I always appreciate when clients reach out to me for advice or guidance on credit, collection, and other issues. As a credit risk management professional, I either try to help a client directly and/or introduce the resources that can support their needs.
Sometimes the situation that I am being asked about can be a first for me and require some deep thought before I can provide any insights. Here is one that I was grappling with during the end of November.
My client is an office automation manufacturer and has been planning to sell a new and unique product for which they do not have a developed distribution network in the US. Through their research they landed on one possible distributor that has a large end user market base that would be a great target market for the new product. However, this distributor is not in a good financially stable situation.
My client’s initial idea was to first sell the product to the distributor on a credit basis but only with the support of certain credit risk management tools which included:
Credit insurance – The major credit insurance carriers all declined to underwrite this distributor as the credit risk was too high.
Accounts Receivable Put Option – A/R put options serve the same purpose as credit insurance but normally to cover the receivable on a high-risk buyer. Although quotes were received, the financially unstable nature of the distributor resulted in quotes that were very expensive.
Sales on consignment – This was a more feasible risk mitigation idea since my client would retain ownership of the product until it was sold and delivered to the end user. The problem here is that along the way, should the distributor declare bankruptcy, there still may be difficulties in getting any product that was shipped to them, but not yet sold and delivered to the end user, returned.
After a few days of pondering their situation, I suggested to my client that in view of the unstable nature of the distributor, perhaps they would be agreeable to let my client sell directly to their end users. My thinking was that the end users would be approached under the names of my client and the distributor, but the delivery and invoicing of the product would be made by my client, with the payment being sent directly to my client. In exchange, the distributor would receive a sizable commission. In other words, rather than my client spending an enormous amount of time and money to develop an end user market, it would be much more cost effective to basically pay the distributor “to rent” their end user market.
My client did not know if the distributor would be open to this idea. However, to their surprise, the distributor was more than eager to work with them on this arrangement. From everyone’s perspective, it’s a win-win-win situation. It’s a win for my client to easily take advantage of a ready-made market. It’s a win for the distributor to receive a commission that would be more than the net profit they would receive if they had to purchase the product and resell it. It’s a win for the end user who can receive a new and exciting office automation product.
It’s also a win for CMI in that we can offer much more than our usual core credit risk management services and further deepen the relationship with our client.
Your thoughts would be greatly appreciated.
Nancy Seiverd, President, CMI Credit Mediators Inc.
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