Major Bank Crafts Custom MSP Financing

Introduced this year, Managed Service Solutions from National City Commercial Capital (NCCC), Cincinnati, Ohio, offer MSPs as way to use their customers' long-term managed services contracts as collateral for financing purchases such as hardware, said NCCC vice president Terry Karageorges.

NCCC presented its Managed Services Solutions Monday at the MSPAlliance 2006 Managed Services International Conference in Orlando, Fl.

A major hurdle for many solution providers becoming MSPs is the financial transformation from billing project-based work in one lump sum to longer-term payment plans at a smaller, fixed rate, said Karageorges. A reality for many MSPs is that if expensive hardware or software has to be added to a customer's network under the conditions of a managed services contract, MSPs who have to pay a distributor the cost of those products within a net 90 day timeframe may have to eat that cost until the incremental payments from the customer catch up, he said.

"The trend right now is for MSPs to provide products and services in one contract. The problem is the MSP is not getting the money up front to buy the needed equipment from the supplier," said Karageorges.

Kollet Walty, director of marketing at Heart Technologies, a solution provider in Peoria, Ill., who is just entering into the managed services business, was intrigued by NCCC's offering. "Managed services is where we are going right now," Walty said. "We see a good idea with (NCCC)."

With NCCC's Managed Services Solutions, MSPs can get NCCC to finance the cost of hardware and software sales in a way that keeps them in line with a customer's existing monthly services fee, said Karageorges.

Interest rates and credit lines are based on the customer, not the MSP, said Karageorges. If an MSP's customer is a publicly traded company, the customer's earnings statements are analyzed to determine interest rates of the NCCC services. If the customer is a smaller private company, NCCC looks at the MSP contract and the customer's credit, he said.

NCCC invoices the MSP's customer, and performs any necessary collections. NCCC can private label invoices to appear as if they are being cut by the MSP themselves. MSPs are paid by NCCC after it takes its cut, said Karageorges. NCCC is hardware and software independent, meaning they do not tell an MSP how or where to buy products, he said. If a MSP's customer defaults, NCCC repossesses and resells any products purchased and pays off the debt, reducing the risk to the MSP, he said.

Jim Swoyer, president of Data Device Inc., an MSP in Rollings Meadows, Ill., liked the thinking behind NCCC's Managed Services Solutions. Data Device has had great success over the last year expanding its MSP offering to more and more small physicians' offices, and has built an MSP offering for the medical field that is easily replicable at a low cost, said Swoyer. But product purchases like hardware can still be a sticking point for Data Device's customers, and a way to spread out costs, even if it means added interest, would be a good thing, he said.

"Physicians are very price conscious, and it's hard for me to tell them look this (hardware) is going to cost you $400,000. But if I can tell them it will cost them $4,000 a month, and they can add another (user) for $200 a month, that gives me flexibility and ultimately that is where I want to go with my model," Swoyer said.

Swoyer was not completely sold on NCCC's particular offering, however. He said Data Device —which does just under $1 million in revenue a year — may be better prepared to add creative financing like the Managed Service Solution once it expands its MSP customer base out to a point where the revenues are so strong that Data Devices overall MSP business — not the individual credit histories of its customers — becomes the basis of collateral for extended credit.

Distributors have said flexible financing and other options similar to NCCC's Managed Service Solutions are under development. But Joseph Heinzen, president of Convergence Solutions, a distributor in Centerville, Va., said distributors and vendors are reluctant to offer solution providers the financial means to flip their point-product buying behavior to an MSP model because that would mean fewer product sales.

"A big myth is that broadline distributors are going to embrace managed services as much as VARS are being led to believe," Heinzen said. "Why would a distributor want to help VARs be MSPs and get them to buy fewer boxes until (the distributors themselves) have to change their own business model?"

NCCC is the eight largest bank in the U.S, with $150 billion in assets and over $300 million in financing already invested in MSP, said Karageorges.