Frank Knight, CEO, Debtsource – Companies differentiate themselves from their competitors through strategic drivers. Price, quality, product and service are the usual candidates they focus on to beat the opposition.
Credit as a competitive advantage usually doesn’t make it to the agenda of the boardroom. But, is there more to credit than meets the eye, and can credit indeed be considered a competitive advantage in the B2Bsector?
In the world of consumer credit, credit as a competitive advantage is a very well- established practice. Some of South Africa’s largest retailers do not necessarily sell product that is unique to them, any cheaper, or of a better quality than the store next door – yet they have grown to massive proportions by simply offering consumers an easier way to pay for their product – in other words they have used credit as the driver to differentiate their offering.
But exactly where does the opportunity to use commercial credit as a strategic driver lie? The starting point is the realisation that the value of credit management is the ability not only to collect overdue accounts or to avoid bad debts, but rather to enable a company to achieve the maximum overall profitability from trading. Then think of all the credit decisions that are made within a business daily and categorise them into three main groups – “Yes”; “No” and “Refer” decisions. The “Yes” and “No” decisions are usually quite clear cut, but the “Refer” decisions are the ones where the opportunities lie.
In a typical B2B debtors book, the “Refer” decisions can comprise as much as 25% of total money outstanding, which in revenue terms can be significant. These are the credit decisions where careful consideration needs to be given to all the factors regarding the client’s credit ability and the whole range of possible solutions (such as securities, credit insurance, terms and payment arrangements) needs to be weighed. Cut this level of customer out of your credit processes and you’ll lose money. Include them all without due consideration and losses will follow.
“Refer” decisions are typically customers that can’t secure credit facilities at will and therefore will be prepared to pay a bit more for your product, so with the correct and appropriate credit structuring can be highly profitable. Simply put – if you become better at selecting “Refer” customers than your opposition you’ll make more money. Be vigilant not to allow just anyone to make a decision on the “Refer” group that only views the transaction from a risk perspective, or from a “turnover at any cost” perspective, as these could have disastrous results. In such an instance risk may very well be avoided, but at what cost to the business?
Senior management need to provide a clear message to credit – what is the business strategy? “Are we trying to grow the turnover aggressively, or are we merely trying to protect the present base we have?” The execution of these credit decisions will be significantly different for both scenarios and the key is to align the credit strategy to the overall business strategy.
In the final analysis, there can be little doubt that credit extension can be a competitive advantage, even in a commercial credit environment. However, the advantage can only be executed effectively if the underlying credit decisions are made by competent experts. Credit extension (as the primary source of corporate revenue) can be your best friend or your worst enemy. Central to making credit your friend is the acknowledgment that this is indeed a competitive advantage.