VARs: Alternative Credit Sources Offer More Value During Downturn

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, especially after Textron Vendor Finance decided to close its IT channel credit and IBM Global Financing cut its Flexible Credit program and made a leasing program restricted to only IBM (and some complementary) products.

The moves have led many solution providers to seek alternative sources to finance deals. Financing deals, as opposed to having customers pay in cash up front or on net 30-day terms, has become more popular as the economy has worsened, according to solution providers.

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.

For example, at least one lender is looking to bring more leads to VARs. Direct Capital Corp. has a business-to-business division that provides financing or capital to small businesses. Part of the conversation with those customers involves finding IT purchasing opportunities that can be passed on to VARs that use the company for financing/leasing business, according to the Portsmouth, N.H.-based company.

"[End users] may need to buy a new mainframe or a network upgrade. The first question we ask is, 'Do you have a vendor or a VAR lined up? Would you like to hear from someone locally or nationally?' A lot of times they say, 'Yes,'" said Paul Ringet, vice president of vendor relations and sales at Direct Capital. "We position that as a value-add to our B2B business. It's pretty unique in our industry, and it's good PR with our VAR/vendor folks."

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.

"There's still some things to iron out with that. 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.

Alternative funding sources like Direct Capital also differ from traditional vendor financing program by handling all the paperwork, Howard said.

"We'll introduce the client, but they take it from A to Z. With [Hewlett-Packard] or Microsoft, they send the legal documents to you and you have to e-mail or print, or send someone over to the client. It takes you out of running your business, if you will. We're focused on technology and solutions; now we're a finance agent," Howard said. "I don't want to know the doctor's EIN or Social Security number or how much he's approved for. I want to offer a good solution to the client, get paid for it and not be a middle man."

Direct Capital has been in business 15 years, starting as a traditional broker and evolving into a direct lender in 2001. The company focuses on opportunities, from a few thousand dollars up to hundreds of thousands of dollars, Ringet said.

Direct Capital offers leases up to 60 months, but more popular lately has been short-term financing of eight to 12 months for smaller-ticket projects, said Sean Hilliard, lead finance manager for the company.

"There's been an upsurge in demand predominantly for those people who are entrenching a little bit. They're spending shorter dollars than usual, and don't want a long-term payment," Sean Hilliard said.

While there's always a seasonal bump at the end of a year, as companies try to get expenses on or off their books, Ringet said Direct Capital has seen a bigger bump than he expected.

Smaller lending companies can be more nimble, relationship-driven and have deeper knowledge of the sector that allows them to be more flexible when evaluating creditworthiness of customers, said R.J. Grimshaw, general manager of the technology leasing group for Tygris Vendor Finance, Parsippany, N.J. Tygris Vendor Finance was born after Tygris Commerical Finance Group acquired the former US Express Leasing (USXL) in May 2008. The company saw a 45 percent increase in financing applications through VARs in December, compared with November, Grimshaw said. Some of that is a seasonal spike, but Grimshaw said much of it could be attributable to VARs looking for alternative credit sources.

"What we're seeing in the market, and what's creating opportunities for us, is the relationship cycle with VARs is changing. If a VAR has a payment solution as part of total solution, they're nervous due to so many [financing] players exiting the market. VARs haven't looked to alternative players in the past."

While much of the increase is coming from smaller VARs, large VARs are also looking for secondary funding sources, Grimshaw said.

"You're always going to hear from smaller guys because of cash flow [concerns], but where we're seeing an increase is the largest VARs who have a captive [vendor] partner for financing. They want to say we're not tied to that manufacturer. They don't want to have an OEM tell them where their promotions are. In that situation, the vendor has more control," he said.

Another alternative lender, Falcon Leasing, has found a niche with VARs by focusing on financing software and small-scale IT purchases, said Rob Aldridge, regional sales manager at Falcon Leasing.

Owned by Falcon National Bank in Minnesota, Falcon Leasing has been in business for five years. "In the world of leasing, all companies have specialties: by the size of transaction, credit quality. We determined this was an area we were comfortable with. As it turns out, a lot of people are getting out of that or are focusing on a more captive group," Aldridge said.

Falcon Leasing focuses on leases from $10,000 to $250,000, according to Aldridge. The company offers a "10 Plus 12" plan, which requires a 10 percent payment up front and 12 monthly payments. It helps customers finance projects beyond typical financing plans of 60 days to 90 days, he said.

"Instead of front loading, say every February for $100,000 in licenses and maintenance renewals, they can make the payments over a period of time," he said.

In addition, Falcon Leasing offers leases of 36 months to 60 months, which have become more popular during the economic crisis, Aldridge said.

"It seems to be driven by the [end] customer side. It also depends on the VAR. If they have annual software licensing fees and maintenance fees, that may be the 10 Plus 12 program," he said. "But if it's a solution set, where you're putting in new servers and doing a lot where the useful life of a solution is three years plus, they tend to look at extending payment terms of a longer period of time."

Because the equipment is often obsolete at the end of, say, a 60-month lease, lenders often sell the equipment to the end user at the end of the lease for $1. "For most customers, it's better to own it at the end to take the tax benefits, and those are only going to get better under the current stimulus plan," Aldridge said.

Falcon Leasing bundles hardware, software, services and warranties into a long-term lease and also has a no-payment for 90 days option too, he said.

"Hopefully they are implementing technology to save money and hopefully the solution gives them better operating efficiencies before the first payment kicks in," Aldridge said. "Sometimes people don't have any more allocation in this quarter, or they're trying to get to the next fiscal year before making a payment."

Falcon Leasing also allows VARs to generate custom proposals by setting up password-protected sites with a VAR's logo that can help solution providers put together a quote quickly, Aldridge said.

Bruce Hagberg, president/owner of RTE, a Waite Park, Minn.-based solution provider, said Falcon Leasing's ability to lease software solutions has helped his company.

"They have a very nice and creative way of putting together programs that make it attractive to go after the accounts that we're approaching. I sell ERP. I don't do hardware, I don't do financing, but I can take it to them," Hagberg said. "The feedback from customers has also been favorable. Two of them went back for second financing through Falcon for different things."

How to finance deals has been a more important conversation in navigating through this economy, Haberg said.

"The stimulus package, nobody knows what that's going to mean. My concern is if credit is not available, end users continue to delay critical investments that need to be made for companies to stay competitive and to take advantage when the economy does rebound," he said.

Editor's note: Do you have an alternative credit source or a unique way to get projects financed? If you're a VAR and wish to share your story, e-mail scampbell@everythingchannel.com

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