Credit Crunch Hits The Channel

Hard Times For Hardware
Romi Randhawa, president and CEO of HPM Networks, a solution provider in Fremont, Calif., said he expects lending institutions to tighten up their lending practices in the wake of the financial debacle, especially to those VARs that sell a lot of hardware. "Banks will be pressured to show more profits and less defaults," he said. "We are concerned because we are a privately held company and usually don't show a lot of profit and banks are going to now want us to do that so they can give us more credit lines. The hardware business that we're in is cash-intensive. The services augment our portfolio but not to the point that we are living off of services."

He noted that clients will also face the same credit crunch, and that leasing and finance companies will look differently at customers' credit worthiness when financing IT purchases. "I'm sure that we are going to get into those situations," he said. "They aren't there today, but when the dust settles down, this is going to affect small and midsize businesses."

He added that during the past 90 days he has been closely scrutinizing the credit worthiness of new clients. "That's where we get helped by [Hewlett-Packard Co.'s] agent program," he said. "If we don't feel comfortable with a client, we'll have them issue the [purchase order] to HP and let HP make the decision if they want to float credit or not. We use the agent model to minimize risk."

Despite his concerns, he said that "IT is still holding up—we had a soft Q3 but we expect to have a huge Q4."

He noted particular strength in blade servers, storage, virtualization and consolidation. "Hopefully, come January, we'll say 2008 was a tough year, but it will get better [in 2009]," he said.

Partner Support
Adrian Jones, HP's vice president and general manager, Americas Solution Partners Organization, said HP is ready to provide more financial support to distributors to bolster solution provider credit lines if needed. The vendor primarily relies on its distribution partners to extend credit to its smaller U.S. solution providers, he noted. HP helps fund those credit lines through its Channel Cap program, which provides capital to its largest distribution partners so that they, in turn, can extend credit to solution providers.

"We have been talking with our HP Financial Services people about should we do anything to enhance that to help and support our partners in the market and we are looking at how we can do that," Jones said. "We haven't done anything to change [the program] at this point but we are not looking at reducing that. We're looking at how we can enhance that to help our tier- two partners."

Simon Palmer, president of System Technology Associates Inc., a Tustin, Calif., solution provider, noted that his company finances its operations organically with its own cash. "There are times when that's questionable; there are times when that's a good decision. I'm hoping this is one of those times when it's a good decision," he said.

Palmer noted that he's seen no slowdown in business related to the credit crunch. "But I have a big question mark on Q4," he said. "I think people are going to hang on to their money to see this thing through and see what is going to happen.

"If you have a decent balance sheet and a decent business and a demonstrated history and a business plan for the future, [banks] are going to lend you the money," he said. "We have been through five years of a little bit of false prosperity. Some people who had marginal skills were doing really, really well and maybe those are the people who are suffering now."

Mark Singh, president of Abacus Computers Inc., a Midland, Texas, solution provider, said he too has seen several projects that he expected to go through put on hold in the past few weeks. "Nobody has told us [that they can't get financing], but I suspect that some deals are being slowed down right now," he said. "Some projects that we expected to go through just aren't going. I think the credit crunch is slowing down some business."

Next: Distributors To VARs: Don't Worry About Credit Lines