Get up and grow
How might a smaller channel player turn pennies into pounds that fund expansion?
Pretty much every business venture is designed with a view to growing larger over time, with expansion seen as the ultimate measure of success. But although belts may remain tight, a small channel company could still have a variety of options to find funds for growth.
Even a bank loan may be available, albeit under the right terms and conditions. According to a representative for the Royal Bank of Scotland (RBS) and NatWest group of banks, any business can get help and it approves 85 per cent of applications - lending some £80m to SMBs during the year. RBS/NatWest defines SMBs as companies with a turnover of up to £25m.
"We are the biggest bank for SMBs, and we have a wide range of specialist teams," he said. "We are not selective about the type of business, we are open for businesses to lend from, and we are still lending - contrary to popular belief."
He stressed that businesses must open a dialogue with the bank well in advance, and be prepared to do the paperwork and go through the application process for funding. Recent history means that the bank must ask more questions than ever, but credit, overdrafts and loans are definitely available and being granted.
"Anyone can be eligible," he said. "We are not looking for equity investments. We are just looking to lend the money and get it repaid. A lot of small businesses might struggle in the application process because they do not have a finance team. They often come to us when they need money desperately in the next few days, without giving us any earlier clarity."
The two main requirements are cash flow - a realistic assessment of what money is going into and out of the firm, over what time frame - and a realistic assessment of how the borrower can pay it back under expected trading conditions. Visit http://tinyurl.com/3haouvw and http://tinyurl.com/3regpvv for further practical advice on how to apply.
"A lot of businesses come to us without the right information, or their accounts are not up to date," the representative said. "They can often get the money, but not at the time they wanted it."
There is also the government's small-firms loans guarantee scheme to consider joining. Under the scheme, the UK Department for Business Innovation and Skills (BIS) will guarantee 75 per cent of a loan for a fee of about two per cent per annum on the reducing loan balance, according to RBS.
Private equity from VC angels
Venture capitalists and angel investors may offer private equity to a variety of firms, for many different reasons. The recipient of their largesse does not necessarily need to be a start-up or something that will set the world on fire, although private investors may want to see it as a good investment one way or another. It may also be offered on occasion to distressed firms in danger of going under.
According to the Funding Circle, an online marketplace for so-called social lending backed by venture capital firm Index Ventures, it lent £8m to 107 small UK businesses in its first six months after launching in mid-2010. Its 3,500 members collectively earned an average yield of 8.3 per cent on the monies lent, before fees and bad debt, in the same period.
It claims to lend about £1m a month. In the first six months, most SMBs borrowed either to expand or for growth capital. A third borrowed to generate more working capital.
Backer Index Ventures was not available for comment but James Meekings, co-founder of Funding Circle, said in a statement: "It is a simple proposition which allows individuals to maximise returns on their hard-earned cash while also allowing businesses of all sizes to borrow at lower rates [than those] set by the banks, with a quicker turnaround.
"We are seeing hundreds of people and businesses sign up each month."
It would seem that some VC companies, at least, understand the IT market. Index Ventures most recently helped US-based cloud systems and apps provider Centrify raise $16m (£9.8m) to expand distribution.
"Today's IT environment is ever more heterogeneous," Mike Volpi, lead Index Ventures partner and a former Cisco exec, said in the announcement. "We are seeing the proliferation of a diverse range of services that IT needs to support. Centrify provides industry-leading solutions [that] are clearly differentiated and deliver real value."
August saw the government also move to increase access to equity for SMBs. MP Mark Hoban, financial secretary to the Treasury, announced details of two amendments to the EU Prospectus Directive that have been brought forward by a year.
The amendments mean that SMBs will no longer have to produce a prospectus unless they are seeking more than £4.4m in equity - up from £2.2m. In addition, they are now allowed to target 150 investors - up from 100. This is expected to save money and increase availability of funding to SMBs.
However, Nitin Joshi, founder of ChannelMoney, warns that despite a seeming multitude of funding options, few may easily match reseller needs and even fewer small companies may have the wherewithal to take advantage of them.
"There is really only one big opportunity for the channel to fund a business, and of course the channel basically is heavily factored," says Joshi. "And that is by acquiring other VARs."
He notes that the channel structurally has a cash flow problem. Vendors want payment for their products very quickly from distributors, and distributors must then exact payment from their resellers. The resellers more often than not are stuck with trying to extract funds from the customer - perhaps a local authority or a school or another business offering only 60-day terms or worse.
"The vendors often want their money within 14 days or less," he says. "Yet 58 per cent of products end up in the distribution channel. And most business through distribution is on 30-day terms."
Do not sell anything on which you cannot make a margin, Joshi adds.
Smoothing the cash flow
More indirect routes to funding - such as activities that smooth out cash flow - can be best for those companies not ready to acquire. There are some opportunities such as tax relief, about which an accountant should be able to advise.
The bulk of hardware dealers and VARs use factoring to keep things on the move while waiting for customers to pay. The partner sells its invoices to a factor at cut-rate prices in exchange for immediate finance. It effectively involves three parties in a deal, rather than two as in a conventional bank loan.
Clearly this is not an ideal situation, but it is the only way for some VARs to continue once they have exhausted credit from distributors or vendors, notes Joshi, or other options to make the pounds go further such as leasing needed kit. And it remains difficult for small channel firms to get loans, he maintains.
"About 90 per cent of the channel does not have sufficient assets to justify significant lending by a bank. And if you are a start-up, the only thing you can do is pay your bills on time to your distributor," Joshi (pictured, right) adds. "And, by the way, the market leader in providing credit services to growing businesses and supporting start-ups is C2000. It has done an excellent job over the past year."
What is worse, according to Joshi, is that some new channel players never seem to understand how precarious their financial situation really is - feeling flush after inking a £100,000 deal and spending it on cars or "luxurious extravagances". Fiscal prudence is good for growth.
"A majority of the companies we see failing in the channel have a very high level of extravagance," warns Joshi.
Regional assistance
The place where the channel player is located or operates can also affect what options for improved funding are available - and what is on offer can change rapidly, so keep up to date and connected to local news media, as well as business networks, government websites and similar that may make their own announcements from time to time.
Just this month saw Aberystwyth and Bangor universities announce a £2m fund to boost SMB R&D in Mid and North Wales, and comms provider Kingston offer £300,000 to assist tech businesses in the Hull and East Yorkshire area.
David Cameron has also created 11 Enterprise Zones - from Cornwall to Cheshire - which will benefit from lower business rates, planning controls, new superfast broadband and enhanced capital allowances.
Businesses that are on the lookout for for grants can visit www.j4bgrants.co.uk, which aims to collate information on the thousands of grants available to UK businesses from a range of sources.