If The Credit Free Fall Has Left You Hanging ...4:00 PM EST Fri. Mar. 27, 2009
Call it a sign of the times.
Not too long ago, the ability to get customers to sign off on IT projects was considered the hallmark of a successful solution provider. Now, in the depths of our greatest economic recession in decades, VARs have to hope that signature is even worth anything. Today's financial crisis has made it increasingly difficult for solution providers, and their customers, to secure financing on new business opportunities. Even if end users are ready to spend, they may not get the chance.
While many solution providers interviewed at the recent XChange Solution Provider event in New Orleans said they still expect to grow at a double-digit percentage this year, they also said they will face tighter economic restrictions to get there.
A rash of closed and reduced credit lines has left VARs that once spent the bulk of their time designing and implementing solutions now making financing their first order of business. After all, without the money to buy products, there's no point in going forward. Financial lending has tightened, particularly in the first quarter, to the point where solution providers say they are losing customers. Some also worry that the credit crunch is going to get worse before it gets better.
Without adequate financing to support customers, solution providers will continue to struggle and it will be difficult to kick-start their business once the economy turns around. Research firm IDC recently conducted a survey that found the gap between customer IT financing requirements and channel partner capabilities is continuing to widen. In the survey, 11 percent of solution providers with an average of 1,000 employees reported that they do not have access to capital to continue "business as usual," according to IDC. For smaller resellers, with less than $5 million in revenue, the figure jumps to 20 percent that have inadequate access to capital. In addition, 64 percent of survey respondents reported that their customers have more interest in IT financing and leasing programs than six months ago, the survey said.
So what's the answer? There are alternative financing vehicles available, but solution providers also need to have earlier financing conversations with customers as well as maintain good contact with their own lenders. Several solution providers said they believe those strategies will help until credit opens up again. But getting there is the hard part.
Just in the past three months, at least three channel financing programs for VARs closed or enacted stricter terms. IBM Global Financing closed its Flexible Credit program for small businesses because the program did not meet the predetermined business objectives. IBM also limited a leasing program to financing for just IBM, Lenovo and some supporting vendors' products. In addition,Textron Inc. closed its IT-related financing programs, a source that several distributors including Ingram Micro Inc. and Arrow Electronics Inc. used to provide financing to solution providers. The dominoes continued to fall, solution providers said, as credit lines from distributors, other flooring companies and local banks were reduced as well.
It's difficult to say how much credit capacity has been taken out of the channel, as the Federal Reserve's fourth-quarter statistics won't be released until April.
You Can't Bank On It
As a case in point, Sierra w/o Wires, a Pittsburgh-based solution provider, had $85,000 in open orders in early March that it was unable to fulfill because its total credit capacity was lowered and maxed out across multiple distributors, vendors and banks. The solution provider said Tech Data Corp. cut its credit line by one-third because the market was getting too tight. And then a floating credit line with a bank was reduced by two-thirds last year. Like many other businesses in this economy, the solution provider was already struggling—but those cuts really hurt.
"We're waiting for customers' checks to come in to do the next deal," said Bruce Freshwater, CEO of Sierra w/o Wires. "Banks are no help. They all say they're trimming back because people are defaulting on loans. I said, 'We pay our bills on time.' They said, 'It's not you, it's everybody.' "
The solution provider now requests that customers prepay for IT equipment or else it can't take the order. Freshwater said he has lost business because he's stuck without the ability to float the purchase. "Luckily, some of them have prepaid or we've figured out some way to fund it, but some have taken the business elsewhere," he said. And that's not Sierra w/o Wires' only credit woes. The solution provider recently lost $36,000 because a leasing company backed out of the financing after the equipment was installed, saying the customer did not have adequate capital to cover the lease.
The solution provider removed the products, but by then the boxes were gone and the vendors wouldn't take them back, said Freshwater. "We had to eat the equipment. We have to figure out some way to sell it as open box. At a minimum, we'll take a 20 percent hit because we're not going to be able to sell it at cost because it's open," Freshwater said.
Next: How Do You Make Up For Lost Time?
How Do You Make Up For Lost Time?
Other solution providers are feeling a similar pinch. IT Technology Services Inc., a Norwalk, Conn.-based solution provider, also lost a couple of clients because it couldn't find financing for them, said David Lee, CEO.
