Customer credit: how to keep the cash flowing

customer credit

As banks cut back on lending, retailers and caterers are turning to their wholesalers for support. Elit Rowland and Tan Parsons consider the highs and lows of offering customer credit, and how it should be managed to keep the cash flowing – both ways

Is customer credit really worth the time and money spent (and lost) on it? Many people will use the start of the year to evaluate their finances and consider the value in managing things differently. The wholesale channel is no exception.

“At a time of year when we set targets, goals and resolutions for the year ahead, building a firm basis on which to trade is all the more essential,” says Philip King, chief executive of the Institute of Credit Management. But with more small retailers and foodservice outlets relying on their suppliers for financial support, the customer-credit route is an ‘essential evil’ for many wholesalers.

“The recession has caused banks to tighten up their lending and some retailers are now having difficulty securing loans, putting pressure on wholesalers to provide a credit facility,” says Fida Hussain, general manager of Bestway in Swansea. Although many businesses use credit to secure new customers, in reality, it’s a “false economy” according to Hussain, as delayed payments can put significant strain on customer ­relationships.

Hussain suggests that wholesalers that are giving customers credit should keep a close eye on them. “We visit our retailers regularly to see if their shops look well-stocked and if footfall is high.”

One north-London wholesaler says it is trying to limit the amount of credit it gives to customers because it puts them off coming into the depot. “If we have someone who usually spends £5,000 a week and they stop shopping with us, over a year that’s a £250,000 hit to our turnover – so we’re trying to stamp it [credit] out.”

For some wholesalers in the cash & carry sector, credit is an important way of tying in customers. Marcus Singh, managing director at Hyperama Cash & Carry, says that credit does nothing beneficial for his business, despite offering it to around 5% of customers. “I only offer credit as a last resort.”

If you ever want to see your money again, says Singh, you need to ask your customers to sign personal guarantees. As well as showing they have “confidence in their own business”, Singh says “it separates the men from the boys.”

A personal guarantee is generally given by a manager or business owner as security for money borrowed and the consequences of not paying can be serious – for instance, selling the family home to pay back the debt. “If they refuse to sign the personal guarantee, it sets alarm bells ringing and I’ll let them go.”

The customer credit challenge is particularly prevalent in the delivered foodservice channel, which relies heavily on it. “It’s a different proposition to other channels,” explains Philip Jenkins, managing director of buying group Sugro. “I have a lot of sympathy for catering wholesalers – it’s not unusual for some caterers to expect up to 90 days’ credit, which can be difficult to ­manage.”

Some wholesalers believe that this dependency is routed in old habits. One particular depot is taking the bold step of re-educating its customers.

“There’s an old-fashioned view among many restaurants that wholesalers need to support them with credit,” says Abdul Aziz, managing director of Peterborough-based Adams Cash & Carry. Last year, Aziz started a campaign to phase out credit for good. “Initially, people were surprised by the move. Some customers even threatened to stop using us, but after a few weeks, they came back.”
Aziz suggests that wholesalers having problems with credit should do the same. “If you’re confident in your business, you don’t need to offer credit. Be brave and phase it out – it will benefit your business in the long-term.”

One foodservice wholesaler that’s doing particularly well with a ‘zero credit’ policy is JJ Food Service. “Many of our customers feel they need to pass on cash, so payment on delivery or collection is a good solution and ensures we pay our suppliers promptly,” says Mustafa Kiamil, managing director of the group. “Alternatively, customers can pay securely online using credit or debit cards. By sticking to these simple principles, we can continue to offer the best value for money.”

For some larger wholesalers, credit is an important part of their businesses and offers retailers a helping hand during difficult times. Martyn Ward, commercial manager at delivered wholesaler Palmer and Harvey, says: “We have calculated that our 14 days’ interest-free credit offer gives our average customer a cash-flow benefit of £500 a year.” But with interest-free lending a risky business, the wholesaler says that credit checks are a must.

“We operate on thin margins so bad debts can have a detrimental effect. We therefore carry out numerous checks before we agree any credit terms.”
Other wholesalers are using credit to help their customers fulfil promotional campaigns. Simon Hannah, managing director at JW Filshill, says, “Credit allows our retailers to fully commit, instead of basing decisions on how much cash they have at any given time.” The result is higher levels of promotional compliance in-store, according to Hannah, who says that 93% of his business turnover is credit.

But wholesalers need to make sure that credit is being used to purchase a wide range of products, rather than just tobacco, for instance, which gives wholesalers little or no margin.

“Payment-default is a difficult thing to accept, especially as a large percentage of the value could be tobacco,” he says. Although wholesalers are able to claim the VAT back on bad debt, Hannah says the big question is “Why are wholesalers responsible for the duty value within these bad debt write‑offs?”
If credit is being abused in this way, it can lead to the breakdown of a relationship with a customer. But the solution, says Hannah, is communication and constant dialogue.

“Wholesalers by nature are flexible and acknowledge that if there is an issue, it can usually be worked out between both parties. It is that close relationship that cannot be underestimated and is difficult to put a value on.”

Whether you have the time, resource and patience to commit to customer credit, one thing is clear: you must leave nothing to chance. Sony Bihal, managing director at Time Cash & Carry, says that credit has helped him to grow his north-London business and even places credit application forms at the entrance to his depot.

“We have eliminated our risk by partnering with Lloyds TSB, which insures and finances our debtors, allowing us to maintain our cash flow and drive growth.”
The wholesaler uses two different services from Lloyds: eBond and confidential invoice discounting (CID). “eBond is debtor insurance,” explains Bihal. “The underwriter will credit-score the business and inform us of the maximum cover on that particular customer. We apply a rule of 50% of the maximum.”

With CID, on the other hand, the bank provides 85% finance for 90 days against debtors. “This allows us to keep our customers’ books liquid,” says Bihal.

So whether you’re looking to introduce customer credit to your business or phase it out, the message remains the same: take no risks, communicate regularly and make sure you really know your customer.
“That means check credit details, not just at the start of a new business relationship, but also on an ongoing basis,” explains Philip King. “In these uncertain times, fortunes can change almost ­overnight.”

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