With the insurance industry often dictating credit terms and conditions offered by vendors and distributors, channel companies without a trading history or good credit references are struggling to find credit.
Tougher terms and conditions from big vendors such as HP are accompanied by a new eagerness from distributors to have evidence from resellers that they are not a credit risk.
According to distributors ARN spoke to last week, insurance underwriters are dictating the way credit terms are managed in the industry.
"Those with a good trading history don't have a problem [getting credit]," said Victor Aghtan, managing director of Westan. "The guys that are having a problem are the ones that are new to the game or who don't have a good track record.
"Insurance companies are putting lower limits on what we can offer resellers and asking for us to confirm credit references. Often they will look at a customer and say that no credit can be extended to them. In that case, if we want to deal with them it is totally at our own risk."
As with every other type of insurance, underwriters simply assess the risks and charge premiums at a rate that allows them to cover their claims and make a profit.
Since the collapse of HIH, which was a strong player in the credit insurance game, QBE has dominated the market. John Rumpler, group general manager, credit assurity political risk at QBE Insurance Group, said QBE is a "substantial supporter" of credit risk to the IT industry.
Sources indicate that as much as 85 per cent of the credit insurance business underwritten in the IT industry is carried by QBE since the collapse of HIH. This exposes it to a lot of risk and forces it to monitor closely who is offering what to which resellers.
"Because QBE is insuring just about every large-ish distributor in the country, it can't afford to have a reseller with $100,000 worth of credit at three separate distributors," one source said.
Rumpler said that IT is "not the worst and not the best" industry when it comes to claims payouts, but conceded it has been "a bit difficult" over the last two years.
"It is very similar to other industries," he said. "Flat industry performance has impacted on financial performance, which is represented by increased insolvency, greater bad debt and increased claims right around the world."
This has enforced "a greater focus on quality of risk" by insurance companies, according to Rumpler, and QBE is insisting its customers provide data on the risk it is exposed to. He said that QBE carefully monitors what credit is extended to its credit insurance clients.
"There are many strong companies in the industry but there are also many significantly under-capitalised companies, and where margins are very fine that represents a greater risk," he said. "All suppliers are looking at better-quality customers and so too are their insurers."
Michael Bosnar, managing director of HP wholesaler eXeed, said he requires three decent credit references and a demonstrated ability to manage the sort of volumes they are seeking to buy from him before he can offer a line of credit.
"Unfortunately, a lot of resellers struggle to produce them [credit references]," Bosnar said. "This means they haven't been around for long or they have some skeletons in the closet they don't want us to know about.
"Every time a credit limit gets set for a reseller, it has to have the blessing of the [credit] insurer. Generally speaking, a lot of resellers are not in a position to have credit extended to them because they can't produce the necessary good credit references."
According to Bosnar, this makes it tough and risky for distributors that are trying to extend their customer base. He said some of his competitors actually use sales people to negotiate trading terms with the reseller.
"When you have sales people, who are motivated by commissions, negotiating credit terms it is a recipe for disaster," Bosnar said. "It is just for growth and short-term gain."
The way in which distributors manage their credit risk is one of the key ingredients to success, according to Tech Pacific's managing director, Kerry Baillie.
He said it is essential to ascertain whether a reseller is "credit-worthy" before Tech Pacific will "supply on demand" but he thought that, generally speaking, there was an improved performance from the channel over the last eight months.
"We have seen a great improvement in the health of the channel in this area," Baillie said. "In our experience, resellers have been paying us extremely well.
"We are actually giving more credit than we used to but the payments from our customers have been very good. We have had just a handful of bad debts and our cash flow is very positive from the reseller channel. All credit to them actually, the ones out there at the moment seem to be managing themselves very well."