In 2011, the channel could have a difficult ride if the fourth quarter 2010 insolvency spike and the higher rate of bad debt hitting distribution are any indication. Early in the recession, many distributors and resellers reduced costs in an attempt to counteract the slowdown. Firms in good standing were able to keep their monthly repayments current due to low interest rates. It seems this was not enough.
Graydon UK, the credit reference agency, released figures that showed only a four percent increase in insolvencies during 2010. Over those 12 months, only 269 businesses collapsed. However, narrowing the focus to the fourth quarter of the year revealed that an increase of 17 percent took place, with over 68 suppliers in the IT field alone going out of business.
Graydon head of intelligence Alan Norton stated that the last sharp rise in insolvencies occurred in 2007. During that year, a large number of system builders and etailers went defunct. He stated that consumer confidence will weaken this year due to declining housing prices and the VAT increase going into effect. Organizations within the channel will be subjected to further pressure due to public sector cuts.
In January, increasing bad debts were faced by distributors. Dataplex went under, owning as much as £2 million to suppliers. Suppliers had to accept 50 pence on the pound when corporate debt was restructured by Hamilton Rentals in order to secure a deal with Xchange Technology Group. Those in the industry, like Tech Data’s Andy Gass, recognize the sharp rise in insolvencies.
On Wednesday, banks succumbed to government pressure to offer £11 billion more in small and medium sized business loans than in 2010. The Bank Of England kept interest rates steady at 0.5 percent on Thursday. Financial experts predict a small increase at the end of next quarter, adding pressure to firms that are highly leveraged.