Wednesday, March 07, 2007

Can I Use Credit to Do Business in Africa?

Alright...for those of you who have already read my blogger profile, you know that my full time occupation is credit analyst work. For some time now I've had this idea to do this post and have put it off, but no more! As a credit analyst my primary job is to analyze the risks associated with granting credit to my employers credit applicants, as well as periodically reviewing payment histories and credit data for our customers that are already in our credit files. For more than a few ( 6 years) years now, this has been my field and and quite honestly there have been times that I wanted to walk away, but then again there probably many more times when I've been happy to be "in the know" when it comes to building and maintaining business credit. So with that being said let's talk about how this relates to doing business in or with Africa...

For any of this to be applicable to you there are several assumptions that I must make about you and your business, so before proceeding here they are:

  1. The product or service that you are offering is proprietary or otherwise very niche oriented, so your business is one in only a small group that can supply the customer. (critically important)
  2. You have a well planned and thought out business plan.
  3. That in addition to credit you have some other source(s) of funds.
  4. That the business that you will be obtaining the credit for is or will be incorporated by the time you start applying for credit, so that you will not be held personally liable for any of your business's debts. (very important)
  5. That the main reason your business requires credit is that you have or are projecting a steady stream of paying customers who will be asking your business for credit.
  6. That your business has consistent and recurring goods that must be purchased every week, month, quarter, or etc. in order for you to stay in business and service the customer. (i.e. your economics makes sense)
So what type of business credit are we talking about anyway? Most of the time when someone asks me ,"so what do you do" and I tell them that my title is credit analyst/credit approval they think that this mean I approve for loans or credit cards. So to be sure that we are on the same page, we're talking about what is known in credit parlance as "trade credit". Trade credit is what is created when the supplier of goods or services provides the goods or services to the customer before payment and then invoices or bills the customer instead of requiring upfront cash.

So, let's say that your business is an anti-spam software/email security company. In this example your proprietary service is the maintenance of your customers' email security/anti-spam servers (which you provide), your customers are medium to large businesses who need this service to keep their information private and their expensive systems from crashing. Let's also assume that these customers are in Africa. In this scenario although your main offering is the anti-spam service, we know that most businesses don't just want a good service, they also want to save time and money with a "ready to go" service. If your company sold the customer the email security without the server, then it would not be a ready made service. However, if in addition to offering the service, your company for a small convenience fee also offered the server and installation, provided that everything else makes sense you'd have a customer. How does this relate to business credit? Well, the server that you are offering your customer would fall into the category of a recurring product, I think from an accounting standpoint it might fall under cost of goods sold. Your company projected sales of let's say 120 installations and maintenance packages or 12 per month, but since you aren't in the business of making server boxes you have to buy them from a supplier. Now, let me ask you- would you rather pay for 120 server boxes upfront(or even only 10 upfront) or would you rather be able to get the industry standard 30 days to pay and and have the opportunity to first collect from your customers ? If you are like most cash-flow oriented business people, you probably chose the second option. This is a basic example of trade credit and how it comes about in a transaction.

Now notice in the example above I used a large company that exists in one of Africa's 54 nations...If I hadn't worked in an environment where this was fairly common place I probably would not have used this as an example. But it just so happened that one of the companies that I contracted my credit services out to really did sell Internet security and it also turned out that some of our largest invoices went to some of our customers in Africa (Ethiopia and South Africa) who typically payed very promptly. Just wanted to point that out, that if you have the proper systems in place, you can sell products in another region of the world on credit and still collect your money from America. my example above we assumed that your company would be sending products to Africa. It could also work out such that you are importing products from Africa and maybe just need some finishing products from suppliers here in America like packaging, bottling, cans, or etc. before your product is ready to be sold to your customer. For instance, if your company was a fair trade marketer and you imported coffee beans from Ethiopia for sale here in the States, now before selling them to the final end user (your customer) you will need packaging to put the product in the stores and in front of your customer. After wiring so many dollars to Ethiopia for the coffee beans you may decide to find a way of going easy on the cash outlays . To do this and purchase this packaging your company can use trade credit to help you "finance" the quantity that your company needs. Outside of the fact that this example uses an import concept all of the other assumptions and principles that have been mentioned above and below this paragraph would still apply to this situation.

