At a time when the IT in­dus­try is trans­form­ing and the eco­nomic sce­nario is down­beat, the IT chan­nel must lever­age sev­eral fi­nanc­ing op­tions to fund their busi­ness as well as their cus­tomers’ businesses

At a time when the IT in­dus­try is trans­form­ing and the eco­nomic sce­nario is down­beat, the IT chan­nel must lever­age sev­eral fi­nanc­ing op­tions to fund their busi­ness as well as their cus­tomers’ businesses

“With the mo­men­tum slow­ing, chan­nels must go be­yond their cur­rent re­sources, and take ju­di­cious calls on how to raise funds, and where to in­vest” S RA­JEN­DRAN CMO, Acer In­dia

For al­most half a decade IT ex­perts and the In­dian IT chan­nel have been ad­vo­cat­ing the need for cul­ti­vat­ing a busi­ness that sells and de­liv­ers tech­nol­ogy ser­vices on a recurring rev­enue ba­sis. The rea­son is the pre­dictabil­ity which re­peat rev­enue brings to the busi­ness.

The past two-three years have been tough on IT chan­nels. Apart from the rapid trans­for­ma­tion which the tech­nol­ogy in­dus­try is go­ing through, the do­mes­tic mar­ket is grow­ing at a slower rate. Some of the key seg­ments such as the PC mar­ket are see­ing neg­a­tive growth. While dur­ing the past two decades IT chan­nels grew along with the in­dus­try, most part­ners are now strug­gling to keep their toplines and bot­tom­lines grow­ing.

Also up­set­ting the rhythm of the in­dus­try are sev­eral macroe­co­nomic fac­tors. A weak ru­pee, liq­uid­ity crunch in most SMB seg­ments, and a drop in capex have af­fected the bal­ance sheets of many part­ners.

In ad­di­tion, in­fla­tion­ary trends have im­pacted the IT in­dus­try, and the cost of op­er­a­tions has al­most dou­bled over the past 5-7 years.

In such gloomy times, to en­sure that their or­ga­ni­za­tions grow, chan­nels of all sizes and strengths are look­ing for newer ways to fund their growth. In an in­dus­try where a larger chunk of play­ers are first time en­trepreneurs, growth is a huge chal­lenge be­cause of the lack of cap­i­tal.

Says Praveen Sa­hai, VP, Chan­nels, EMC In­dia & Saarc, “One of the big­gest wor­ries I have about IT chan­nels is their growth. Com­pe­ti­tion in the in­dus­try is in­creas­ing, and newer play­ers are emerg­ing ev­ery day. To sur­vive a part­ner needs to grow not just the topline but also the bot­tom­line.”

Adds S Ra­jen­dran, CMO, Acer In­dia, “With the mo­men­tum slow­ing it is im­per­a­tive that the chan­nels go be­yond their cur­rent re­sources and look for ex­ter­nal op­tions to in­crease the cap­i­tal in the busi­ness. Ju­di­cious calls on how to raise funds, and where to in­vest, are crit­i­cal for suc­cess in any busi­ness.”

Sa­hai is a big ad­vo­cate of learn­ing from other in­dus­tries. He says it is time IT chan­nels start learn­ing from the au­to­mo­bile and con­sumer durable in­dus­tries which thrive on smart fi­nanc­ing op­tions. “In the past, chan­nels have been wary of ex­plor­ing fund­ing op­tions be­cause they never had to. To­day that is not the case. I be­lieve ev­ery ven­dor in­clud­ing EMC, has been ask­ing chan­nels to con­sider all fi­nanc­ing op­tions to fund their busi­ness as well as their cus­tomers’ businesses.”

How­ever, the fi­nance which chan­nels need is not

“In the past chan­nels have been wary of ex­plor­ing fund­ing op­tions but to­day it’s the best op­tion to fund their own busi­ness and that of their cus­tomers” PRAVEEN SA­HAI VP, Chan­nels, EMC In­dia & Saarc

just for fund­ing trans­ac­tions. Many point out that the money re­quired by part­ners is more for other as­pects of the busi­ness such as build­ing in­fra­struc­ture to sup­port cus­tomers, hir­ing qual­ity man­power, and re­tain­ing and re-train­ing em­ploy­ees.

“This is a very im­por­tant as­pect which many miss,” ob­serves KV Ja­gan­nath, CEO, Choice So­lu­tions, Se­cun­der­abad. “There is cap­i­tal re­quired to build or­ga­ni­za­tions, and that is the most im­por­tant in­vest­ment which any grow­ing busi­ness needs to fo­cus on.”

