In most industries, the standard terms of trade are 30 days. This sometimes stretches out to 60 days. But in the printing industry, paper suppliers regularly offer extended terms of 90 days, sometimes even more. The paper merchant business model is built around providing credit to printers. The longer the term, the bigger the impact it has on cash flow right across the industry.
One thing is blindingly obvious: if your business is getting supplies or equipment worth, say, $100,000 over a quarter, it’s effectively a cheap $100,000 loan. When banks tighten up on credit, paper and equipment suppliers become lenders of last resort. That works fine when the economy is booming – however, over the past two years, the economy has been anything but.
According to Coface Group, a leader in global credit management, the hard times in the printing sector are part of a crunch that had to happen. “The sector has been in need of real consolidation for some years, which has been rapidly forced by the GFC.”
Christian Vollbehr, country and general manager of Coface Australia, says to ProPrint: “Over the past three years, we have experienced a marked deterioration in this sector, which impacted manufacturers, wholesalers and printing firms suffering from a range of factors.
“The negative development has produced a significant increase in non-payment notifications creating an unprecedented level of claims for our insured customers. We constantly review our exposure to the industry and expect a more stable situation once the end of the consolidation phase can be confirmed,” adds Vollbehr.
In the past year alone, the industry has seen many printers go under, get placed in receivership or fall into liquidation, often burning creditors left, right and centre.
The high casualty rate has left paper merchants badly exposed. One of the worst cases in 2010 was the Quality Print Group, which went under with a whopping $12.8 million of debts. The biggest debts to trade creditors that the liquidators identified included $3.5 million to CPI Paper, $1.55 million to Angus Agencies and $118,150 to Fujifilm.
David Hunt, national credit manager at Fujifilm, says his company has been forced to tighten up its procedures due to the high number of business failures over the past two years.
“We have suffered fairly large losses over that period of time through our graphic arts division,” says Hunt. “We have lost probably half a dozen to delinquencies and by that I mean receiverships, liquidations and voluntary administrations.
“We have taken a much firmer and tighter stance in so far as when we open new accounts, they are checked more thoroughly and the actual account management process is tightened up. We give 30, 40 or sometimes 45 days, and on 46 days, we stop supply.”
On the day the account is due, the company starts making calls. The next step is to issue a letter of demand. And there have been instances where Fujifilm has taken printers to court. It currently has action underway against print companies.
Industry players say there hasn’t been any noticeable or structural change in the way merchants have been collecting money from printers. Nor has there been any change in trading terms. What has changed, however, is that debtors are more rigorously monitored.
Raising the standard
Simon Doggett, managing director of paper merchant KW Doggett Fine Paper, says rigor has become standard in the industry.
“In a nutshell, what it’s forced us to do is not to trade when we consider there is a credit risk,” says Doggett. “And there has been a fair bit of that going on. There wouldn’t be a merchant that hasn’t been left holding the bag as [the printer has] fallen over in the last two to three years. Some are bigger than others.
“Typically over the years, we have put them on credit hold when terms have been exceeded so they go to the next merchant and buy off them until he goes on stop. Sometimes, it’s a case of who is left holding the bag at the end with the biggest amount when they drop.”
Doggett says one of the big problems is that some printers are unable to spell out their financials in full detail when the merchant is seeking information to support increased credit. In order to give credit, merchants will request a complete picture about the company’s financial figures. While some printers provide the right information, but there a number who don’t, can’t or won’t.
Doggett says that even when printers make the effort, their numbers aren’t always that clear. Some companies might be great printers, but they don’t have a head for finances.
“The frustration we have is that when we go to a printer and they give us their financials, they are generally internal numbers that are missing a lot of information. So there is a lack of information for us to be able to make an informed decision, “ he says.
“They typically run their sales and gross margin through their internal numbers but what they don’t book is the depreciation and the interest on their leases, for example – the numbers that are generally put in by external accountants at the other end.
“It’s typical of a lot of small businesses. They don’t have the right numbers in front of them to know the true cost of running their business. They need to be working very closely with external accountants or experienced financial advisors and they need to understand their true cost base, and that’s inclusive of all costs.”
So why do longstanding suppliers that have gone through several cycles of delinquencies continue to provide credit for ailing printers? It’s all because of competitive pressures.
“There is pressure to maintain sales levels and turnover. There’s pressure from the mills to provide support with certain tonnages on products,” says Doggett. “Those sorts of pressures are brewing and while that’s going on in the background, you are trying to keep the wheels spinning as much as you can.
“And when those pressures are going on in a contracting market, you might make credit decisions that you can later regret.”
In response to the casualty rate, KW Doggett has overhauled its credit management system with new policies and procedures, even bringing in a new insurance provider.
