How to Protect Your Business During the Credit Crunch

While small businesses across the country start to feel the credit crunch caused by the ongoing financial crisis, the squeeze has yet to affect the IT channel.

To ease the crunch, which is making it difficult for some companies to finance their operations, the Federal Reserve reportedly is considering a plan to buy unsecured short-term debt those companies tap into through lenders for day-to-day activities.

According to channel lenders, the ongoing crisis so far has spared solution providers, who still have access to financing from distributors and lenders. As of this morning, there were “no observable changes in credit as we know it,” according to Scott Tillesen, director of credit at distributor Tech Data, Clearwater, Fla. “It’s been pretty much business as usual.”

But that doesn’t mean solution providers shouldn’t take precautions to keep their businesses on solid footing.

Tillesen says just as distributors have taken great pains to keep sound financing practices, the solution providers that buy products and get financing must do the same with their own customers, the end users.

Solution providers, he says, should take some other steps to protect their businesses.

To start with, Tillesen says, solution providers should push customers for pre-payments. Explain to the buyer why it makes sense to pay in advance for a portion of a hardware or software purchase, he says.

“It helps customers not only to reduce their risk, but also to improve their balance sheets,” Tillesen says.

Discussing pre-payments is a good starting point to negotiate a sale, he says, but typically solution providers don’t even broach the subject. Tillesen believes that’s because they either haven’t thought of it or they fear that suggesting payments in advance will scare the customer away.

In addition to pushing for pre-payments, Tillesen says, now is a good time for solution providers to evaluate their spending. They should take a close look at overhead and staffing to make sure those costs are in line with profits.

On overhead, he says, solution providers should evaluate whether, for instance, they can do without an office in a certain geographic location. If the customers reached through that location can be serviced from another existing office, it might make sense to close it, he says. In some cases, using contract workers instead of staffing an office may be preferable.

And what about vertical markets? Solution providers should evaluate if the energy they are putting into reaching customers in certain markets is justified by the profits those customers generate, Tillesen says.

“This is not the environment for sitting and waiting to see if decisions they made [to target certain verticals] were the right ones,” he says.

On staffing, Tillesen says, business owners should evaluate their headcount and do the math: Does each staff member generate enough revenue to justify their continued employment?

Where it makes sense, solution providers ought to consider contract work as opposed to full-time staffing. In those cases, channel companies can turn to companies such as OnForce, which specializes in matching contract technical workers with solution providers.

Paul Nadjarian, OnForce senior vice president of marketing and product management, says the number of solution providers using the company’s service increased 30 percent from the first to the second quarter of 2008, and the number of contract technicians went up 35 percent. It’s an acceleration from previous quarters, which he attributes to the slowing economy.

Tech Data also offers temporary staffing service to solution providers, through its TDOnCall Staff Augmentation.

Tillesen says that solution providers who take the steps he proposes will increase their chances of weathering the current economic storm.

For its part, he says Tech Data has always been very cautious about extending credit, so the current crisis hasn’t necessitated any major changes in the distributor’s financing practices.

To make determinations on credit-worthiness, he says, the company looks at solution providers’ track records of paying other creditors, their banking relationships and certain patterns such as repeat business with existing customers.

Typical red flags, he says, include plunging into new technology or vertical markets without due diligence on the solution provider’s part.

“I don’t want to have the best collection staff in the world,” Tillesen says. “I want to have the best credit grantors in the world.”