Where Solution Providers Can Turn for Financing
by Tim Lowe – Director, Consulting
Channel financing issues can be at the core of a solution provider’s mobility or the reason why you keep hitting roadblocks. For solution providers in today’s economic environment, credit is no longer readily available. Several credit facilities that were options five years ago no longer exist today. Finding sources of short-term financing for large deals in particular is more challenging and more time-consuming than it was in the past.
But credit for solution providers is just as important in an up economy as in a down economy. My experience has been that if you don’t plan for success and line up avenues of credit before you need them, then you will limit your ability to prosper in any economy. If you plan on growing, it’s better to solve these issues before you need the credit.
So where can solution providers turn for financing? The fact is that vendors and distributors are places where solution providers can seek financing for their own businesses.
Distribution is the obvious choice for reseller financing because they’re considered to be the banks of the reseller industry. Broadline distributors have been extending lines of credits to resellers for a very long time. They are experienced and skilled at analyzing a reseller’s financials and helping them make good credit decisions. Distributors want to be very careful that they don’t have more invested in the reseller than the owners do. In today’s market, distribution is definitely the first place for a reseller to seek credit.
In fact, some solution providers may not be aware of the financing sources a distributor may offer. A little-known facility is called end-user financing. It speaks to the ability of broadline distributors to utilize the creditworthiness of the end-user for specific deal financing. Doing so is an exception that can be used for a deal that exceeds the reseller’s existing credit line on a one-time basis. If you’ve utilized your credit line and you have a deal that exceeds your ability to finance it through distribution, then distributors can use this facility to use the creditworthiness of the end-user. Because distributors often don’t advertise this end-user financing, you may have to do some research to see if it is a feasible option.
Financing Options for Changing Service Models
Many solution providers are shifting to a new service-based model. As they do so, they need to learn how to line up credit sources that are appropriate for this service model based on recurring revenue.
Consider a benefit of recurring revenue – that it builds – and how that affects the solution provider’s need for credit in the short- and long-term with regards to lining up credit sources.
Moving to a managed services model, like many of today’s cloud-based services are, actually reduces a need for as much credit financing. The reseller no longer has to finance the capital outlay (unless they are becoming a cloud service provider and building out that infrastructure). As a reseller of those services, they don’t require the same level of credit as if they were selling the infrastructure to the end-user. However, offerings like professional services and project services that are delivered by the solutions provider still require them to be able to pay staffing costs.
Particularly as solution providers make their model transition, they have to be able to keep up a lot of lingering and/or incoming expenses. They need to look to their short-term credit options to finance the transition to the new business model. They have to manage the cash flow and the overall change to the business model when moving from a traditional reseller of products and services to just a managed service reseller.
One thing that needs to remain from a vendor standpoint is to continue funding traditional long-payers such as public sector accounts. Doing so is essential, because end-users will continue to need those extended services that the vendor can provide.
Alternate Options for Vendors, Distributors and Solution Providers
Vendors and distributors have a strong focus on the end-user and making sure the end-user gets financing. However, it would be beneficial if they allotted the same resources in reseller financing programs as well. Credit is not one of the most exciting aspects of our business, but it IS fundamental to the business. If you can’t buy it, you can’t sell it. Distribution and vendors absolutely have to support the reseller model with any of their credit issues.
But if a distributor program doesn’t work, where can a solution provider turn to set up credit facilities?
One alternate option is certainly a bank. Business all have banking relationships, and the
bank they do their business with can offer a line of a credit based on their business relationship.
Private investors can be an option as well, but when investors holding even short-term credit in your business, they may like they have a participation in business decisions. That’s a further price to pay in addition to the financials of letting investors finance your business.
Even though finding sources of financing is more challenging and more time-consuming than it was in the past, strong credit solutions for solution providers are just as important as ever. Solution providers need to line up avenues of credit before they need them in order to grow in any economy. Whether you turn toward vendors and distributors, banks or private investors, the creation and maintenance of strong credit will be a true asset to your company.
To listen to my full podcast discussion on where solution providers can turn for financing, sponsored by VSR and Zebra Technologies, click here.