With the ever present threat of the credit crunch and the daily national newspaper coverage casting more doom and gloom on an already struggling economy, channel players are thinking of longer-term plans to keep their businesses flowing smoothly.

However, as always in this type of climate, credit insurers are increasingly jumpy and are likely to withdraw cover at a moment’s notice, which in turn has a knock-on effect on the risks that distributors and other lenders are willing to take.

Earlier this year, figures released by automated payment organisation Bacs revealed that the value of outstanding money due to SMEs in the UK has increased by £2.6bn year on year. The research also revealed that the average amount owed to a small business is around £30,000, with 29 per cent of companies questioned by Bacs claiming they could go bust if faced with overdue invoices of just £20,000 (CRN, 7 January).

But the wily VAR will always find other ways to keep the finance machine oiled and working smoothly. One method that is growing in popularity is factoring and invoice discounting.

This is a when finance is made available to channel businesses either through subsidiaries of clearing banks or independent financial institutions. It means firms can secure a percentage of the money upfront, which will be due to them from the final invoice, and it allows them to pay suppliers and keep their business flowing. Factoring prevents firms from being dependent on customers paying their bills on time, and falling victim to the late payment blues.

But Nitin Joshi, founder of advisory service ChannelMoney, said resellers should not just take the first deal they see.
“Too many channel businesses are going bust because they do not look at their banking arrangements properly
and are paying too much. They are not shopping around,” he said.

“If a VAR sells to a corporate, factoring would give the VAR 75 per cent upfront instead of waiting for customers to pay them, which usually takes 60 days. Most distributors want to be paid within 30 days, so it helps to bridge the gap.
“It is up to the distributors to get this right and help resellers to choose the correct deal,” he said.

Eddie Pacey, director of credit at Bell Micro, agreed. “The channel is likely to experience a knock-on effect from the credit crunch. Banks have already toughened their approach to loan portfolios and are more demanding about the amount of money they are prepared to lend channel firms,” he said.

“While banks have tightened their lending criteria, invoice discounters are more willing to look to the average client and offer 85 per cent of invoice values. However, some are tightening their conditions and reducing this to around 80 per cent of the draw-down value. They are also capping the credit ceiling – this obviously affects the working capital that a lot of resellers have.”

Pacey added that channel players should look at how to properly finance their businesses. “There are firms out there that could well be willing to be more flexible and look at a climate like this as an opportunity. It is important that companies review how they work with finance because it is the difference between managing and not managing cash, and ending up in a situation where you cannot pay your suppliers,” he said.

“It certainly does come down to risk,” said Pacey. “If we see a downturn in performance when we review the financial information of our clients, we have a duty to advise the reseller that we see a potential problem. Quite often firms are grateful for this because it affirms their own thoughts that they should be rethinking their finances. Some resellers have a tendency to think that they cannot be bothered to shift things, but they can pass responsibility to someone else, they do not have to do it themselves.”

Trevor Byrne, marketing director at credit management service provider Coface, said, “Managing cash flow is a subtle art at the best of times, and w ith the effects of the credit crunch being felt by almost every sector, it is becoming a challenge for resellers to understand how to make the best use of the credit management services that are available to them.
“Low and falling margins are widely acknowledged as a key issue for firms in the IT sector. Increasingly, firms are looking at factoring and invoice discounting to manage cash-flow problems,” he said.

Factoring lends against invoices and provides a flexible alternative when cash is needed, he added. “It evens out cash flow with quick and timely payments, and in the event of non-recourse, replaces funds that are lost through bad debt via credit insurance. Inclusive ledger management enables firms to focus on core activities, such as business retention and acquisition, rather than chasing debts.”

However, Andrew Binding, vice president for northern Europe at distributor Magirus, said factoring can sometimes be restrictive.
“I have never been a huge fan of factoring,” he said. “Not that it is a bad thing, but it tends to be a little bit more restrictive than people think. Particularly when a company wins a large project; factoring can make it more difficult to get credit.
“Also, if you have a debt that has gone bad – these debts are excluded from the calculation of your overall limit. So if you
do get involved in factoring, you really do have to understand the pattern and the nature of business.”
Binding added that channel firms have an unfortunate tendency not to look for credit until it is too late. “In cases where it is last minute, it is often more difficult to get credit in place in time,” he warned.

“Our new business model has meant we are getting closer to our partners and credit is becoming less of an issue for us. This is for two main reasons: because we are aware of credit requirements in advance; and because we have a greater understanding of their business models.

“Credit is about taking risk, but if you understand the business model, a lot of that risk is taken away. If credit is an issue, I would advise working more closely with customers and getting involved in the process at a much earlier stage to avoid problems.”