Anyhow, hopefully we have established that business credit is an excellent way for your company to supply the demands of your customers, while not straining your cash flow. So now how does a brand new business go about convincing its suppliers that they should extend you credit of 30, 45, 60 days or what have you... Well this is what I look for when evaluating a customer for credit:

New Customers

  • Make sure that the customer is really a first time customer and has never been delinquent before with us.
  • Business credit report.
  • Credit references from other business suppliers.
  • The big picture or business fundamentals, as told by my company's sales rep who sold my company's service to the prospective customer.
  • If it's a really large order sometimes I may ask for a bank reference also.
Ongoing Customers (Credit limit Increases)
  • The payment history since becoming our customer
  • The big picture or business fundamentals, as told by my company's sales rep who sold my company's service to the prospective customer.
  • Every now and then, I mean when the credit limit increase is substantially larger than the current credit limit, I will pull a new business credit report on the customer.
What this means to you is that if your business is brand new although the initial process of obtaining a "trade line" (permission to pay by invoice and not COD) is formal, with business trade credit the process is fairly relaxed once you have established yourself as an ongoing customer with a steady payment history. I think that this is where trade credit differs from any other type of credit, it can be much easier to obtain than consumer credit, for instance. Another tidbit is that most business suppliers have a standard credit limit that they almost always give to new business customers, this will depend upon the type and price of the product or service being sold. Ordinarily, if the dollar amount in your request for terms is less than this standard amount is, then I don't come into the picture because the accounting software does not "red-flag" the customer. On the other hand, if your order is slightly larger than the standard credit limit amount or if our accounting software determines that any aspect of your company's credit or order falls outside of the standard parameters then that's where I come in at. Out of all of the bullet points that I have listed above, I would say that the two most important are the reputation that your company has with my sales representative and the way that you have payed our invoices after you became a customer with my company. With this in mind if you can find a supplier that will let you start out with small orders, on Net 30 terms, and you consistently pay the invoices on time-like over 7 or 8 months and at the ninth month you explain to your sales representative that you are growing and need more products for your customers then most likely your sales rep will do everything within their power to convince the credit department to grant you with a credit limit increase-nine times out of ten in my case those requests have been granted.

So, if you are seeking trade credit or terms with a supplier try to establish a good working relationship with your sales representative. Like maybe after you all have spoken 4 or 5 times about their company's offerings and you have built some rapport with the salesperson and are about to give in and say yes. This would be a very opportune time to ask your prospective supplier questions regarding their credit policy like:

  1. What is the minimum credit limit that your company grants to new customers?
  2. What if my company wants to get bigger orders from you?
  3. How long does the credit process take, because my business is growing fast? (or you know...something along those lines to let the sales Representative know that you may go to a competitor if it's not a quick process)
  4. You don't require personal guarantees do you? (I would only ask this if the product was either expensive equipment or just a very large order and of course if your business was incorporated)
  5. Ask if they report to the business credit reporting bureaus, because once you become a customer, you'd like them to report your good payment history-thereby building more credit.
Why those questions, hmmm thought you'd never of the biggest things that my experience as a credit analyst has taught me is that there are generally two types of companies, especially here in the States. Those that are sales driven and then there are those which are process driven. As a new business seeking to optimize cash flow, what you want to do is find suppliers for your company who are sales driven. If the answer to those three questions directly above this paragraph all seem to be very accommodating to your needs-chances are that you have found a sales driven company, who is at a stage where sales growth is more important than containing bad debt. Usually smaller private suppliers with commission-based sales representatives fall under this category. Sometimes you will find that a small group of sales driven companies are set up so that the sales rep plays just as big a part in determining credit policy as the credit analysts. Whereas most large companies whose stock is publicly traded are more process driven and are more concerned with presenting a very controlled and stable environment to their investors rather than sales at any and all costs. One more thing always remember that whether the company is sales driven or process driven they are in business to do business, ultimately they want the sale so remember to always maintain a confident attitude. If for some reason your request is denied kindly find out why so that you can fix it and then go on to find a sales driven supplier to help you build your business.

