Ask solution providers about their credit situations and some may chuckle. It's not that they find credit a humorous matter. They just don't know how to answer.
Quite simply, financing customer orders has become a problem.
Distributor consolidation has shortened the list of credit resources, and flooring companies,lenders specializing in financing inventory,have become leery of opening their wallets for IT companies, industry executives say.
What's more, as solution providers have upped the percentage of their businesses devoted to services, they've trimmed the product volumes they need to warrant larger credit lines and qualify for certain financing programs.
 Chemung Computer's Michael Semel says it's becoming too expensive to finance deals. |
The result: Hundreds of millions of dollars in credit are no longer flowing through the channel. And the situation is making it tougher for some solution providers to close deals.
"It's getting harder and harder to do business," says Marie Graziano, CEO of Computer Consulting Services, Carrollton, Texas. Recently, Computer Consulting Services nearly lost a six-figure project because it didn't have enough credit with its primary supplier, Graziano says. She saved the deal by combining three different credit resources,a time-consuming and expensive practice, she adds.
Solution providers finance most of their business through four different types of credit sources: distributors, manufacturers, flooring companies and local banks. The mix of lending sources can vary greatly, depending on geography and the size of the solution provider and the order, executives say.
In many cases, it's not so hard to find credit,it's just hard to find affordable credit, solution providers say. Distributors and flooring companies insist they are raising credit lines and have plenty of credit available. But some solution providers, citing their already paper-thin margins, say money often is too expensive to borrow.
"It's not harder to finance deals, but it is more expensive," says Chemung's Semel. "What's really frustrating is the amount of fees that have been added. On paper, it looks like a good deal with the interest rate. But there are so many transaction fees that it cuts into profit."
Semel's story resonates with other solution providers. "It's getting harder to establish or maintain accounts with manufacturers or small distributors," says Guthrie Chamberlain, president and CEO of Eagle Technologies Group, Marietta, Ohio. "They're going through the same pinches we are. There are no margins on what they sell to us, too. Financing terms are cutting into bare minimums."
Adds John Eckhoff, business consultant at Venture Computer Systems, Rochester, Minn.: "I can finance any deal, but sometimes it takes a while to put a package together."
Banks are nervous about lending to small solution providers, Eckhoff says. "I had to change banks," he explains. "I wanted to extend my business, but Wells Fargo didn't want to do more debt on that category. Our industry is not attractive to large banks right now."
Many solution providers tap flooring companies to finance deals that would exceed their credit limits with distributors. But some of the four largest flooring companies,which include Finova, IBM Credit, Transamerica and Deutsche Financial Services,have had financial troubles.
Finova wrote off a $70 million loan from an unnamed computer distributor earlier this year and has been for sale since May. Transamerica and Deutsche Financial Services recently came off the selling block. Another flooring company, Bank of America, couldn't find a buyer and exited the market, says Lino Martin, senior vice president and North American treasurer at Ingram Micro. Banks also are tightening credit standards at the request of the Federal Reserve Board, Martin says.
Chemung Computer's primary financing company, Deutsche Financial Services, changed its terms on short notice, Semel says. "Deutsche has a 45-day surf program, but they should call it the 'sink or swim' program," he says. "We were not given a choice. We were given a take-it-or-leave-it plan that we had to sign, or [we'd] lose all our financing in a short period of time. They basically told us, 'If you don't like it, find someone else.' "
Deutsche offers small solution providers a net 30-day payment program with no administrative costs and a 45-day program with administrative costs, says Mike Marcolina, vice president of national marketing at the finance company. "We're trying to be more flexible because we see the small solution provider market as crucial to the IT industry, especially in their ability to provide services. It's no longer about inventory financing; it's about working capital for those guys," he says.
Ironically, the IT industry has created some of the flooring companies' problems, Ingram Micro's Martin says. "As major PC manufacturers become more efficient, it's sucking inventory out of the channel," he says. "PC manufacturers have changed their flooring plans, and they've stripped out a lot of financing revenue and margins from these financing companies."
And flooring companies are adapting to manufacturers' changes, says Bill Doscas, vice president of marketing and sales operations at IBM Global Financing. "As vendors decide how to change, we'll work through appropriate programs to finance the channel," he says. "That's the bottom line."
Distribution executives say they understand solution providers' plight and are taking action to lessen credit problems.
Tech Data, for instance, recently raised the credit limit of 39,000 small and midsize accounts, says Tim Curran, senior vice president of sales at the distributor.
"There's no doubt the credit crunch is an issue to the channel," Curran says. "The loss of some of these channel distributors does put a credit constraint in the marketplace."
Solution providers chide distributors for not reacting quickly enough to boost credit lines. But distribution executives say they must be fiscally responsible themselves. "[Solution providers] need to understand that we can't be their bank for them and assume risks," says Wade Bruce, director of credit at ScanSource, a Greenville, S.C.-based distributor of point-of-sale products.
"Say a small company has $50,000 in net worth," Bruce explains. "We may give them a $50,000 line [of credit], and they may get that from multiple distributors. But when there are fewer distributors, we can't just give you twice as much credit, because it might not make financial sense for us."
Distributors offer free consulting services and business development seminars, which often are standing-room-only. But those services reach only a fraction of solution providers, executives say. Ingram Micro, for example, offers its Ingram Financial Services unit as a free consulting resource for solution providers in the small- and midsize-business market, Martin says.
Some distributors offer better terms for quick payment. Ingram Micro, for one, gives solution providers a point if they pay within 10 days, Venture Computer Systems' Eckhoff says. The problem is getting customers to pay within that time frame. "Customers who buy large-priced items want 45 to 60 days to pay me. It's the float between the 10 days and the 45 to 60 days that I have to finance other than through a distributor," Eckhoff says. "We have a line of credit with our local bank, and we've applied to just about every manufacturer's flooring line."
Besides finding their own credit, solution providers face tough decisions as credit providers to customers, says Computer Consulting Services' Graziano, who recently had an unpleasant exchange with a longtime customer. The customer owed $15,000 for a couple of months, and attempts to collect partial payments weren't successful, Graziano says. So she left a friendly message saying that she needed the $15,000 because "the big boys [distributors] I've got to deal with are crunching, and I don't want them to cut my credit line."
Several days later, Graziano got an envelope with a check for $3,000 and a phone call from the customer. He didn't have the other $12,000 to send. "I said I was surprised and that I really need the $12,000 because my distributors are getting tougher," Graziano says. "I said I didn't charge them a deposit, but I probably would have to start charging that."
The customer said he would go to another solution provider and asked Graziano if she still wanted him as a customer. "After I hung up, I thought about it," she says. "He's right. Why do I want to keep someone like that as an account?"
Eckhoff says he writes off profits every month from customers who make late payments. "If it takes two months, I've lost two points," he says. "Some might argue that with 8 percent margins, a net of 6 [percent] is not worth doing. But we feel we enhance the relationship with the vendor."
"I know smaller solution providers are really struggling," Eckhoff adds. "A lot have gone out of business with Ingram Micro and Tech Data holding large receivables. That also makes it difficult for good resellers to get credit."
With an unstable IT economy, the situation could get worse, some industry executives say.
"It's very uneasy in the business economy today," Graziano says. "There's a whole lot more of 'I want something for nothing' than I've ever seen. But you keep going, because you do feel responsible and don't want to put employees out on the street and don't want to let customers down."
