In a smaller funding world

Banks are no longer lending with such alacrity for larger deals, so what can be done?

The financial crisis has prompted a monumental shift in the IT finance market. The credit crunch has forced many banks and other lenders to make a radical 180-degree turn in how they lend to businesses that want to buy or upgrade IT.

In the years running up to the credit crunch, most lenders were actively pursuing the largest IT funding deals they could. Funding bigger deals creates obvious economies of scale for banks, allowing them to hit their targets far more easily -- and there are obvious financial incentives for staff to close big deals.

The economic downturn, however, has prompted lenders to rein in this ‘big is better’ policy. Many funders are now looking to offer far smaller loans to a wider client base.

For funders, this sudden appetite for small IT funding deals, away from larger deals, is an effort to keep their risks at a minimum. The smaller the loan size, the more diversified their exposure is across their loan book. And the lower their exposure is to the failure of any one business that they have funded.

What does that mean to the IT market, is this really a problem, and if it is, how can IT vendors deal with it?

Dramatic impact

This new approach has in fact had a dramatic impact on the market. Vendors have told us that when they have used certain funders they have had nearly all their deals over a certain size queried or even refused.

There are few things more frustrating for an IT vendor than having completed negotiations with a client, agreed on price, and virtually completed the deal to find that funding for the deal is not available.

A failure to get vendor financing for a deal could be the end of that sale. Businesses are trying to avoid using cash to make IT purchases, which is why finance is now central to the sales process. Secure a finance agreement for their IT investment and you close the deal – fail to get them competitive funding and you may lose it.

Demand for that funding is increasing, yet getting access to credit is still the problem. Figures released last month from the Office for National Statistics confirm there is a growing appetite for businesses wanting to upgrade or replace their IT systems.

From Q3 2009 to Q1 2010 there has been a 16 per cent rise in spending by the private sector on IT software and hardware. In Q3 2009, £2.78 billion was spent on IT software and hardware. In Q1 2010 this figure rose to £3.23 billion.

Meanwhile, the British Bankers Association has reported a 20 per cent drop in lending to small businesses -- in May 2010 £523 million was lent compared to £628 million in May the previous year. So this would suggest issues over funding are not about to go away.

So how can you deal with the problem?

Staged sales can offer a way around the funding dilemma. A staged purchase enables a customer to stagger the purchase of IT products or systems – breaking sales up into smaller transactions that funders should accept far more readily.

Funding various parts

Rather than trying to push the entire purchase of one major IT system through one bank, the purchase could be broken down into several parts with funding for the various parts done through a vendor financing programme with different funders. This will ensure that no one bank has to take the entire risk on the IT investment.

The other solution is to look to complete the smaller deals, and focus bigger sales drives on those customers that will be considered a healthier credit risk by banks.

With the funding of banks from the wholesale market reduced far below expectations during the first six months of this year, banks will have to safeguard their capital carefully.

Their balance sheets are still struggling to support a backlog from loans agreed in the lead up to the credit crunch, when they had a far bigger appetite for risk.

The net effect of this tightening on lending criteria is simple: SMEs cannot borrow from their banks to fund IT buys directly. So IT vendors that can provide funding as an integrated part of their package will thrive. However, vendors will need to know which clients are good risks and which kind of deals the banks will go for -- or they need a funding partner that can do that for them.

The new funding environment driven by the banks’ much more risk-averse attitude does create substantial channel challenges. There are answers, but one of the most obvious would be to seek a funding partner that has access to funding from a diversified range of banks.
Philip White is chief executive officer at Syscap