June 24, 2009, 1:56 PM — The ability for distributors to offer, lend and extend credit and financing to partners is nothing new. However, because of a weakening and uncertain economy, many distributors have had to revise the ways in which they are able to, or not, in some cases, provide this out.
According to Paul Edwards, director of SMB and channel strategies at IDC Canada, the economic crisis has impacted distributors and partners across the board because end-users are spending less and there's less credit being made available now.
"The biggest hit comes on the hardware side which is the biggest part of the overall market and is what the distributors and their partners count on for their business," he said. "Distributors bring credit to partners who may not have the capital to buy a big roll out of IT. They'll provide credit to the partner so they can then do the deal and roll it out and they'll pay back the distributor once they get paid from their clients."
But here's the problem though, Rick Reid, president of distributor Tech Data Canada, says that because many customers are slowing down their payments to the reseller, this in turn, causes a significant backup and issue in the distribution supply chain.
"Small to mid-sized resellers especially, usually don't have the ability to pay in advance large invoices, so they wait for the customers to pay them" Reid said. "Because of this, the reseller can't pay us back as rapidly as they once could, and that's really when the issues begin."
A reseller's ability to pay the distributor back in a timely manner is critical to the distributor's decision of whether or not to extend credit and financing to them, Reid said. When it comes to granting credit to resellers, Reid says the distributor will look at the reseller's profitability, their equity in the business and also how quickly they're able to pay the distributor back.
Yves Hebert, vice-president of sales, cofounder and owner of Telenet Informatique Inc., an ISV, VAR and solution provider located in Chicoutimi, QC, and also a Tech Data Canada reseller partner and TechSelect member, said it's important for his company to leverage the credit and financing offerings provided by Tech Data.
"We're using a bit more credit (from distributors) than we were before because it's harder to collect money from customers now," Hebert said. "We have good credit lines because we've been a customer of theirs for a while and we have a credit history with them. It's tougher to get paid in the 30-35 day time period with our customers now, so sometimes we need to get an extension of four to five days with the distributor."
Edwards explains that in today's market, the distributors who rely on financial institutions for credit are facing hard times since many banks have now frozen credit and aren't as quick to provide it to them.
Luckily for Tech Data Canada though, it's a self-funded business because it's the Canadian subsidiary of its parent company, Tech Data Corp.
"We have a lot of credit granting availability and we see no restriction of the total credit granting," Reid said. "But we can't and will not continue to grant credit to partners if they take too long to pay us. We need to be paid on average in 40 days, and while it's still early on, we're just starting to see signs of some resellers getting into trouble because they're not getting paid in time from their customers."
Edwards suspects that some of the smaller resellers will go out of business because their overall business revenues have started to shrink.
In addition, Mark Snider, vice-president and general manager for Ingram Micro Canada, said he thinks the resellers that will be hit the hardest as a result of the economy, are those who don't bring any value-add to their customers. Snider says that when the market's good, these resellers are selling to "make a quick buck," but once the economy slows down, they don't have anything else to offer to their customers.
Reid agreed by saying, "We don't automatically stop dealing with a reseller if they have hardships. We work and communicate with them on the situation. Sometimes we can suggest an alternate method of financing or a partial payment."
Reid admits that it's a "risky business" when it comes to lending out and getting credit back from its customers, and says that if the economy continues to spiral downwards, the distributor may have to become more restrictive in certain situations.
Both Snider and Reid advise though, that if resellers have any concerns, they should bring it to the attention of their distribution partner.
"If resellers have any concerns about credit with their end-users, now's a good time to come see us to see what we can do to help them," Snider said. "We're a self-financed company and we have a lot of flexibility and the time to help customize solutions for resellers."
As reported by Joe Fay on the Web site, Channel Register, Ingram Micro's CEO, Greg Spierkel said he expects about 15 per cent of the company's resellers, mostly Mom and Pop-type shops to be in decline this year, compared to the usual drop of five to 10 per cent.
Snider said he doesn't expect to see this high of a percentage in reseller declines this year, saying perhaps only five per cent of Ingram Micro Canada's roster of 8,000 reseller partners could be affected.
He said these declines will not be coming from its "top" resellers, but most likely the ones that are "further down on the list."
While the economy may make doing business harder now, Bell Micro Canada's vice-president and general manager, Peter Diniz, says his company had a strong Q4'08 and Q1'09 quarter.
"On the (reseller) side, our count has dwindled a bit, and those are probably smaller customers whose business model isn't as aligned with ours," he said. "That's probably dwindled by about 10 per cent, but my overall business hasn't dwindled at all, so that just means we're getting more business with fewer customers."
Partners can increase their chances of staying profitable and in business by diversifying their solution and focus areas, Edwards said.
As for advice for distributors, Edwards says they must build and maintain strong relationships with their vendor partners.
"Getting more margins from vendors to give to partners and getting spiffs and incentives from them will be very important to partners," Edwards added.
Hebert says at the end of the day, it's the relationships that matter the most.
"We need (distribution) and they need us," he said. "At the end of the day, the vendor needs distribution too, otherwise it would cost them too much money and their strategy won't be as effective."