As we entered the recession, the IT channel was optimistic that access to credit and financing wouldn’t be a barrier to IT investment. However, now that we’re in the eye of the storm, the barriers are looking more daunting than expected.
A survey by research firm IDC of 43 US-based channel partners with an average of 1,000 employees shows a major disconnect between the financing requirements of clients, and what channel partners have the ability to offer them.
According to the survey, 64 per cent of large channel partners said their customers are more interested in IT financing and leasing programs than they were just six months ago. Some 11 per cent of partners reported they don’t have the access to capital they need to continue business as usual.
The situation is particularly acute for smaller resellers. Some 20 per cent of smaller resellers, defined as those with less than US$5 million in annual revenue, said they had inadequate access to capital. Nearly half of partners said they were having trouble getting customers financed in this economy, and amongst smaller partners that number rises to 73 per cent.
Joseph Pucciarelli, program director, technology management and financing strategies with IDC, said he believes vendors understand the need for and importance of financing, but they’re constrained by the same tightening of credit terms that customers and partners are facing.
“Maybe 18 months ago there was a certain level of underwriting criteria but that criteria has changed for everybody, not just the channel,” said Pucciarelli. “Transactions that would have been readily completed 18 months ago aren’t going to be readily completed today.”
Since the beginning of the year, Pucciarelli said most IT organizations have moved to a “just in time” buying model, where they’re buying exactly what they need and at the last possible moment.
Those that will get squeezed the most, said Pucciarelli, are partners with a business track record of less than three to four years, and those lacking liquid assets. He advises VARs to fall back on business fundamentals, and really examine their customer bases.
“There are customers that have been longstanding partners that have been the bedrock you’ve built your business on. This is an opportunity to focus on those relationships,” said Pucciarelli. “Gather key vendor relationships as well. Focus on the ones that are really important and ensure they’re executed with really high levels of competence. If that means narrowing some of your other work that’s not so bad. It’s focusing on what you do well.”
The results of the IDC survey ring true with Greg Tobin, general manager of distributor D&H Canada. And while the survey largely focused on larger VARs, for the smaller partners – D&H’s primary focus – the credit challenge is even more acute.
“It’s challenging to get credit in the market as a distributor channel in Canada and the US, as credit insurers are resetting their policies to reflect a riskier environment,” said Tobin. “The smaller lines of credit are readily available but there’s far greater scrutiny on the mid-sized and large ones, and it’s getting higher.”
Even on lines of credit as low as $50,000, Tobin said the scrutiny is increasing sharply. And it’s not that hard for a VAR to go through as much as $200,000 of consumption in a 30-day period.
In response, Tobin said some resellers have been looking to diversify where they make their purchases, spreading-out their buys to ensure they can access the credit they require to do business. He added there’s also been evidence of deals falling through because of an inability to access credit.
“We want to look at this. In the U.S., D&H initiated a credit assurance program in partnership with the vendors. The captive finance units of each of the major vendors are looking at this, and taking steps to ensure they can facilitate the business,” said Tobin. “Vendors are considering underwriting more of the risk, and we’ll be looking at that in Canada too.”
No one wants to take risks in this economic climate, said Tobin. The key to D&H’s approach will be proper due diligence, taking the time to really understand the reseller’s business.
Ingram Micro Canada general manager Mark Snider echoes the need to get closer to resellers to learn the true strength of their business, but he’s a bit less pessimistic about the overall credit picture.
“Across our reseller base we have more credit than ever in our history,” said Snider. “We have a strong credit organization that is really one of our differentiators with other distributors. We make personal credit calls and take the time to understand VARs’ personal credit situations.”
Snider said taking that personal, hands-on approach has allowed Ingram to actually raise a lot of credit lines recently. Many VARs are stronger than their balance sheets would indicate, because Ingram doesn’t base its evaluation on direct purchases alone, but also overall VAR health.
An issue lately though, said Snider, has been the seeking of longer terms, as customers begin to string out resellers for longer terms.
“That’s where we’re starting to see some problems,” said Snider. “But on total access to credit, I don’t think we’ve seen as much tightening as we would have thought.”
