Third-Party Lenders IBM, De Lage Landen Cut Channel Credit

The credit squeeze is starting to have a direct impact on solution providers.

Third-party lenders IBM Global Financing and De Lage Landen Financial Services have discontinued credit programs for solution providers and there is concern that more cuts are forthcoming.

Within the last week, Jay Tipton, vice president of Technology Specialists, saw credit lines cut by both American Express and IBM, moves that forced him to scramble to find replacement lines. "It takes time away from selling for me to work on this," Tipton said. "I don't know what I'm going to do. That's what I have to figure out."

Tipton said he got a call from American Express last week informing him that his line, which approached $30,000, had been reduced to about $10,000. Technology Specialists used the line mostly to pay recurring bills, he said. "It got cut down to where things started bouncing," he said.

American Express told Tipton it was concerned that his monthly charges were too high. He said a slow summer caused him to delay a payment, but he had caught up by October. Calls to American Express were not returned.

Meanwhile, Tipton also received an e-mail from IBM saying the company was discontinuing its IBM Flexible Credit program effective Jan. 5, 2009.

"While the IBM Flexible Credit offering has provided opportunity to enhance our channel relationships and support resellers with credit capacity, the program has not met the business goals that we set for it," wrote Robert Flood, IBM's director of commercial financing, Americas, in the e-mail.

The e-mail invites Tipton to apply for a new credit facility under IBM's Inventory Management program. Calls to Flood were not returned.

"At least they gave us two months' notice," Tipton said. "Our numbers are drastically up with IBM. It's very interesting because if things keep up, there's not going to be any credit for small resellers."

Tipton estimated that his total credit capacity had been reduced by about 25 percent.

Meanwhile, Michael Bidwell, vice president of Know Problem Business Technologies, said a $25,000 credit line he had with De Lage Landen Financial Services through D&H Distributing was cut overnight last week.

"I ordered on Monday. I ordered on Tuesday. When I tried to order on Wednesday, they called to tell me it came back refused," Bidwell said.

Bidwell said he called both parties, who blamed each other over the ending of the program. "They point fingers at each other but they never sent an e-mail or placed a call to their dealers," Bidwell said.

It's likely that De Lage Landen pulled the program because it didn't make economic sense for the lender with so few customers utilizing it. Calls to De Lage Landen were not returned.

Next: D&H Offers VARs Advice On Assuring Credit Access

Clarification: De Lage Landen only cut the D&H program and continues to offer other SMB credit programs to solution providers. D&H's Flex Credit program with De Lage Landen was launched in June 2006 and targeted small solution providers who previously paid through credit card. Back in 2006, D&H expected that up to 3,000 solution providers might utilize the line, but there were only 29 active users in the program, according to Joe Chaudoin, director of credit and financial services at D&H.

"I'm a little disappointed that we did not get as much activity out of it, but a lot of these guys are cut-and-running on small customers. It's our bread and butter, but it's not really theirs," Chaudoin said.

D&H said it extended a net terms account to Know Problem, but Bidwell, like Tipton, has to spend time looking to secure another credit line. He is concerned that it will be difficult because he's a very small business (around $250,000 in annual sales).

"How many applications and fees will I incur trying to get financing? I'm up 47 percent [in sales] over last year, but who knows how this [cut] will affect me. You get a couple of credit cards at $5,000 each and it only goes so far," he said. "The biggest problem I have is giving one of my customers net 30 terms and they take 60 days to pay. It's tight everywhere, but I can only juggle it myself for so long."

Thus far, solution providers' credit issues seem to be contained to facilities through third-party companies like DLL and IBM. Those VARs that have credit facilities directly with distributors said those lines are stable. If it seems odd that most distributors are claiming they can increase credit lines, or at least keep them steady, through economic turmoil, it may have to do with how they've run their businesses the last few years.

For example, Westcon Group restructured its debt about 18 months ago to ensure that it would have the flexibility to work with solution providers that needed some credit help, said Chuck Thropp, CFO for the Americas, at Westcon Group.

"We made sure we cut a deal that allows us to have that flexibility. Because we have such strong relationships with our own banks, we have enough working capital to work with customers. If we didn't have those relationships and have strong working capital ourselves, we wouldn't have that flexibility," Thropp said.

Westcon Group has increased its own credit facility with VARs by $70 million over the last 12 months, Thropp said.

In other words, Westcon Group and other distributors haven't run their businesses like certain airlines or auto manufacturers. And that's good news for solution providers.

"I'm not sure the IT channel is any different when it comes to making credit decisions. We've had a pretty sound credit evaluation process in place," Thropp said. "We don't see the pulling of credit because of what's going on in the economy. We see it as these are our business partners. We're trying to work hard to make sure we get deals done."

However, most small VARs cannot rely on one distributor's credit line to finance purchases. The bad news is that it could get even harder to secure third-party credit.

"There is money to be borrowed and lent. But [VARs] can expect some of these third-party guys will tighten down, especially for the small dollars," Chaudoin said. His advice to VARs is to seek credit with a small number of lenders and ensure that you're a good customer to all. "You might do better by not having all your eggs in one basket, but not in a lot of baskets either," Chaudoin said. "Pick two or three good [companies]."