To give or not to give credit


Principals need channel partners to disseminate their products and to build their brand. As most channel partners cannot afford to pay for the products upfront, principals offer credit limits to provide them with some respite, to spur sales and also to increase their brands’ visibility in the market. However, this practice has spawned numerous cases of financial deception and payment delays, leading to monetary losses for manufacturers. Most have grown tired of chasing dealers for due payments and feel that giving credit is not a sustainable business practice. They are of the opinion that there are more viable ways to assist partners.

Partners feel like they can take the credit limit for granted because it’s not their money that is involved but the principals’. “To get the partner involved in the second half of the business cycle, it should be made requisite for him to bring in the funds,” says G Indeevar, general manager, marketing, sales and service, Amara Raja.

By Rutaksha Rawat 

Wednesday August 19, 2009: Majority refuse credit Increasingly, more and more credit-givers are con­verting into cash and carry enterprises, offering credit to none. Urjaghar Power Solutions is strictly against offering credit after suffering major losses due to payment deferral last year. The company, which used to offer a 7-day credit period, lost Rs 1 million in bad debt last year alone and vows never to give credit again. Once bitten twice shy, the enterprise now commences processing of orders only once it has received the entire payment in full. However, for its regular clients it takes only 30 per cent of the payment in advance, while the rest is paid against delivery.


“Our experience has been that giving credit leads to loss of customers as well as revenue. Once the partner has received credit from us, he goes to another principal,” reveals Anshuman Chandel, proprietor, Urjaghar. “Humans are a flawed species. Once someone is given the liberty of credit, he can and in most cases does use it to his own advantage and unfortunately, to the manufacturers’ disadvantage. Credit policies corrupt partners and make them complacent because it’s our money on the line, not their’s,” adds Chandel.

Amara Raja, too, insists on taking payment along with the order, without any exceptions. “It is the most effective system to ensure a sustainable cash cycle and get the partner involved in the right spirit,” opines Indeevar. “The pipeline is cleaner and the output more realistic if there is no credit offered by the principal. The company’s sales force as well as partners can focus on what is best for the long term success of the business when there is no credit extended,” he adds.

Hita, which used to offer a credit limit period of three weeks has stopped giving credit to its partners due to insincerity in payments. The com­pany has accumulated a considerable amount of bad debt—to the tune of Rs 3.5 million. “First the payments would not come on the due date. Then, we started receiving requests for delayed deposit of post dated cheques (PDCs) and finally, even the PDCs started getting dishonoured. Therefore, we have stopped giving credit altogether,” explains Arun Ghosh, managing director, Hita.

Some offer with precautions

Those who are currently offering credit, too, are consciously reducing the duration of the credit limit and plan to stop awarding it altogether even­tually. The main reason why most have closed their doors to credit seekers is the shirking of payments and the subsequent cases of bad debt. Total Power Conditioners gives a credit limit of 15 days to its partners but intends to put an end to this convention. “We gave credit initially to attract partners but now we are gradually cut­ting it down as 1 per cent of our annual turnover has been reported as bad debt. We expect to stop altogether within the next three quarters,” discloses Y B Suresh, managing director, Total Power Conditioners. The company cites delayed payments (by 45-60 days) as the reason behind this decision.

Some enterprises that are not granting credit do make exceptions for a select few. Microtek gives out its products on cash and carry basis, only yielding credit to a spattering of dealers. “We make exceptions for old and loyal channel part­ners but otherwise, we rarely hand out credit,” affirms Manoj Jain, vice president, marketing, Microtek International.

Both Numeric Power Systems and Emerson Network Power do not directly provide credit to their channel partners but align those partners who don’t want to cash and carry with their national distributors. “We don’t impart credit because it leads to payment delays, which chokes the business,” justifies Mandeep Gupta, country manager, channel business, Emerson. “Extend­ing credit doesn’t and cannot guarantee good business. Unless the partner has the discipline of retrieving payments from customers, it’ll become a vicious cycle of deferments and bad debt. Credit is what poisoned the American economy and led it to recession,” adds Mandeep.

Negative impact of credit

Giving credit can help augment business when times are good and there are prospects aplenty. When the market is positive, it will demand greater volumes, which will lead to more sales. At such a time, it is not very risky to offer credit as more sales will ensure that partners are mak­ing enough money to pay back. However, when the market is down, it yields neither volume nor timely realisation of sales, leading to retardation of payment cycles.

According to Suresh, the negative impacts of conferring credit are many. “It stunts one’s turnover due to the financial limitations it gives rise to and may also lead to non-recoverable payments, directly affecting the profitability of the business. Also, channel partners may divert principals’ funds when the outstanding payment is large,” he states.

“Offering credit holds absolutely no advan­tages for principals. It only helps the channel partners. Also, it makes channel partners com­placent and leads them to take us for granted,” vents Suresh.

