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How big is the credit problem in Malta
and is it restricted to certain areas?
Although credit
problems do not exist only in Malta, late payment and
dishonouring of credit terms in commercial transactions are
considered as the main concerns of the Maltese business
community.
Some companies,
across all sectors of the Maltese economy, are facing
liquidity problems, which are evidently seen and remarked in
their audited accounts. We also see a great deal of
bartering going on with building developers exchanging
property as payment to sub-contractors. Another issue is the
large number of dishonoured cheques, and it appears clearly
that this negotiable instrument has lost a lot of its value
as a payment tool. The lack of adequate action taken against
defaulters in this area either by banks or the authorities
reinforces the defaulters’ actions.
Some other
companies also complain that as a result of late payment,
they are unable to restructure appropriately in order to
face the new challenges and opportunities of today’s market
demands. Credit problems exist in all sectors of the
economy. The wide variety of commercial sectors that our
Members come from, give a clear indication of this.
What led to the credit or liquidity
problem?
The principal
reasons that are contributing to liquidity problem in the
local market are:
1. Under-capitalisation
of businesses which consequently rely on their banks’ and
trade creditors’ capital to pull them through. Shell
companies with Lm500 authorised share capital and Lm100 paid
capital try to hide behind the limited liability shell that
such a company offers.
2. Poorly
managed businesses, which in some cases inefficiency and /
or fraud may be the primary causes of distress. This is
often a result of gross lack of basic management, accounting
or business training. The owner also sometimes does not
manage to separate his personal interests from those of the
business.
3.
Overtrading, occurring when the business’s turnover
increases faster than its cash profits, so that eventually
it becomes unable to obtain the extra capital required to
finance the expansion, thus having cash flow problems.
4. Intense
competition, leading to unsustainable price wars through
misunderstanding of the company’s cost base which effect the
profits of any business in the long term.
5.
Government is mopping up liquidity from the economy through
its attempts to maximise efficiency in timely collection of
taxes and other charges. It is quite obvious that these
measures are hampering companies’ liquidity and adversely
affecting consumer expenditure.
What is the businessman’s biggest
enemy when it comes to credit management and what should be
his biggest ally?
Avid sales
targets, inadequate research on the client assets and
performance, lack of noting trends of late payments,
dishonoured cheques, and post-dated cheques drawn by their
clients / debtors are the trade creditor’s enemies, when it
comes to credit management. Often it is caused by management
zealously pursuing sales objectives rather than profit
objectives.
‘A sale is a
sale only when the money has been collected’
An effective
credit management process should be proactive by having
reliable and up-to-date information system providing the
necessary data about the prospective credit applicants. MACM
educates how this should be done and assists by providing
elements of the credit information required to take business
decisions. Moreover, credit reviews should be made on a
regular basis, taking immediate action against any
defaulting debtor as necessary at an early stage such as on
site visits, repayment agreements and ultimately legal
action if co-operation is not forthcoming from the debtor.
‘How can a
businessman give credit or review an existing credit
facility to a client without knowing the real worth of the
client, his credit history with other creditors, and his
commitment to abide with the credit terms and conditions
set?’
MACM is therefore
active in educating and assisting creditors in order to
manage their debtors in a more professional way, so that
credit would be seen as an important tool to enhance the
trading relationship between the client and his supplier,
and not as a selling technique. |