Getting Credit, Keeping Cash Flow

If profitability is the measure of a business’ success, credit is the lifeblood that keeps it moving.

Today, Cisco Systems financing arm—Cisco Capital—is launching a new initiative to educate its partners on the changing dynamics in their customers budgeting and financing, and show them how to use the credit it provides as a means for closing new technology deals.

“Our mission is to ensure that the customer remains current with the latest technology. A bank’s mission is entirely different,” says Maryann Von Seggern, director of Cisco Capital.

Cisco is one of the many vendors pushing their financing options as means for keeping theirs and their partners’ sales flowing. By using its vast cash reserves – now totaling nearly $30 (£21) billion – Cisco wants its partners to know that customer’s need for financing to pay for their technology investments is more critical than ever and could make the difference between them getting an order or not.

“Solution providers are technical guys; they want to talk about the speeds and feeds. But if they don’t change the way they’re selling, they won’t get deals,” says Von Seggern.

Since the credit markets seized in September 2008, businesses of all sizes have lost access to credit, which they need for everything from investing in new infrastructure to covering cash flow gaps to pay for inventory and staff salaries. Particularly hard hit are small and mid-sized businesses, which typically do not carry cash reserves on their balance sheets and have limited access to lines of credit. Many small businesses use credit cards as a means for paying for capital and operational expenses.

When you consider than credit card companies and banks have withdrawn more than $2 (£1.3) trillion in credit card liquidity in the last six months, you can quickly see that the pool of available credit is shrinking.

Solution providers are not immune to the credit crunch. While participants in the Channel Insider 2009 Market Pulse survey say access to credit hasn’t changed much in the last year, anecdotal evidence exists showing the types of credit available and payment terms are getting much tighter. Some solution providers report having their lines of credit changed without notice because a late customer payment caused them to miss a payment to their bank. Others are seeing their customers cancel, delay or scale back orders because bank financing fell through.

Financing, leasing and extended payment terms are nothing new to technology sales. All of the major vendors have financing divisions to provide credit to their customers and partners. However, solution providers haven’t always leveraged these credit options, instead relying on their customers to figure out the way they’re going to pay for a purchase.

When the credit markets seized, end users were forced to look for alternatives for paying their technology investments. Cisco says it sees a trend where the end user dragged its solution providers into the credit and financing conversation. As cash disappears, businesses have an easier time paying for purchases out of their operating budgets (ongoing expenses) than their capital budgets (one-time expense). Through financing, a customer essentially creates a payment system similar to the billing structure of a managed service engagement.

Over the last quarter, several of the large vendors have promoted their credit services and announced special financing options to spur sales. IBM, Hewlett-Packard and Dell, for instance, are all offering low- and no-interest financing on hardware. Last summer, Microsoft started teaching its army of partners about its financing options, in which it would underwrite deals even if they only included one piece of Microsoft product. And distributors such as Ingram Micro and Tech Data have created new portals to show solution providers how to finance a technology purchase.

Cisco’s aim in its financing awareness push is more than just showing solution providers how to use credit to seal a deal today, but how credit helps the ongoing engagement with the customer. Cisco is now sending its partners reports on their mutual customer’s credit accounts, showing the partner when a loan is coming to term and for what equipment. Cisco says that gives the solution providers the opportunity to plan conversations about equipment replacements and maintenance renewals. In other words, Cisco wants to turn credit into a sales renewal tool.

Several vendors report feeling as though their credit and financing programs are falling on deaf ears. Part of it may be a lack of understanding about how credit programs work and how they benefit both the solution provider and the customer. Part of this may be true because selling credit is not natural for a technology-oriented company such as those of solution providers. And part of it might be that there’s nothing in it for the solution provider; yes, they get paid on the deal, but the vendor captures all the interest payments.

The top 10 wealthiest vendors are sitting on more than $100 (£68) billion in cash reserves, and most are willing to use them to underwrite channel sales. The $787 (£542) billion stimulus package President Obama will sign today may stabilise the financial services industry, but it will be months before to logjam clogging the credit markets is broken. Solution providers should take the time to learn about their vendors’ financing options and how they can leverage capital services to their and their customers’ benefit.