5 - 11 July 2001

Solving credit problems

Geoffrey D. Borg, President of the Association of Credit Management, talks to Blanche Gatt about the aims and ambitions of this recently set-up organisation

Over the past few years many businesses in Malta have had to face an increasingly alarming credit situation, in which they remain unpaid for services or products for long periods, often forcing them to defer their own payments, setting in motion a dangerous cycle that could have disastrous consequences. A similar situation has prevailed in Europe, and, recognising this, the European Union has over the last few years put in place a number of strict regulations to protect smaller operations and control the damage that an accumulation of bad debts could do to these enterprises. Of course, small companies are not the only ones to be affected by delayed payments, and though larger outfits are able to carry more weight, at a certain point, unpaid bills can also shake the foundations of the larger corporations.
Malta does not yet benefit from EU legislation, and bad credit
management remains a risk for all companies who sell on credit. So far, however, Maltese businesses have shied away from doing anything concrete about improving the situation here, but following the failure of two large supermarkets and the ever-increasing incidence of bounced cheques a group of Maltese companies have finally decided to coll-
aborate on an initiative that should help strengthen their position in future. Geoffrey Borg, President of the newly constituted Association of Credit Management, explained that, “while attempts have been made in the past to set up some form of information exchange between companies who sell on credit, the worry of local businesses that competitors could use this information for their advantage has always been a stumbling block in the past. The recent supermarket failures and bounced cheques has however brought a stark reality to those businesses that to cooperate is to win in this critical area.”
“The Association of Credit
Management is a group of leading Maltese companies who sell on credit in a variety of commercial sectors,” he explained. “Together they represent a market turnover of over Lm200,000,000 and employ over 4,000 people. The Association was modelled on a number of countries, but most predominantly the National Association of Credit Management in the United States, which was set up in 1896 after a number of businesses had gone into bankruptcy. Another organisation which was researched was the Institute of Credit Management in the UK, founded in 1939.”
Across the business world, organisations regulating credit management have been operating for a long time, but the recent upheavals left in the wake of bad credit decisions have finally prompted local companies to shelve their suspicions and cooperate for the benefit of all. “Finally it was felt that like other management disciplines, such as accounting or marketing, there was a strong need for a local association in line with international trends, which would focus and advance the requirements of a credit manager in the local market. One can see that we have been somewhat lagging from an international perspective.”
The Association of Credit
Management, which was launched on 1 June this year, has outlined a number of objectives, which include the provision of a central national organisation for the promotion and protection of all credit interests pertaining to local businesses; to foster and facilitate the exchange of credit information; to encourage efficient service in the collection of amounts due; to promote economy and efficiency in the handling of estates of insolvent, distressed or bankrupt debtors; and to promote, support of oppose any legislative or other measures which affect the aforesaid interests represented in these and other developments.
“The fast developments in the commercial sector and a strengthening of credit legislation and enforcement are the primary factors for the huge interest in the Association” said Mr Borg. “The initial members are a mix of a number of business sectors but predominantly FMCG (fast moving consumer goods) and the automotive sector. We have also found enormous support from all sectors of the business community and once the secretariat of the Association, staffed with full-time professionals, is set up, we will widen the initiative to other sectors that have expressed interest.”
Setting up a Credit Rating System, to facilitate the exchange of credit information on customers between companies who sell on credit will mean companies will be able to access the history of a potential client through the secretariat of the Association. This information can help them then choose whether or not to extend credit to people with a bad track record. “For example,” said Mr Borg, “a company that sells cars will do a search on a new client, finds out that he’s a reliable customer, or that he has a string of bounced cheques or unpaid bills behind him and make their decision to extend credit based on these facts. Of course, this will never eliminate risk completely, but this service
will definitely give creditors a sounder platform from which to take decisions.”
However, Mr Borg insists that the main objective of the Association is to improve the environment in which we do business, using the sharing of information as one of the tools to work with. “Our first priority is to encourage and educate businessmen about how best to manage a credit situation. In the UK, one out of every two business deals is made without any credit terms being agreed. No doubt the situation is the same, if not worse, here. So what we want to do is compile a procedure to be followed, guidelines for members to use when negotiating credit terms with new customers. The more efficient everyone becomes in creating the right framework for credit situations, the easier it will be for debt collection to improve.”
A pivotal part of the Association’s mission is to improve the quality of legislation on credit terms. Thanks to recent legislation within the EU, small companies are able to enforce a 30-day credit maximum, while a directive to come into full effect in August 2002 allows for a benchmark of 30 days as payment period unless specified otherwise in a contract. “In Malta this law has already been moulded to meet some circumstances as part of the Business Promotion Act,” he said. “But the applicability of the law as it stands is limited to micro enterprises and to situations in which companies have a dominant position. However, it could easily be modified to serve the whole market, and as we believe it is ineffective to have a piece of legislation that applies to practically no-one, the Association will be working hard on getting a wider, more comprehensive form of legislation into place.”
One of the thrusts of the Association is towards giving a service to distressed businesses. “This will take two forms,” he explained. “We will either help the businessman to rehabilitate, or help him to leave the market professionally. A distressed business is the way we describe someone in financial difficulty, and in order to help him we would have to examine his accounts and turnover very closely to determine what his turnover/profitability record has been. Our objective will be to try and help these people to either reinvest further to solve his problems, restructure or look at leaving the arena.
“If his books and accounts show that he is an honest market player, we will do our best to help him find a way to continue operating, but we have to be realistic about things, to make the business environment a better one for all concerned.”
As more and more businesses in all areas complain about the difficulties in collecting long-overdue debts, the many enquiries the new Association has received show
that many in all areas of businesses would welcome some sort of
debt-collecting service. Just how much is owed in outstanding credit, however, Mr Borg says is unknown. “We don’t know what the figures are,” he said, “but we do know that our members represent a turnover of over Lm200,000,000. But besides, it is not the amount of debt that is concerning, but the risk around that debt. As for a debt collection system, it is very early to talk about this. Ultimately we will be building up a comprehensive picture of the situation, we’ll carry out surveys and be able to offer concrete statistics upon which to base our policies. A working group has already been set up to study legislative requirements and discussions are underway with members, legal advisors, politicians and professional bodies to identify all those legislative measures which will provide a sound credit framework for the commercial commun-ity in the future. In fact, credit rating, insurance or factoring could technically be available today, but the interest in such areas waned in the past due to the high level of competition and associated risk that the business community exposed itself to. With a sounder credit regime, more organisations will be willing to investigate opportunities in areas of credit services.”
“Debt will always be a problem,” Mr Borg continued, “but what we can make sure happens is that people become more professional. If before people extended credit to new customers they went out and did their homework, a lot of today’s problems would not recur.”
The long-term plans of the Association of Credit Management include looking into areas such as credit insurance and factoring, cooperating and sharing expertise with banks as well as forming alliances with international associations of credit management in order to be able to provide their members with a much wider service. In the meantime, however, the Council and the various working groups are examining the issues that are considered most pressing; creating
a sound framework within which
the local business community can operate with confidence and giving their members the tools, the education and the information to take the right decisions.