuts.

“We are in relatively unchartered waters and we don’t know what the next six months will hold,” he said.