Solution Providers Face the Cost of Doing Business
The federal reserve has stopped raising interest rates, but for solution providers borrowing money is still a risk.Even though the federal reserve has stopped raising interest rates, at least for the time being, borrowing money is still a costly proposition. For solution providers, which work on ever-tightening profit margins, higher interest rates can deal a harsh blow to an organization’s bottom line.
Interest rates affect everything from financing inventory to the ability of customers to purchase solutions, so any uptick in rates can be detrimental to a solution provider’s economic health.
Luckily, solution providers can leverage the generally larger bank accounts and credit lines of the multimillion- or billion-dollar organizations with which they do business, and those include the finance divisions of such giant vendors as IBM and Hewlett-Packard, as well as distributors such as Ingram Micro, Tech Data and Synnex. “A lot of vendors are really pushing their financing programs. As much as it is for interest rates, it is also about spreading payments and getting people over the hurdle,” said Skip Tappen, vice president and general manager of managed services at NWN (previously Netivity Solutions), in Waltham, Mass. One popular financial resource available to solution providers is inventory financing or floor planning, whereby a distributor or other finance group does not receive payment on product for 30, 60 or 90 days. This gives the VAR the opportunity to collect payment from its client before shelling out money to a distributor or vendor. “That gives business partners a significant amount of working capital to run their business,” Callies said, noting that in the first half of the year, IBM’s Global Financing group grew about 15 percent versus the same period in 2005. Solution providers also can leverage their clients’ credit by tapping into accounts receivable financing. In this case, the customer is directly billed: The cost of the product goes to the distributor or finance company, with the balance, which constitutes the profit margin, going to the channel company. “The fastest growing business for us is financing to end users, followed by the inventory financing and accounts receivable financing,” said Callies.
Leaping for Leasing
As interest rates rose in the last three years, leasing, a financing option that had not had much traction in the channel, started to become more popular. Enterprises and the solution providers that serve them as their IT trusted advisers have been embracing leasing as a cost-effective option, said Peter DiMarco, general manager of sales at Ingram Micro, in Santa Ana, Calif. “When you look at rising interest rates, there’s more strain from a working capital standpoint,” said DiMarco. If there is more pressure in the future as a result of further interest rate hikes, he added, businesses will want to make their costs as predictable as possible. For this reason, distributors such as Ingram Micro have invested heavily in educating their channel customers about leasing, DiMarco said. “We think there’s an opportunity to aggregate leasing. VARs who select partners today have to understand leasing because it will enable them to be competitive. The majority of high-value, high-impact VARs have leased a transaction in the past [and] a strong portion have a leasing portfolio in their business.” Next Page: The power of leasing.