Tightening credit requirements squeee smaller VARs

As we entered the recession, the IT channel was optimistic that access to credit and financing wouldn't be a barrier to IT investment. However, now that we're in the eye of the storm, the barriers are looking more daunting than expected.

A survey by research firm IDC of 43 US-based channel partners with an average of 1,000 employees shows a major disconnect between the financing requirements of clients, and what channel partners have the ability to offer them.

According to the survey, 64 per cent of large channel partners said their customers are more interested in IT financing and leasing programs than they were just six months ago. Some 11 per cent of partners reported they don't have the access to capital they need to continue business as usual.

The situation is particularly acute for smaller resellers. Some 20 per cent of smaller resellers, defined as those with less than US$5 million in annual revenue, said they had inadequate access to capital. Nearly half of partners said they were having trouble getting customers financed in this economy, and amongst smaller partners that number rises to 73 per cent.

Joseph Pucciarelli, program director, technology management and financing strategies with IDC, said he believes vendors understand the need for and importance of financing, but they're constrained by the same tightening of credit terms that customers and partners are facing.

"Maybe 18 months ago there was a certain level of underwriting criteria but that criteria has changed for everybody, not just the channel," said Pucciarelli. "Transactions that would have been readily completed 18 months ago aren't going to be readily completed today."

Since the beginning of the year, Pucciarelli said most IT organizations have moved to a "just in time" buying model, where they're buying exactly what they need and at the last possible moment.

Those that will get squeezed the most, said Pucciarelli, are partners with a business track record of less than three to four years, and those lacking liquid assets. He advises VARs to fall back on business fundamentals, and really examine their customer bases.

"There are customers that have been longstanding partners that have been the bedrock you've built your business on. This is an opportunity to focus on those relationships," said Pucciarelli. "Gather key vendor relationships as well. Focus on the ones that are really important and ensure they're executed with really high levels of competence. If that means narrowing some of your other work that's not so bad. It's focusing on what you do well."

The results of the IDC survey ring true with Greg Tobin, general manager of distributor D&H Canada. And while the survey largely focused on larger VARs, for the smaller partners -- D&H's primary focus -- the credit challenge is even more acute.

"It's challenging to get credit in the market as a distributor channel in Canada and the US, as credit insurers are resetting their policies to reflect a riskier environment," said Tobin. "The smaller lines of credit are readily available but there's far greater scrutiny on the mid-sized and large ones, and it's getting higher."