Credit, Money Strategy: IT Solution Providers Navigate Tight Financing MarketBy Alison Diana | Posted 2011-09-07 Email Print
Small businesses including IT solution providers have found it tougher to get the money and credit they need to operate their businesses, especially if they've moved entirely to services. Here's a look at the state of financing for VARs and MSPs.
The indirect channel’s ongoing embrace of services and move away from warehousing physical products, coupled with downward pressures on the overall economy, have made it increasingly challenging for solution providers to get loan-approval from banks and other traditional money-lenders.
"We are in a fairly esoteric biz and we sell an intangible product. There’s nothing physically shipped," Jim Kurtowicz, CEO of three-year-old Serac Technologies, which provides Oracle services, told Channel Insider. "Our bank is a large, national bank. We went to and talked to some of the smaller banks, which was the suggestion of our bank when we initially began looking at getting a business loan from them. At that point, when we were first looking at those options, we got a similar message: 'Look, you guys don’t have enough business history.’ I was very naïve, when founding the company, in thinking we could get a loan because I have good personal credit."
Unlike retailers which purchase inventory, mark it up and hope to resell it at a profit, a growing number of VARs do not sell any hardware or software. If they do offer product, these items more typically arrive directly at the client’s door. Instead, solution providers’ focus on intangible services—including relatively new concepts such as cloud and virtualization—can make a local loan officer’s head spin in confusion.
That lack of understanding about solution providers’ business, the risks associated with funding any start-up, and a conservative lending market have proven challenging for many new channel businesses hoping to garner funding from local or national banks.
Despite a well-established relationship with the local branch of this national bank, Kurtowicz was unable to secure financing from the institution for the solution provider he planned to found soon after being laid-off from his full-time position at a software firm. Unlike some areas, which are no longer served by small local banks, he did have access to this option. However, like their larger counterparts, local loan officers were equally unwilling to provide unsecured funds to a new company with no financial history, said Kurtowicz.
"We went into the bank and said, "Hey we’re here, give us some money.’ We were met with the reality of, 'If you make it through first two years and you can show you’re profitable and if the economic outlook looks positive, we might consider it,’" recalled Kurtowicz.
Well-established solution providers continue to find funding from traditional sources, despite the poor economy, said Jolea Kidd, vice president of credit and collections for Avnet Technology Solutions, Americas.
"In working closely with solution providers on financing, Avnet Technology Solutions has found that the ability for larger solution providers with stable balance sheets to obtain financing from traditional credit sources has not changed significantly over the past year," she said. "However, Avnet Technology Solutions has noticed that larger banks have become much more selective in providing financing for smaller solution providers with small balance sheets, even if they have strong credit ratings and are in good financial condition for their size. These smaller solution providers aren't capturing the attention of the larger banks, so they are turning to the community banks. While the community banks welcome solution providers with this profile, they are also being a bit more selective than they were a year ago."