Tight times
Another prominent paper merchant, who asks not to be named, says many merchants had tightened up on their procedures. “Apart from Accounts Payable 101, the paper merchanting fraternity has changed its stance on credit limits and terms,” he says.
“They are now more strictly adhered to than they have in the past. The driving force behind this is undoubtedly the compliance requirement to meet credit insurance obligations. Anecdotally, credit insurance is becoming more difficult to gain. In fact there’s declining cover as the industry’s risk score becomes greater.
“Also, a higher degree of due diligence is being performed prior to changes in credit amounts and or terms. Stronger internal procedures, combined with obtaining far more accurate data is paramount.” He says doing business in person has become even more critical. “Basically the need to be in front of the customer face to face discussing these issues has elevated in the past couple of years.”
But he adds that many paper merchants have fallen into the trap of providing credit for struggling printers because their judgment is compromised by close personal relationships. Another reason is the cancerous pursuit of volume. And then there are the pressures created by new merchants coming into the industry, prepared to take on more risk.
Credit is a supply chain, and printers can be lenders as well as borrowers. Andrew Lees, who oversees debtor insurance and who collects money at Focus Paper, said there would be fewer problems if printers followed the lead of paper merchants and upgraded their credit management policies. He said too many of them are providing credit to customers without doing proper checks and chasing up when accounts are due. Indeed, this is similar to the problems merchants face getting proper financials out of printers. In both instances, it boils down to a lack of business expertise.
“The collection process could be improved in the industry, there is no two ways about it. It’s reasonably strong in the merchant community, it certainly is in the supplier community and it has to filter down to the printers. The printers need to be more diligent in how they collect.
“We don’t extend credit where we feel we are taking a huge risk or a risk that we feel is unrealistic, but I don’t think that’s the same for a lot of printers. Printers take the business hoping they are going to get paid.”
Lees says that when printers have bad collection procedures, it should be a warning for the merchant. “The people you have to watch don’t have strong credit procedures of their own.”
Guarding security
David Bull, a director at CPI, said the $3.5m owed from the Quality collapse was manageable because the company had taken a mortgage on the home of Paul Canty, a principal at Quality. That, he said, was standard procedure for CPI. “In terms of where we stand, we either have an endorsed [insurance] limit, or we take levels of security against debt from the owners of the business,” Bull says. “We rarely provide it without security.”
He says CPI, like other merchants, worked closely with insurers. He says that the actual process had not changed that significantly. What was different was that insurers now wanted more information.
Bull’s view tallies with the perspective from Coface. “Credit insurance is obviously a good credit and cash flow management tool. However, in underwriting the sector and assessing risk, a high level of transparency is required.”
Credit experts at Coface say that for the best chance of getting insured, you should be prepared to disclose current financial statements, insight of order book, key customers, funding and bank support, and growth and development opportunities.
“Credit insurance has provided companies with a much-needed cushion to cover against non-payments incidents and has protected the balance sheet of many companies during and after the GFC.”
Insurers tell ProPrint that transparency is a problem in the printing industry. Atradius business development manager Dean Jenkins says transparency is critical for all credit insurers. Unfortunately, many printers refused to provide it, telling the insurer it was none of their business.
“Traditionally, business has always been done on trust but given the GFC, people are taking more strides to get their credit ratings correct,” says Jenkins.
“What they try to do is use insurers, and insurers will try to get the information and if they can’t, then the level of trust dissipates,” he adds.
Jenkins says the bottom line is that the more information a printer provides, the more comfort it will provide an insurer and the more open the lines of credit. “If you have a good printing company and need credit, you shouldn’t have anything to hide,” he says.
Simon Chown, general manager southern region at insurer NCI, says insurers had steered clear of some merchants who had been regarded as high risk with their loss ratios blowing out 400% after being burned by failures among their customers. However, this had started improving and insurers were coming back. He reckons the downward trend over the past two years seems to have bottomed out.
However, insolvencies always climb when there is a recovery: the banks want their money back and the tax office becomes more aggressive. As a result, he said, we can expect more business failures. “It won’t be at the levels they were, but we are expecting more.”
That will mean one thing: paper merchants and suppliers will not ease up on their more rigorous credit management. That’s unlikely to change for the foreseeable future. At the same time, that will put pressure on printers to also lift their game.
Top tips credit
· Be completely up front and transparent about your accounts when asking for credit.
· Get credit insurance
· Make sure your financials include all costs, including depreciation and interest payments. It might be necessary to do this with an external accountant.
· Credit history is crucial. Establish a solid credit history with payments coming in on time.
· Make sure your own credit management policies are rigorous, backed up with solid policies and procedures.
· Check the credit history of each prospective customer and put in calls when accounts are due, and follow up with letters of demand.
· Make sure you let the supplier giving you credit know all about your credit management policies.
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