The recent spate of channel companies going into administration has left its scars on distributors who supplied them. Faced with rising premiums, the question now is whether it's better to self-insure against further disasters.
The recent demise of PC assembler, BCN Technology, left a list of suppliers $4 million short. Last year, Omega's closure resulted in $8 million in unpaid bills, including $2 million owed to Ingram Micro and $1.4 million to Synnex. Storage integrator, EnStor, Queensland-based retailer, The Disc Shop, and wireless distributor, Integrity Data Systems, have also hit the wall in the past 12 months.
Despite the Omega loss, Synnex continues to insure its own debts. Marketing manager, Danny Feldman, said self-insurance gave it the ability to pick and choose which resellers to work with.
He pointed out that third-party insurers would not offer the same understanding of a dealer's business or adjust credit facilities to help them trade out of difficulties.
The distributor reviewed its self-insurance policy after Omega's closure, but decided it was still the better option. Synnex puts a percentage of all sales into an insurance provision fund.
"We asked ourselves how much we would have to pay a third party for insurance and compared that to putting money away," Feldman said. "Even after writing off the bad debt, we were still significantly in front. This vindicated our self-insuring philosophy."
Firewall Systems has also opted against third-party insurance. CEO, Scott Frew, said insurance was only needed when a distributor could no longer manage its debtors' ledger and partner list intimately. Firewall would consider insurance if annual revenues exceeded $100 million.
"It would depend on how many resellers were making up our turnover. If there were lots of little resellers involved, I might consider insurance," he said.
Frew said Firewall had ticks and balances in place advising when a reseller had not paid its dues. He estimated it only wrote off $1000 of bad debt last year. One of the downsides to third-party insurance, Frew said, was the limits it placed on working with resellers.
"If one insurance company doesn't like the reseller from a debt point of view, it's going to flow on to all distributors. There are only so many insurers in this industry," he said. "If you are closely managing accounts you know what plans resellers have for payment. If it blows out the first time, we would ask them what the story was."
Frew said Firewall had taken this approach to a reseller who had financial difficulties last year. In that instance, the two companies put together an extended payment solution.
"It's about trust. Someone may burn us, but for the most part, professional resellers will tell us what's going on," he said.
Avnet managing director, Colin McKenna, said there was an increased risk in providing credit to resellers. Despite this, the distributor was committed to self-insurance for bad debt.
"We do review it periodically. If we ever expanded into the volume market with thousands of partners like Ingram, we would go to third-party insurance," McKenna said. "But we have hundreds of partners with complex product sets so we are able to manage it ourselves more effectively."
Bluechip Infotech managing director, Johnson Hsiung, said the hardware distributor had taken out third-party insurance for bad debt from day one. Its current policy covered debts over $20,000.
"Insurance is designed for disaster recovery only," he said. "You still have to be careful about who you give credit to in order to minimise potential losses. "Everyone has a different view and level of insurance. I can understand if you'd want to be self-insured but you have to be more careful.
"Some customers have been with us five or six years, but you never know exactly what they are doing. If something happened suddenly, you can still run into problems."