“Vendors providing direct credit in today’s market environment will make supply chain management (SCM) highly impractical because of the spread of the market into B and C grade towns and the rate of growth of the channel partner network,” comments N


There are firms, however, who are not only giving credit but also vouch for it as an effective business enhancing strategy

Uniline Energy Systems

Q Do you think giving credit to partners is important?

We think it absolutely necessary to give credit to partners as it gives us visibility in the market. The channel is a strong community, instrumental in making a brand sell. It must be kept in good humour at all times. Nevertheless, the reliability and intent of a partner must be judged before granting credit.

Q What’s your credit period limit?

45 days. The credit period generally depends on the credibility of the partner.

Lzen Electronics

Q Why do you give credit?

For us, giving credit is a must. Till now this formula has worked for us and we will continue to offer credit in the future too.

Q What are your views on the subject of credit?

It helps to build one’s brand. If you offer credit, more channel partners can afford your product and your brand will be seen in that many more places, strengthening visibility and erecting your brand name in the process. In the end, we are offering credit to construct our brand—to sell our product. It’s our growth and theirs, not our growth vs theirs.

Q Do you face any payment problems?

Lzen’s products mainly cater to the service industries, who require after sales support. We provide our own after sales services, so our partners still need us after they have lifted our products. That is the chief reason why we don’t face payment deferments from partners. If they don’t pay up, how will they come back to us for after sales support?

Q Do you think principals should continue to offer credit to channel partners?

It should not be the crux of one’s working module but it is necessary for brand building, provided the partner is trustworthy.

Delta Energy Systems

Q Do you think giving credit to partners helps to enhance business potential?

Yes, definitely. It helps channel partners to thicken the volume of their business, which translates into more sales for principals. Also, it allows partners to handle multiple projects at a time without waiting for cash flow. Furthermore, as giving credit reduces financial constraint on the partner, he can market our products more aggressively and close more deals.

Q Do you face any problems in retrieving payments from partners?

Our partners comprehend that to remain profitable, it’s important to retrieve timely payments from their customers. We haven’t faced a major problem with our partners and are glad to state that we have had 0 cases of bad debt till now.


Channel partners share their views on credit issues

Royal Infovision

Q Do you expect a credit limit from principals?

It is a boon for industrious channel partners who have the right intentions but not enough means to buy products. There will always be black sheep in the herd, but one cannot paint all dealers with the same brush.

Q How many brands of UPS/inverters do you sell in all?

We sell products from APC, Numeric and BPE. All of them offer us credit of up to 30 days.

Q According to you, what are the positives and negatives of receiving credit?

The positive is increased buying power, which also happens to be a negative point, as it leads to over-purchase.

Q In what other ways, apart from offering credit, can manufacturers help channel partners?

Local service centres should be established by manufacturers, at least in cities where their products are being sold in bulk so channel partners may provide their customers with efficient services.

Principals’ dead on arrival (DOA) policy needs to be inked in black and white. Currently, some manufacturers are according replacements when products are declared DOA, whereas others are only offering repairs. No one wants to buy repaired products—people want new products. So, all manufacturers should formally adopt the replacement policy when products are declared DOA. This would be even more helpful than offering credit as channel partners incur frequent losses due to DOA products.

Unique Power Solutions

Q What would you call an ideal credit period limit?

A limit of 90 days should be extended to reliable partners.

Q Do you tend to push those brands more, whose manufacturers offer you credit?

Absolutely. Firstly, we are aware of the credit period limit, so the pressure is high to sell the product fast. Also, there’s a sense of goodwill attached to credit-giving, which makes us feel more loyal towards principals that offer us credit.

Q How can principals shield themselves from financial losses?

The issue of giving credit should be dealt with extreme care as it can become a double edged sword for the principal. The ideal situation would be for principals to offer credit but only after taking sufficient measures to safeguard themselves.

Brands matter more than credit

Manufacturers have always perceived channel partners as agents, giving them more visibility in the market and were gladly giving the latter credit to build their brands and their businesses. However, with the shower of payment evasions, they have started to rely on the virtues of their products alone for sales and believe that a good product will be in demand, come what may. Firms feel that distributors approach those principals who make reliable and salesworthy products, not those who are merely offering credit. “If your product is good, it will sell. So, why put yourself in jeopardy and offer credit, where there’s no guarantee that you’ll get your money back? Companies that are secure about their product’s quality will never feel insecure about not offering credit,” says Abhishek Singh, project manager, Urjaghar.

“Business generation is not an outcome of credit but of demand. If there’s demand, there will be business, notwithstanding the credit criterion,” remarks Mandeep.

Shield against credit

Convergence had a credit period limit of 21 days but isn’t offering credit anymore due to the current market conditions. The company feels that giving credit is fine as long as it is secured first.

For example, some principals take advance blank cheques from channel partners to fend off nonpayment. Also, some take a sum of Rs 1.5-2 million in advance from partners and then proceed to offer credit against that quantum. “One must take PDCs against sales, conduct regular follow ups on the concerned partner and thoroughly document business transactions to weed out any scope for denial of payment,” advises Suresh.