Well, I hope that you find this post useful in your quest to find practical solutions for helping you do business in or with Africa.

Below are a few related resources

From the leader in business credit Dun & Bradstreet on how to update your business's credit.

Here is a similarly written article on

This is another type of cash flow management too that is related to trade credit.

I found this one one Yahoo it talks more about obtaining credit cards for your small business.

This is a risk management company operating out of Kenya, but doing business in several African countries. And this is another one out of Nigeria.

Of course, I love your comments. But, if you can't comment at this particular time- but would like to let us know that you were here; please sign and View my guestbook


Ssembonge said...

Credit system has been proven to work in countries that have a proper mechanism of dealing with defaulters.

Not in Africa, and specifically Kenya. Debt recovery carries the highest risk because the benefit of defaulting outweighs the cost of defaulting. You default from one creditor and move to the next unlucky creditor. There are hardly any laws and regulations to protect lenders.

IMHO, I would only lend money if it is secured by collateral in my possession worth at least as much as the credit.

For now, people have to rely on past relationships and goodwill to lend goods and services. This is unworkable if Africa is to develop to economic levels matching the West.

Benin "Mwangi" said...


Thanks for visiting and I really appreciate that you took time out of your work or schedule to express yourself.

I agree with you that the credit industry in many parts of Africa is still in a very young age. However, I propose that we agree to disagree on how to respond to this fact. You suggest only selling there on a COD basis, whereas I say that with the proper due dilligence and precautions it can be done.

One interesting thing to note is that many of the big companies are already doing this. Just take a look at a company with public ownership who does business all over the world-take a look at the annual report and you would very likely see in their sales maps a region referred to as EMEA-this stands for Europe, Middle East, and Africa. Many might be surprised to know that many of these transactions are credit based. It doesn't mean that theyy are being sloppy either...It just means that they are using the proper remedies to earn the sale and protect their balance sheets. International irrevocable letters of credit are one remedy that many of these companies are using to ensure payment on goods delivered in international markets. Also, contrary to popular belief, even though the credit systems in Africa are not as advanced as in the States there are some very strong companies there that do show up on international credit "radars".

Next point, if the product or service that you have is proprietary then its not easy for a customer to just pick up and go without the product or service because it's difficult to find an alternative provider. That was the unique position of the client that I worked for prior to my current employer-this was an internet security company. There was one customer in Southern Africa that was almost every other month billed five figure invoices-and they paid very promptly(before the terms even expired, less than 30 days!) almost without fail. There were some NGO's in Ethiopia some of them were based overseas and they paid alright (within 45 to 60 days) as well. The other assumption that I made in the post is that the company that tries it has a thorough business plan, implicit in this is a proven credit policy. I am not saying that it is easy, especially without a competent credit manager, but that it is an alternative.

Also, I used two examples in the post and one of them was for a company importing products from Africa into America.

Last, I am in my early 30's and can recall a time as a child when I heard folks talking about something called "redlining". Redlining was an unwritten or unspoken policy of American banks up until the 1980's whereby they took maps, found the predominately black populated sections, and then drew red lines around them and told their bankers not to lend there because of the perception that African American borrowers represented huge credit risks. This practice has long since been abandoned and today African American borrowers in good standing represent a sum that is comparable to the GDP of some of the worlds smaller economies. With time, I believe that the same could happen various parts of Africa. I do agree with you that this is a thin line, but if we are talking about healthy businesses, then credit is an essential component of growing to meet increased demands. I would say that as Africa's businesses and industries become more interwoven into the global economy not embracing a sound credit system and instead choosing to go cash only could mean risking falling further behind the global competition who does embrace this resource. Likewise, businesses who serve the international markets yet choose to ignore the African markets for fear of credit risk do themselves a dis service by not learning about how to protect themselves against credit loss.

The discussion has been great, thanks for coming out to The Benin Epilogue!

Ssembonge said...

Large firms don't have a big problem with defaulters because they can buy justice and their mark-ups can cover for such losses. In most instances, the COGS is very low and its just that their expenses are not.

For the small scale mom and pop businesses, they have thin margins and rely heavily on positive cash flows to sustain their business. It is thess outfits that bear the brunt of the defaulters cause they have no recourse.


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