Cost of fi­nance

For many years part­ners built multi-crore businesses on top of dis­trib­u­tor and ven­dor credit. In a mar­ket that was fast grow­ing and where mar­gins were healthy, this busi­ness model worked. “How­ever, that is not the case any­more,” points out San­deep Sal­man, COO, One So­lu­tion Tech­nol­ogy, New Delhi. “To­day, we are forced to walk away from trans­ac­tions be­cause the mar­gins do not cover even a fi­nance cost op­por­tu­nity of 2 per­cent a month when cus­tomers push pay­ments to 60 days and above.”

The cost of fi­nance and the com­pli­ca­tions as­so­ci­ated with it have dis­cour­aged a num­ber of part­ners from ex­pand­ing. “There are very few risk tak­ers in our in­dus­try,” com­ments J Ramesh, VP, Ralco Syn­ergy. “Many are wary of tak­ing loans, and want to work within the lim­its of the credit ex­tended by sup­pli­ers.”

Oth­ers point out some un­pleas­ant re­al­i­ties. “The mar­gins in the busi­ness should cor­re­late with the cost of fi­nance. I be­lieve that for healthy growth the aver­age mar­gins should be a few times the cost of fi­nance. Re­gret­tably, that’s not the case in most re­selling or even sub-dis­tri­bu­tion businesses. This is the rea­son most of us are de­pen­dent on ven­dor and dis­tri­bu­tion credit; it also makes sense for both the ven­dors and dis­trib­u­tors,” re­marks Ge­orge Thomas, CEO, Al­dous Glare Trade & Ex­ports.

Many in the in­dus­try point out that there is a sig­nif­i­cant dif­fer­ence in the cost of fi­nance depend­ing on the play­ers—it skews un­fa­vor­ably for the smaller chan­nel part­ners.

Ramesh ex­plains. “While most es­tab­lished play­ers en­joy bank in­ter­est rates which vary from 8 to 16 per­cent, smaller play­ers are of­fered un­se­cured loans at be­tween 18 and 36 per­cent. Since they also make lower mar­gins the equa­tions are un­fa­vor­able for smaller re­sellers.”

Oth­ers in­sist that it is a mat­ter of ed­u­cat­ing chan­nel

“Over the past two years we have seen the de­mand for cus­tomer fi­nanc­ing op­tions in­crease among both large en­ter­prises and SMEs in In­dia” PRADEEP KHEMANI Coun­try Man­ager, SMB & Chan­nels, HP In­dia

part­ners about smarter fi­nanc­ing op­tions.

Ven­dor fi­nance

Al­most all ma­jor ven­dors such as HP, IBM, Cisco, Dell and EMC have their fi­nanc­ing arms op­er­at­ing in the coun­try. These arms are keen to work with chan­nels to fund qual­ity cus­tomer busi­ness.

“Glob­ally we have seen ma­jor spurts in the way cus­tomers have been avail­ing fi­nance through HP Fi­nan­cial Ser­vices (HPFS). Over the past two years we have seen the de­mand for cus­tomer fi­nanc­ing op­tions in­crease among both large en­ter­prises and SMEs in In­dia,” says Pradeep Khemani, Coun­try Man­ager, SMB & Chan­nels, HP In­dia.

This is where in­dus­try pun­dits have been telling IT chan­nels to fol­low the au­to­mo­bile in­dus­try. Though a ma­jor­ity of auto cus­tomers are con­sumers, al­most the whole au­to­mo­bile in­dus­try sells its prod­ucts with fi­nance op­tions.

While al­most all ven­dors have been op­er­at­ing for a long time with their fi­nanc­ing arms, a sense of ag­gres­sion has crept in only re­cently. While ear­lier these com­pa­nies were strict about fund­ing only those or­ders where 70 per­cent of the bill of ma­te­ri­als were their own brands, in many deals the ven­dors have re­laxed their norms.

“In some rare cases we have funded cus­tomers where the Cisco com­po­nent has been as low as 35 per­cent,” in­forms Pramodh Menon, MD, Commercial Sales, Cisco In­dia.

The loans are of­fered to the cus­tomer; for a part­ner the money is usu­ally cred­ited within a week of suc­cess­fully com­plet­ing a project.

Last year, Sify Tech­nolo­gies is said to have re­ceived a loan ap­proval for ` 150 crore from HPFS. The com­pany has used the loan to give busi­ness to nearly a dozen part­ners.

All the fi­nance arms of ven­dors are reg­is­tered as Non Bank­ing Fi­nance Com­pa­nies (NBFCs), and the RBI reg­u­la­tions on NBFCs ap­ply to them.

