Actor Will Rogers once said, "It's not so much the return on my money that concerns me as much as the return of my money." How poignant for today’s market.
I’ve talked with a number IT channel partners and vendors over the last two weeks about what the Wall Street mess means for the IT industry—at least for the next two quarters. The key concern for the channel is about access to credit, while the key issue for vendors is will the channel remain financially viable.
Nearly every morning in the pre-dawn hours, I walk my two dogs. One guy that I see nearly every day is a commercial banking executive. I asked last week what may be happening with commercial credit and after an hour long chat, he strongly recommended getting access to as much cash possible and as quickly as possible, including drawing on credit lines, because credit has tightened dramatically over the last three weeks and he expects a significant credit freeze for the next six to nine months, including cancelation of credit lines as banks retreat to risk adverse lending practices. This view was echoed by a top guy in the IT finance world who said there is a fear if banks freeze credit in the commercial market, it could have an impact on the IT industry.
Pretty dramatic statements, but given the stock market melt-down and US banking woes, which have spread to Europe, you may need to stop and smell the ‘greenbacks’ in the bank.
We have returned to a market where cash is king. For most resellers and distributors who live on razor thin margins, cash is always important, but in today’s market, this is the beginning of a new market where you must re-evaluate your business model from a financial perspective. In other words, if you are not getting back as much as it costs you to get capital, you have no choice but to immediately change your business model—and fast.
Yes, we’ve all heard about this before, but what I’m hearing from a handful of channel partners is credit lines are being frozen. Some partners thought they had credit lines available for use, but when one tried to use it last week, he learned a hard lesson that there is a difference between a “committed credit line” and a discretionary or signature credit facility.
So, what can or should you do? Diversify your credit sources—and fast.
There are four key sources of credit, but most channel partners are not diversified or diversified enough. These are:
- IT Vendors (manufacturers, software publishers): One of the most untapped sources of liquidity in the IT channel is IT vendors. Most have been reluctant to offer credit directly to channel partners—for obvious reasons. But, the savvy move is for vendors to partner with an expert finance company, like GE Commercial Distribution Finance, to support credit to the channel and control risk. So, you may need to re-evaluate the vendors you sell in order to tap into supported credit offerings.
- Distributors: one of the primary sources of channel liquidity. Each distributor offers some vendor-support credit programs, as well as some open account terms. Distributors are a great resource, so working with a distributor to include products in your purchases that come with financial support may bring a couple of profit points into your deal.
- Committed bank credit lines: traditional credit lines, but make certain you read the fine print to ensure you are operating within the “covenants” of the agreement regarding your balance sheet strength, DSOs, inventory levels, and so forth. In other words, now is not the time to give your banker the opportunity to close or reduce your bank line.
- Discretionary credit facilities: this is similar to the consumer equivalent of a HELOC. If you read the smallest fine print, most banks can decline a draw on the credit line for any reason, at any time. For many channel partners, these are the typical bank credit line, so don’t count on this line in a bear market unless you want to immediately draw on the line and sit on the cash—which I do not advocate because of the potential risks.
That said, a key benefit of drawing in the credit line is that the money is there and available for use. But you have to protect it to ensure you won’t lose it. In other words, the stock market is not the place for safe keeping! The negative is you have to pay for any borrowed money now, even if you don’t need it now. And, a big draw on a credit line could trigger your bank to descend on your business to review your financials.
How much of your credit should come from each source? For my money, I’d say:
- IT Vendors (manufacturers, software publishers): 40% to 60%
- Distributors: 30% to 60%
- Committed bank credit lines: 25% to 50%
- Discretionary credit facilities: less than 10%
Finally, it’s worth repeating—cash is king. Now is the time to:
- Keep your eye on your balance sheet
- Ensure you are getting paid within your credit terms—and making payments within your credit terms
- Continually monitor and manage your financial exposure to your customers
- Confirm your inventory is in check
- Diversify credit sources and research availability of supported credit programs each and every time you are ready to bid a deal or purchase through a distributor. Brand shifting may not be your gig, but if it comes with financing, it may be critical to your survival
In other words, back to basics with traditional ‘blocking and tackling.’
And remember, IT vendors have a big financial stake in the channel selling their products, so it is time that they open their wallet to support sales.