Turning the credit corner as funding improves

White: Funders are returning to the market

The extent to which the IT market relies on funding has been laid bare by the downturn. Sales in the sector were hit hard by both a lack of vendor financing and a fall in demand. We are now finding that the flow of funding is returning, indicating light at the end of the tunnel.

The drying up of liquidity within the financial markets, triggered by the onset of the credit crunch, led various funders to withdraw from the market and this has had a considerable impact on cash-strapped businesses no longer able to proceed with planned investment in IT and vendors that lost sales as a result.

Recent research by finance industry analyst firm Invigors on the vendor finance programme sector confirms what you have all suspected ­ that a lack of funding capability has had a major role in the fall in IT investment.

Invigors’ research suggests that 90 per cent of the market saw a decline in available funding, acceptances from lenders fell by almost 30 per cent, and 55 per cent of vendors could not close sales because they could not get finance.

Today, we are having increasing success in encouraging funders to return to the market, as well as drawing in new funders, and this will go some way towards helping to turn the tide. However, the question is: will the availability of funding recover at the same pace as demand?

Many businesses have not been in a position to make critical investments in IT since the beginning of the credit crunch. Latest government figures for the second quarter this year reveal that hardware spend by UK businesses collapsed 30 per cent from Q1 to £1.09bn ­ down from £1.54bn, highlighting the extent to which private sector IT investment tumbled.

But the figures also show that hardware spend has the potential to make a strong recovery.

Businesses understand that maintaining legacy and ageing systems is simply not cost-effective in the long term. Many of these businesses will not have upgraded their computer hardware for years, as plans to invest in new PCs, ser vers and networking were put on the backburner. Those businesses are now catching on to the fact that their hardware is fast depreciating as it becomes less efficient.

Clearly, one of the features of the IT sector is the speed with which developments are made, bringing updated and often new operating systems and appliances to the market that existing hardware may no longer be able to support.

For the same reason, software spend may also be close to a return to growth. For many businesses, the recession has highlighted the need for additional investment in their software systems. It has been widely reported that a number of businesses were caught off-guard by a rapid fall in sales triggered by the downturn and these businesses will understandably want to improve their internal reporting software.

Maximising operational efficiency
As business picks up, companies may also focus on the elements of their software systems that could hamper their ability to deal with increased sales or achieve maximum operational efficiency.

Many businesses have taken heed of the experiences of previous recessions, where organisations slashed resources so close to the bone that they failed to respond quickly enough to the economic recovery.

Businesses will want to ensure they are prepared for the upturn and will be looking at upgrading their IT systems. So the stage seems set for a bounce in IT spend, but this will have to be underpinned by a considerable increase in funding capability.

Financing is one of the most flexible and efficient methods for SMEs to make crucial investments and increasing numbers of funders are now re-entering the IT financing market. From July to August, we saw a 31 per cent increase in the number of loans approved by our funders.

Our recent success in bringing new banks and other funders into the IT vendor finance market will help ensure businesses can equip themselves for an economic recovery. It will also help to break down those remaining barriers to sales that were caused by a lack of available funding.

The degree to which IT hardware spend has fallen in recent months clearly demonstrates just how dependent the sector is on the availability of funding. A recovery in demand will be fruitless if it cannot be matched by a recovery in funding capability and this is why we believe that the stream of funding that we are beginning to see will really help.

Philip White is chief executive officer of independent financing company Syscap