Emerson attributes some redeeming factors to credit-giving but feels they might not work well for everyone, as an extremely well managed channel network is required to retrieve one’s payments. “Extending credit certainly helps principals in managing working capital and inventory, allowing them to invest in special projects. Nevertheless, they have to be extra careful about payment collection,” informs Mandeep.

There are some companies that allot credit to dealers but only after the latter have been through an observation period of approximately six months. J B Enterprises grants its partners 21-60 days’ credit but only after assessing the partner’s credibility for six months after appointment. “Upon completion of six months, we give the partner 10 per cent credit of his previous six months’ turnover,” reveals Jaya Karvat, proprietor, J B Enterprises. According to Karvat, “Giving credit will only spoil the new dealer. He will divert the principal’s money into some other business for his personal gain. That is why we wait for six months before yielding credit and that too on a performance basis.”

Screening process

The wrong dealer can cost principals in revenue and peace of mind, so the process of screening and checking the reputation of the partner is extremely crucial.

“We deliberately don’t give credit during the first six months to ascertain the earnestness and intent of the dealer and use this period to check his background. Before giving agency, we take his TIN number and get a detailed report from the commercial tax web,” volunteers Karvat. “We go through their bank details and credentials. Also, we find out how long they have been in business and what kinds of services they provide to customers. The partner must have the minimum infrastructure required, ample manpower and stock holding power,” says Suresh.

“We usually ask for the partner’s latest audit report and his bank statement for the last six months before extending credit. We also check the reputation of the partner through references,” volunteers Prabhat Dubey, sales (North), channel, Delta Energy Systems Pvt Ltd.

Fraudulent practices

Some fraudulent partners try to evade payments by handing over invalid cheques. “The culture of honouring a cheque and commitment is lacking,” laments Indeevar. Others quibble about the ordered quantities or point out imaginary flaws in the products to escape disbursement. When channel partners delay or defer payments, principals often find themselves helpless. “Gaps in communication, contradicting statements regarding payment details on both sides and long term delays lead to bad debt,” explains Suresh.

“One can follow up with regular calls or even direct visits. If even these measures fail, then there’s really little one can do but feel the pinch. It is almost impossible to recover bad debt. Sometimes partners point out flaws (which aren’t there) in our products in order to avoid paying up. It’s best to demand payment in advance to avoid being cheated,” expatiates Singh.

“We practically beg them to give our money back,” says a distressed Karvat, whose enterprise has lost Rs 5,00,000 to bad debt.

Alternative solutions

According to most principals, it is better to offer partners alternative business-aiding solutions other than credit. Principals can make funding available to partners through ‘channel finance’ tie-up ventures with banks. Banks, nowadays, are geared to dole out credit to small businesses and it is fairly easy to get financed. With this manoeuvre, principals can succour partners as well as safeguard themselves against financial injury.

Emerson does not offer credit to its partners but appeases them by getting them financed by financial bodies. “We have tied up with a few financial institutions for channel financing. We also help partners to get credit from banks for special projects, wherein payment conditions require taking credit,” discloses Mandeep. Furthermore, the enterprise provides support and training to encourage its partners.

Hita feels that since the cash flow is not good, providing credit will only complicate the situation. “Instead, partners should be provided with better prices to boost sales,” opines Ghosh.

“We offer rebate, cash discounts and schemes to promote and support our partners,” claims Karvat. Manish Gupta, director, Lzen, enlists some alternatives, “Principals can offer partners sturdy marketing support. Principals can provide training to partners in marketing through experienced and proficient marketing professionals. This move will facilitate more and smoother sales. Also, they should provide partners with engineers for sales support training, so that they can cater to their customers efficiently. They should render partners ample material for product propaganda.

For eg, hoardings, placards, etc.” “Instead of maiming partners with credit, manufacturers should concentrate on furnishing them with better products and services for their customers,” says Suresh.

Credit alone does not offer business competitiveness to partners. “It’s the whole gamut of products, after sales support, good margins and long term channel policies, which empowers partners to fight out competition and succeed,” points out Kumaran.


Here is how principals can shield themselves against credit-incited losses

• Take blank checks in advance• Thoroughly check repute of dealer from references• Observe the dealer for 6 months before granting credit

• Take a consolidated payment before engaging partners and

give credit against that quantum

• Don’t give credit directly but through national distributors

• Conduct regular follow ups on partners you have granted

credit to

• Thoroughly document and record all business transactions

with dealers

• Take dealer’s tin number and get a detailed report from

the commercial tax web

• Go through dealers’ bank details and credentials

• Check how long the dealer has been in business and whatkind of services he provides to customers• Ensure that the dealer has the minimum infrastructure

required to stock products

• Check if the partner has adequate manpower

• Tie up with an international credit rating agency, which

provides a credit rating to each channel partner depending

on his past record, turnover, business, etc

• Check partner’s latest audit report and his bank statement

for the previous 6 months

• Appoint an after sales support team. That way, partners

will need you for your services even after they’ve lifted

your products and will be more inclined to make punctual


Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine