IT Vendors Offer More Customer Financing to Boost Sales

By July 20, 2011Financing

While it may be tougher for IT solution providers to land business lines of credit themselves these days, financing for end-user company purchases of technology are readily available through a host of big vendors and their separate credit arms. Here’s a look at the state of financing in the channel.

 

Although, in the wake of the worst of the recession, solution providers’ access to bank funding continues to be limited, distributors and vendors are rolling out a plethora of financing and leasing options designed to fuel sales and ignite channel business.

 

Even at the economy’s high-points, traditional money-lenders did not always understand the service-oriented solution provider business model. With so much value tied to people, skills, and intellectual property instead of buildings, products, and machinery, banks were sometimes loath to lend-out large sums of money to growing channel businesses with healthy bottom lines that needed cash to feed further expansion.

 

Banks—having been burned by once apparently healthy businesses with plenty of bricks-and-mortar assets and huge stockpiles of inventory, often in the midst of sometimes forced acquisitions, and under increased government scrutiny— now have turned off the loan spigot for even long-time customers in good standing, according to industry observers.

 

In fact, 63 percent of those SMBs that applied for a business line of credit from a bank were denied, the Federal Reserve Bank of New York’s Community Affairs Office found when it conducted a Small-Business Finances Poll in June and July 2010. In February 2011, lenders approved 76 percent of capital spending credit applications, the highest level in at least two years, as credit standards eased, a study by the Equipment Leasing and Finance Association found, according to a report by Reuters.

“Despite signs of improvement, access to capital continues to be a hindrance to growth, innovation and job creation in America’s economic recovery.  As an association representing more than 2,500 members in the IT sector, mostly small and midsize companies, CompTIA knows that access to capital is vital to this crucial segment of the economy,” said Todd Thibodeaux, president and CEO of CompTIA, in a statement to the House Small Business Committee.

 

“What we’re seeing—and have been seeing for some time–is that it’s harder for solution providers to get bank financing in today’s economic climate. Generally speaking, our credit criteria and lending standards haven’t changed as a result of the economic climate. We have seen increased demand for alternative financing including end-user financing and more recently leasing, but the criteria and lending standards are the same as they were,” Kelly Carter, director of credit at Ingram Micro, said in an interview.

 

The Channel’s Varied Alternatives

 

Perhaps not surprisingly, solution providers may not even consider banks first. Indeed, 28 percent of all SMBs surveyed by CAN initially go to non-bank providers; 27 percent rely on their credit cards, CAN said.

 

Davenport Group, which specializes in Dell Compellent data center storage solutions, works with vendor partners and clients’ existing finance companies, Sonia St. Charles, CEO of the St. Paul, Minn.-based solution provider, toldChannel Insider.

 

“We encourage our customers to look at leasing, although some customers will not evaluate it,” she said. “We would definitely go through Dell Financial Services if there’s an opportunity. Probably less than 15 percent [of clients] come in with leasing in mind—unless they’ve had prior leasing experience. If we get to the CFO, we can sell leasing.”

 

After all, leasing allows businesses to write-off equipment as an operating, not a capital, expense, said St. Charles. Companies also are not locked-in to obsolete hardware at the end of the lease, do not have to retire hardware and software, and can refresh technology as desired, she noted.

 

“End-user financing has been a great option for solution providers who may have been hit by the economy,” said Ingram Micro’s Carter. “And presenting a leasing option to the end user can be a great value-add to bring to the sale that may help further differentiate one VAR from another.”

 

Understanding the Business Model

 

Solution providers can use both the range of available financing options and their funding partners as an additional differentiator, executives said. Because they understand the channel and its business model, vendors and distributors are well-positioned to fund both solution providers and their customers, executives said.

 

“We never changed that during the heart of the crisis and we continue that—if anything we’re accelerating that pace now. We’re one of the fortunate financing companies that wasn’t forced to pull back, to change our approach. We stayed close to our sweet spot. We know our partners well. We understand our clients well. That knowledge, that understanding, that prudence, allowed us to stay true to our course,” Tom Higgins, director of IBM Global Finance, told Channel Insider. “We are extremely focused on the partner route to market. We are very focused on financing small deals.”

 

This year, leading vendors such as Cisco, Dell, Hewlett-Packard, IBM, Lenovo, and others, along with distributors including Ingram Micro and Tech Data, have unveiled new and enhanced programs designed to help end-customers buy or lease products and services from partners. HP’s leasing program, for example, saw double-digit growth in lease volume during its most recent quarter.

 

Although some programs are associated with a vendor, this does not mean the services solely fund that company’s products.

 

“We’re in the business of financing hardware, software and services. We want to focus on IBM solutions and IBM partners’ solutions. [But] we recognize they’re going to come in the flavor of hardware, software and services. They’re going to come in the flavor of hardware and tablets,” said IBM Global Finance’s Higgins. “It clearly makes it simpler and faster. It’s one total solution, one check, one finance company.”

 

Financing as a Competitive Advantage

 

Solution providers should add finances to their portfolio of differentiators, industry executives said. By offering leasing, for example, customers may be able to afford more projects or a larger implementation. Low- or no-interest financing through a vendor or distributor is an attractive alternative to an end-customer’s generally higher-interest business line-of-credit.

 

For this reason, solution providers are wise to include financing early in the conversation, said Kirk Robinson, vice president of Ingram Micro, in an interview.

 

“Solution providers must understand or anticipate what the end-user is going to need – and that includes financing. Engage us early in the process so we can be ready to hit the ground running. In doing so, solution providers may also uncover some new services, resources or programs they weren’t aware of that could assist them in earning the business,” he said. “The biggest miss we see is when a solution provider doesn’t engage us early enough in the process.”