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Tuesday, February 12, 2008

How Distributors can Navigate Tightening Credit - Part 1

Click HereAs a distributor or a buyer it is the phone call that ruins your Monday, Tuesday, Wednesday, Thursday and especially Your Friday evening.

"We were just getting ready to ship your order of 10,000 widgets, but the credit department needs more information to release your account from hold."

Take a big breath maybe some energy pills or a red bull and then get ready to do some business. 

Reviewing The Facts

You have a great payment history.  This is your vendor calling telling you that they can't ship a sale to you.  You call your your sales representative with the vendor and they can't fix anything, but promise to take you out to dinner whenever they see you next quarter.

Your shipment and possibly your own customers delivery (and their subsequent payment!) are in the hands of a twenty something credit analyst that works either for your vendor or for a factoring company somewhere halfway across the country.  They do not know you by name, they do not know anything about your business nor how much business you have done, do today or will do tomorrow, if that order will just ship!

When Credit Tightens Cash Rich, Debt Free, Transparent Companies Thrive

There are three characteristics that companies will adopt if they want to thrive during a period of tightening credit in the distribution industry.  These characteristics are not mutually exclusive and can be mixed or matched for even greater rewards.

The Characteristics:

  • Cash Rich Companies - both cash in hand and a healthy cash flow process
  • Debt Free - Companies that are debt free will have a better chance to borrow money during a credit tightening period.  If a company goes into a credit tightening period with a line of credit fully open, even better.
  • Transparent Audited Books - If your company is going to keep vendor financing flowing through the vendor credit department or through a factoring house, then you will have to provide updated audited financial statements on at least a yearly basis and probably a quarterly basis. (Quarterly to supplement audited yearly)

Now when credit flows free, you might be able to get something shipped based on your relationship with the vendor, the vendors sales team, or even officers in the vendor company.  But when credit is tight, everyone is locking down on controls like firefighters cutting fire lines to fight the spread of trouble.  No one is going to risk their jobs, their careers or their company on single deals when they can not support their business decisions with the facts.