The Credit Conundrum

"The bank probably viewed us as a high risk," says Pontefract, principal of Boom Vang Consulting, a small e-business solution provider based in Portland, Ore. "We had only 60 days to pay everything back. We would have had to shut down or find family members to help us if we didn't find another bank."

Thankfully for Boom Vang, it did. But many of its competitors haven't been so fortunate.

Securing credit has always been difficult for VARs, working in a volatile industry fueled by high growth and small profit margins. And credit has grown increasingly scarce given the current economic downturn, with too much available equipment, shrinking IT budgets and weak pricing power-cutting into VARs' profits. As a result, many solution providers lack funds to complete transactions. Some can't pay their credit-card bills. Others have filed for bankruptcy.

"The economic slump has hit the technology sector more directly, and it will be the last to recover," says Avivah Litan, vice president and research director of financial services at Gartner. "Capital expenditure is at a negative right now. Instead of spending, companies are consolidating the equipment they already have, trying to make it work harder."

Dwindling Credit Lines

Increased competition from tech manufacturers has also contributed to the revenue decline. "It takes away the value of the middleman," Litan says. "That's the way the industry is headed, especially for commodities."

In addition, consolidation in the financial services industry is decreasing the supply of credit for VARs. For example, six months after the original bank canceled Boom Vang's line of credit, the bank merged with another financial-services company. That impending merger likely prompted the original bank to restructure its portfolio and eliminate Boom Vang, Pontefract says.

In other cases, solution providers may receive lines of

credit from two different banks. If those banks merge, the new, consolidated financial-services company is unlikely to issue a single, larger line of credit to the VAR that equals the two original amounts.

Another problem: Companies that have cash are squeezing out those who don't. Litan points out that Dell takes more than 70 days to pay suppliers, which is almost twice as long as competitors. As a result, suppliers are, in essence, financing Dell because it is able to keep cash for a longer time and use it to increase the growth of its own company.

"The last place you want your cash is with your customer," Litan says. "You want it working for you. [Solution providers are getting squeezed everywhere right now. Not only is spending drying up, but also distributors are taking them out of the intermediary position."

But solution providers can help those distributors and manufacturers that don't want the responsibility of logistics, such as shipping and customer support, in regional SMB markets. To keep them in the equation, both distributors and VARs have added new ways of financing transactions. In addition, smart companies are increasing or adding services to create additional revenue streams.

"It's survival of the fittest," says Lino Martin, vice president at technology distributor Ingram Micro. "The solution providers that have transformed their businesses to react to changes in the industry,offering the proper balance of product and services,will stay around."

Increasing Capital

Wondering what else you can do? Here are a half-dozen points and workarounds that can help improve your credit situation:

• Don't carry inventory,have distributors manage it. That way, if sales drop, you won't be stuck with excess products shrinking your profit margins.
• Traditionally, banks have financed VARs. Now some banks are financing the end user. The banks pay you on behalf of the customer, who then repays the bank. This is called short-term buyer financing. It works much like a credit card. As a result, you get paid quickly and can use that cash to make more deals.
• Distributors lend money to VARs based on the end-user's credit-worthiness, rather than the solution provider's. The distributor bills the end user and collects the money, then sends a commission check to you,and that allows you to make larger deals than existing credit lines would support. It also cuts back on your overhead because you're relying on the distributor's accounting department to do much of the back-end work, such as invoicing and collecting. This helps smaller VARs and start-ups to get on their feet, and midsize solution providers to enter new markets.
• "It gives us the ability to get any size opportunity, as long as the end user is a good company," says Bunty Lalchandani, president of Micro World, a Torrance, Calif.-based VAR that provides IT solutions to SMBs. But be warned: Some distributors reserve the right to take a 1 to 1.5 percent cut from the VAR's profit for financing the deal, Boom Vang's Pontefract says. "But if it is a huge deal, Ingram will likely let me keep that 1 percent," he says.
• VARs can win deals with end users by leasing equipment. Smaller, periodic payments will more easily fit into end users' budget constraints. Leasing also allows VARs and end users to keep current with the latest technology. "It turns the discussion away from prices and toward the value of the solution," Ingram Micro's Martin says. In some cases, VARs can add a leasing rate. "On a small deal, such an increase might just be a couple of bucks a month, and that's not visible."
• Flexible financing can close deals and persuade end users to pay sooner. For example, the first 30 days of financing could be free. But, thereafter, VARs could charge an interest rate on the minimum payment. This gives end users an incentive to pay within the first 30 days.
• Consider one of Pontefract's techniques. He offers discounts to end users that pay when they submit a purchase order. Then Boom Vang wires the money to its distributor the day the order is placed, enabling it to close a deal worth $200,000, even if it only has a $95,000 line of credit.
• "The various services that distributors are now offering are changing the equation," says Ellis Posner, CEO of TechprodX, a Los Angeles VAR specializing in emerging technologies in the security and management of content delivery. "They allow us to increase our credit lines, and that is a great competitive advantage." n
• Lisa Meyer ([email protected]) is a freelance writer based in Staten Island, N.Y.