Neither a borrower or a lender be, as the old saying goes - but ifash flow. But what are the best financial options for small firms when it comes to keeping their business ticking over? the channel heeded that advice, it would soon grind to a halt. The IT trade runs on credit - it has to, as goods are passed from vendor, to distributor, to reseller, to user. Keeping the cash flowing is one of the secrets of survival.
And it's a particular problem for smaller resellers dealing with smaller businesses. According to the business finance specialist division of Lloyds TSB Group, maintaining cash flow is a priority for small businesses in the UK. In a survey it conducted at the end of last year, 92 per cent of small companies and owner-managers said that concentrating on maintaining cash flow was a key concern.
Equally important was making a profit, but another 87 per cent also said keeping a close eye on expenditure and outgoings was critical. It's clear that smaller businesses are going to hang onto their cash for as long as they can. That in itself is a problem for SME dealers with staff to pay. But compounding the problems, further up the channel, distributors and vendors are pressing to get their debtor days down and keeping a tight rein on credit. That's making cash flow and continuous financing a constant challenge for small resellers.
Just like any small business, they are responding by prioritising profits and cost control. Mike Hill, managing director of Greengage Computers, says the only way out of the credit spiral is to make money. 'Making profit is the main concern with margins under pressure. Only profit generates cash.'
Andrew Bryson, director at re-seller CQ Technology, says smaller resellers are constantly struggle with cash flow. 'Our biggest cost is our salaries, but more and more, customers want us to be a one-stop shop, supplying everything. Invariably, due to market conditions and despite getting a small deposit from them, we still have to outlay a considerable amount of money to purchase hardware.'
CQ is still a relatively young company - it has been trading for less than two years - and that makes it harder for it to obtain decent credit facilities. The problem for those providing credit is that the industry is so volatile, says Martin Williams, joint managing director of credit-checking specialist, Graydon. 'A company can build up a turnover of several million pounds very quickly and the traditional methods of checking credit are just too slow.' That means credit managers have to rely, to some extent, on overall risk levels and their own gut feelings.
Computer 2000 is able to provide a certain amount of credit without full prior authorisation if a customer can fulfil certain criteria. But it is limited, and if it steps over the line, the company loses its insurance on the debt. What the company really needs to see, says Tony Taylor, finance director of C2000, is payment histories and balance sheets. 'We'll probably trade on a cash-only basis at first and then look at the company's net worth. If its payment history is good, we will give it more credit.
But I admit, it is not easy for the smaller dealers.'
Even when you are established, extended credit is hard to get, says Hill, and when it's not available it can stop smaller dealers doing business.
'Distributors have tightened up considerably on credit. They do this even at the expense of extra business from the dealer. They should adopt a more flexible approach.'
Distributors are, however, limited to some degree by their insurance cover and without credit facilities, resellers usually have to finance the deal themselves - but they can't afford to turn business away. 'This means that we can outlay a hell of a lot of cash and wait potentially six to eight weeks before we see it back again,' says Bryson. 'On a typical three-server, 20-workstation site, that could be up to #60,000 by the time you add in software. Add three of these together in a week and, boy, do we have fun.'
But assuming that resellers cannot get some kind of credit facility to cover a deal may not be the case. Many distributors run deal financing plans and vendors will also get involved to secure business if the customer can be shown to be credit-worthy enough.
Most of the key broadline distributors run stock finance plans, most of them with Deutsche Financial Services (DFS). These schemes allow the reseller to have 60 days' credit on their purchases and they are usually called upon when a deal needs to be done but the distributor can't sanction any further risk of exposure.
Under these schemes, the credit company pays the distributor and the dealer pays the credit company. It costs less than one per cent of the value of the deal to run the finance in this way, and with some vendors and distributors, the deal is part-financed for the dealer. Cisco, for example, runs a scheme with DFS through C2000.
Stock financing is also used extensively between vendors and distributors.
