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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.