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.
Fortunately for them, solution providers can counter high interest rates by taking advantage of creative programs designed to help grow their businesses while bypassing the costs of borrowing from local banks and lending institutions.
“Our costs are going up,” said Kevin McClung, owner of KPM Computer Solutions, a VAR in Winfield, Kan. “Everyone we talk to is taking a hit.”
Even though in recent months interest rates have stabilized, they have more than doubled in the last three years. The prime rate—that which banks charge their most creditworthy borrowers—was 8.25 percent on Nov. 1, 2006, compared with 7 percent one year earlier and 4 percent in 2003, according to MoneyCafe.com.
On Jan. 1 of this year, the prime rate was 7.25 percent versus 5.25 percent 12 months earlier, according to the financial portal.
“People are thinking twice about borrowing money today,” said Bruce Zanca, senior vice president and chief marketing/communications officer at Bankrate, a North Palm Beach, Fla., aggregator of financial rate information for consumers on more than 300 financial products, including credit cards; automobile loans; money market accounts; certificates of deposit; and checking, ATM and online banking fees.
For the IT channel, in particular, the effects of any increase in the cost of borrowing are immediate, say industry executives.
“For the reseller channel or business partner channel, an increase in interest rates is going to have an impact on all their business models because the cost they’re going to have to pay for working capital is going to increase. Many of these businesses, especially in the distribution area or those resellers that sell primarily online or on the phone, have very thin profit margins theyre running on,” said John Callies, general manager of IBM Global Financing, in White Plains, N.Y., who manages a portfolio of about $36 billion.
“As interest rates go up, clients buying equipment, software and services are going to be more challenged to figure out a more cost-effective way of paying for it,” said Callies.
Where the Bucks Are
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.”