This allows the latter at least 60 days to clear stock and bring in the cash, which is usually more than enough for any distributor. Stock finance is also used by the distributors to drive higher sales. A distributor trying to increase its sales may not be able to get the cover it needs to fund that drive as insurance cover will not be granted to many customers who are already at their credit limit.
Brett Rutland, European credit manager at the peripherals division of Fujitsu, says that it's the credit-worthiness of the customer that matters in the end. If that can be proven and the deal is big enough, the channel will find a way to do a deal. 'It's a matter of working back-to-back with them on the deal. A lot of it is looking at the business and asking what it is going to mean for your company - basically, you are looking at the user because a lot of the time, the reseller can't fund it.'
The usual result of the vendor becoming involved will be an agreement, secured by letters of credit or by arrangement with a bank, for automatic payments to vendor accounts when a bill is settled. This might mean setting up a joint or 'escrow' account for payments to be made automatically when the user pays. Alternatively, big deals can be secured for the vendor by the customer agreeing to underwrite the reseller - that is, pay the vendor directly if the dealer does not pay the vendor within an agreed period.
But such deals are rare and only used when large sums are involved or there is an incongruity between the size of the reseller and the contract.
For example, one supplier told PC Dealer that it was currently helping a reseller that has #15,000 on its balance sheet to finance a deal worth about #4 million with a top company.
Suppliers are having to be much more innovative about credit and finance through the channel. But surprisingly few dealers use the stock financing schemes or approach vendors for help with deals. 'There is a high degree of reluctance in the UK market to pay for credit,' says Williams.
Rob Steele, sales and marketing director at accountancy software developer Exchequer Software, suggests that vendors could help dealers in a more direct way. 'There is no reason why larger vendors should not be able to offer low-interest finance schemes for resellers' customers, just like in the motor industry. Interest-free loans to help resellers with their expansion plans - particularly where an exclusive agreement is in place - would also be beneficial to resellers.'
Some vendors are waking up to the need to provide more flexibility. IBM has set up a whole financing operation to address the growing number of issues surrounding the use of IT in all areas of its business. Jonathan Morris, director of commercial finance for IBM's Global Financing EMEA operation, says the manufacturer is moving into this area and most partners are taking advantage.
The vendor is attacking the problem in numerous ways. 'We are moving into all sorts of areas, including second-tier financing and stock financing with the re-sellers and distributors. We'll also take on accounts receivable and acquisition financing,' says Morris.
IBM regards the financing side as an opportunity. The vendor has the resources to provide the service and is, as Morris points out, already providing stock financing and invoice discounting services to the channel.
It will also consider lending money to resellers that are looking to acquire other businesses. The fact that the business may not be totally IBM-oriented is understood, says Morris, and it won't matter. 'Acquisition financing is becoming a big requirement in the industry. We'll look at each case as it comes and work out what is right at the time,' he adds.
It's probably fair to say that IBM is somewhat ahead of its rivals in this area. While Dell is being flexible and Hewlett Packard does have user financing schemes and also stock finances the channel, no other key vendors are very active in the financing area. Compaq, however, can be expected to wake up to the need to provide stock financing and other services, especially as it is now routing more of its business through the distribution channel.
Loans for any kind of business will always have some conditions attached.
An interest-free loan might, for example, be one way for the vendor to ensure the reseller is tied to its product. Such deals may work where there needs to be a long-term commitment as there does in the software market, but may be harder to stomach in the systems business where there is less prospect of repeat revenues.
The fact that the loan will be financing all of the reseller's business - not just the part that involves the vendor's product - might also be a sticking point with some companies, even though Morris says it is certainly not a problem for IBM. Loans may work for Exchequer, but how many such deals could Compaq, IBM or Sun Microsystems make with SME resellers?
Even so, Bryson feels that the big boys could do more to help than they do at present and do more to support the smaller service-oriented distributors.
'Most of the work we do is through little distributors and suppliers because we feel we get a better return for our money.'
Such is the scale of the problem of cash flow on hardware deals that, for smaller dealers, it is often better for the user to buy the kit direct.