"We went through every step to secure credit for them and [the financing companies] said it [won't] work. The customers don't want to do personal guarantees. The banks don't want to do the risk," Lee said. "The [banks] said flat out, it's not going to happen. I had to go back to the customer and say we talked about financing, but it doesn't exist for you. They said they'd go to someone else who would be able to do it." In such situations, not only is the customer lost, but the time IT Technology Services put into the opportunity is wasted as well, Lee said.
"I know we spent hours doing a lot of pre-work to get that going and it was dead from nothing to do with our service or our ability to do our jobs. It was dead from the financing," he said. "When you tell someone you can get it done, then you don't get it done, that's a way to lose the relationship."
Lee and other solution providers said they've learned some lessons the hard way and have started to ask for a customers' financial information up front to try to ensure the client can secure financing before they proceed. But that takes time and resources, and a lot of businesses don't want to part with that information so readily either. "In the past, you could get people what they needed when they needed it. Now you have to really work hard at it," Lee said.
Tough Road For New Companies
George Usi, president of Sacramento Technology Group, Folsom, Calif., used to finance nearly 100 percent of his sales through Textron, especially in the public-sector market. When that line closed, Usi quickly scrambled to secure two lines of credit with De Lage Landen Financial and GE. He was able to match the line he had with Textron, but he fears that other solution providers will end up with less credit than their Textron lines.
"We've [diversified] our business model. We do quite a bit of managed services. In my opinion, that helped when we were going through the financial review process," Usi said. Usi also fears that new companies will face additional hurdles to secure credit in the current environment.
"They don't have the relationships, the history. It'll be tough for them to enter the market. This is going to stymie innovation. There were will fewer entrepreneurs, less competition," he said.
Next: Be Proactive, Communicate
Be Proactive, Communicate
Solution providers that have not yet been hit by reduced credit capacity should still plan for that scenario, said channel executives. Even distributors, long considered the primary financing arm for many solution providers, are now more cautious with their credit lines. Although D&H Distributing Co. Inc. recently increased the credit lines to about 4,000 VARs by a total of $38 million, distributors can be just as tight as any other financial lender.
At Tech Data, "We're making sure we've got more eyes on particular accounts than what we do normally," said Joe Quaglia, senior vice president of U.S. marketing.
Tech Data, Clearwater, Fla., has an executive committee to review large credit deals, but smaller purchases are also being watched more closely, he said. "There's a policy of workflow that we go through to ensure they're credit-worthy and ensure their customers' credit-worthiness. They may be a longstanding customer of ours, but if those relationships [with end users] are new we want to know that," Quaglia said.
To guard against a surprise credit line reduction, solution providers should more proactively communicate with their lenders, said David Johnson, vice president and co-owner of The Fulcrum Group, a Keller, Texas-based solution provider.
"We've spent a lot of time and effort to make sure our lines of credit with [companies] like Ingram Micro, Comstor, Dell and HP are good. We meet with the bank regularly, provide them with financials, let them know where we're going with our business," Johnson said. Financing is no longer a "no-brainer" when a sales opportunity is won, said Jeff Albright, founder of Albright Consulting Services, Evansville, Ind.
"The only challenge for us was to engage [IBM Global Financing] soon enough and to make sure what we did dovetailed into the technology plan the client had in place. The landscape changed dramatically and quickly. I equate it to nobody wants to be the last guy standing without a chair," Albright said.
Albright said his company typically wins a small number of very large deals each year, a model that will be challenged as credit lines shrink.
"This effectively puts the kibosh on us doing big deals. I don't know what we'll do if we come up with another $1 million opportunity," Albright said. "It was quite shocking. The whole plan from IBM Global Financing was to be in the SMB market. Yet they're killing the very guys that have access to those kinds of clients."
As the credit availability for the channel from the big, traditional lenders becomes more restrictive, more solution providers are turning to smaller, alternative funding sources to ensure that customers can finance their IT purchases.
In many cases, lesser-known lenders can be more nimble and provide value that larger players cannot, solution providers said. Companies like Direct Capital Corp., Tygris Vendor Finance and Falcon Leasing are actively looking for VARs' business, said executives at those companies.
Finding a reliable financing company that understands the channel is more important than ever, VARs said, and those lenders are finding unique ways to attract solution providers. Direct Capital, for example, will pass leads on to VARs in order to finance the deals.
Tim Howard, president of RMON Networks, a Danville, N.H.-based solution provider, said he has received six to eight leads from Direct Capital since the program was launched late last year.
"It's a lukewarm-to-cold lead, but, hey, that's great. No one else is doing that. We'll take them all, especially in this environment," Howard said.