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Distributors brace for credit crunch

Distributors brace for credit crunch

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Several distributors are warning that turbulent global economic market conditions could trigger a credit squeeze in the local IT channel.

Cellnet managing director, Steven Harrison, reported a slight slowdown in business across the board over the past month. While things should heat up during the end of financial year rush, he expected tighter market conditions to become apparent shortly after.

"The cost of money goes up because of the interest rate rises, and we will see a tightening up of credit limits within the channel," he said. "I think there'll also be more casualties this year as the banks get tougher and choose to foreclose on some businesses.

"Credit insurance premiums will probably go up and distributors will have to become stricter on trading terms." Express Data managing director, Ross Cochrane, said it had not yet seen any significant sales slowdown, but pointed out larger deals were taking longer to get approval.

"The feedback from our resellers is that larger deals are taking longer to close," he said. "There seems to be more diligence taking place. At a board level it gets harder to get sign off as board members are more aware of the economic uncertainty in the market.

"If those larger deals aren't going to happen, we need to find a lot of run rate business to make up for it."

Dicker Data sales manager, Chris Price, said an indirect affect of the international economic crunch was on insurers. As these organisations tightened their belts and became more risk averse, credit could become more expensive, forcing distributors to re-evaluate their terms and conditions.

"The amount of firms that go into bankruptcy affects our insurance terms - if there are more companies going under the amount of insurance, and in turn the credit we can provide, gets affected," Price said. "In the past six months we've seen a lot more resellers than usual going out of business, which has affected the credit terms we can provide and the overall sense of security most insurers have.

"If there's a genuine slowdown during the rest of the financial year, then I can see more firms going out of business and credit tightening up. And at a distribution level, this means there's not as much flexibility provided in credit terms - for example, our ability to allow a reseller to pay a bit later goes out of the window."

While agreeing credit conditions could get squeezed, Cochrane said Express Data had not made any changes to its credit terms to date.

"Everyone is nervous and nobody wants to lend to anybody if they're unsure of getting the return," he said. "You have to look at the listed companies and their results to see the economic effects. Many have used cash as their credit limits were constrained by suppliers.

"Because of the small margins we work on, distributors have to take big risks with credit. But we're comfortable we have strong procedures in place to manage risk."

In its last half-year report, Cellnet wrote off $3 million in bad debt stemming from credit. Harrison said it now had measures in place to check credit conditions.

"If you take out the bad debt, we would have had reasonable profits in the last half. It's a good example of what can happen if you let credit get out of control," he said. "We've got on top of it now and I've instructed our credit controllers to batten down the hatches.

"We've also brought on Moneytech to give some of our smaller customers another line of credit."

Cochrane suggested channel players servicing the financial services markets could be hit hardest by the economic squeeze. Dicker's Price pointed to tier one resellers with multi-million dollar credit terms.

"Resellers that have $75,000 in credit or less won't be affected as much. But if you look at the larger players, they're not sparkling balance sheets," Price said.


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