One reseller told PC Dealer that Dell was a great asset to it and helped it to smooth out cash flow. 'Dell will allow our customers to go direct and purchase PCs through our account - and therefore with our pricing.
This saves our cash flow considerably.'
Resellers that are either too new, too small or don't have a big enough deal on the table to warrant the direct interest of the distributor or vendor's financial department, have to look elsewhere - usually to the bank or to factoring and invoice discounting services.
Both C2000's Taylor and Rutland at Fujitsu think these methods are useful and worth considering, especially for fast-growing dealers. 'Factoring has been in and out of fashion like nobody's business and we use structured funding from the bank now. But factoring is the best way to fund a growing business. It helps you fill in the gaps,' says Taylor. The gaps are those left in working capital when the business is growing fast but has not managed to secure an extended overdraft or loan from the bank. During the growth spurts, factoring schemes can keep cash flow moving.
Rutland also advocates the idea but thinks it should be used with caution.
'It does help small businesses to grow, but it can be costly and can stunt your growth as well if you lose the closeness to the customer.' Factoring in particular - where the debt is paid to you immediately, less a fee, and the factoring company collects the money - detaches you from the customer and de-personalises the affair.
Invoice discounting, in which the finance company pays you a discounted value of the invoice early and then takes the full amount from you as soon as you collect the debt, is less impersonal. Both methods incur a cost.
CQ Technology used factoring, but Bryson does not think it is a very good option. 'We often have to chase customers ourselves and the attitude of the factoring company is pretty awful. It takes its cut but does not really seem to do a hell of a lot in return. OK, it does advance money to us and this does help, but I guess if we had more resources for this work we could get a better result ourselves. My advice is talk to the bank first and only factor as a very last resort.'
Morris says leasing is an option that is often forgotten, but can appeal to users and can also help the smaller reseller. 'If we get a user sale on a lease then the reseller will get paid a lot quicker.' IBM Global Finance provides leasing agreements and there are many specialist leasing firms that will do business with computer products.
Hill has never used leasing or invoice discounting, factoring or any other cash flow scheme, but his impression is that they are not straightforward.
He prefers to concentrate on getting the basics right - on income and the bottom line.
Keeping a tight rein on credit control is also vital. Taking it seriously and having dedicated staff is strongly recommended, says Bryson. 'We recently took on a person to handle credit control and the results have been excellent,' he says.
In the end, the financial experts say the most effective way of raising cash and keeping the business moving is to make a profit and ensure that your balance sheet is strong. 'There are many ways to raise finance and one of them is internally from your own balance sheet. If you have a good balance sheet and cash, and if you have good working capital, you can take advantage of some very good deals in this business,' says Taylor.
Rutland adds: 'Some resellers have cash tied up in the business and it's good for any manufacturer to see that and to see them putting their money where their mouth is.'
Part 2: Structuring the business in PC Dealer, 17 March.
STARTING FROM SCRATCH
If you are starting from scratch, there are steps you can take early on to avoid cash flow problems later. The high street is not a bad place to start these days, says Bryson. 'Banks do tend to be more helpful than in the past, but obviously some are better than others.'
Mike Hill, managing director of Greenage Computers, says one of the most important rules is to keep your bank informed of what is happening. He adds: 'I know it's a pain, but if you do not have pots of cash to start with, do a daily bank balance, weekly cash flow projections and, most importantly, keep the bank informed at all times even if the news is bad.'
Generally, banks are more receptive and helpful than they used to be, says Hill. But like many smaller businesses, he suspects that won't always be the case. 'Whether a recession will change this remains to be seen,' he comments.
Andrew Bryson, director at CQ Technology, thinks that keeping it simple and talking to the bank are important, but also believes that taking the hardware out of the supply chain completely is now advisable.
'My advice to a start-up or other business is talk to the bank and work with them. Stay away from factoring and, where possible, set up a relationship with a supplier that allows the customer to go direct, but with your blessing, and purchase the things you advise them to rather than the latest marketing campaign.'
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