How­ever, these com­pa­nies are able to of­fer bet­ter rates be­cause their risk cov­er­age on a loan for their prod­uct line is lesser than that of a tra­di­tional NBFC. Most of the ven­dors have poli­cies on used equip­ment, and leas­ing arms which can find a cus­tomer for used equip­ment. This helps a Cisco Cap­i­tal or HPFS to of­fer loans at any­thing from 1-4 per­cent cheaper.

“In ad­di­tion, as with a loan for a high­end car, where the loans can be re­struc­tured to show that in­ter­est rates are lower than the ac­tu­als through re­bates is­sued by the au­to­mo­bile com­pany to the fi­nanc­ing com­pany, ven­dors are able to present at­trac­tive fi­nanc­ing op­tions,” says Harikr­ishna Prabhu, CEO, Tech­nobind, Ben­galuru.

Some part­ners ad­mit that they have not done enough to sell so­lu­tions with fi­nanc­ing op­tions. Says B Shankar, Di­rec­tor, Ashtech In­fotech, Mum­bai, “We would have

“Bill dis­count­ing is an ex­cel­lent op­tion for a small re­seller who would like to ser­vice a large en­ter­prise cus­tomer. Un­for­tu­nately very few part­ners use it” S SRI­RAM CEO, iValue In­fos­o­lu­tion

ideally liked to sell more. Look­ing at our past year we have closed or­ders with only 3-4 cus­tomers with HPFS, but then we have gone to only that many cus­tomers.”

Bill dis­count­ing

There are two types of bill dis­count­ing. Pur­chase bill dis­count­ing is a fi­nance op­tion usu­ally rec­om­mended by dis­trib­u­tors. It es­sen­tially al­lows part­ners to raise fi­nance against the in­voice or bill of IT prod­ucts pur­chased from a dis­trib­u­tor or sup­plier.

Sales bill dis­count­ing (also called Fac­tor­ing) al­lows com­pa­nies to raise funds based on the cre­den­tials of their cus­tomers. Fi­nan­cial as­sis­tance up to the value of the in­voice of the goods sup­plied to a cus­tomer is pro­vided by the lend­ing fi­nan­cial en­tity; the mar­ket rep­u­ta­tion of the cus­tomer is of prime im­por­tance for avail­ing this loan.

In both cases the cre­den­tials of the part­ner are very im­por­tant. While In­gram Mi­cro and Redington have signed with a num­ber of banks in­clud­ing HDFC, ICICI, Citibank and Stan­dard Char­tered to of­fer pur­chase bill dis­count­ing op­tions, not ev­ery part­ner has availed this ben­e­fit.

“We would like more part­ners to take the ben­e­fit of chan­nel fi­nanc­ing which ex­tends their credit lim­its and in­creases work­ing cap­i­tal through a pur­chase bill dis­count­ing model,” says SV Kr­ish­nan, CFO, Redington In­dia.

Most of the pa­per­work around pur­chase bill dis­count­ing is stan­dard, and it is not dif­fer­ent from any other loan. Apart from reg­u­lar pa­pers for risk ap­proval for the bank, orig­i­nals of the pur­chase bill and a let­ter of rec­om­men­da­tion from the dis­trib­u­tor are manda­tory. The usual loan pe­riod is be­tween 30 and 180 days. Pay­ments are usu­ally made with a sin­gle post-dated cheque or through mul­ti­ple part-pay­ments. Pur­chase bill dis­count­ing in­ter­est rates are of­ten 2-3 per­cent above nor­mal bank­ing in­ter­est rates.

There is in­tense com­pe­ti­tion among banks and NBFCs to do chan­nel fi­nanc­ing, and many sub­dis­trib­u­tors say their aver­age an­nual in­ter­est pay­ment is now as low as 14 per­cent. Some of the sub-dis­trib­u­tors even use pur­chase bill dis­count­ing to make an im­me­di­ate pay­ment and avail cash dis­counts, which are of­ten above 2 per­cent pre ne­go­ti­ated with the ven­dor and dis­trib­u­tor, and which could be lower than the in­ter­est rate paid out dur­ing 30 or 60 days of fi­nanc­ing.

“Other sub-dis­trib­u­tors use a bill dis­count­ing loan of 40-50 per­cent of the bill value as a short-term fund made avail­able for a pe­riod of 30 days. This pro­vides them with an ex­tra month to man­age the cash flow and col­lec­tions,” in­forms Narayan More, Head, Fi­nance, Sogo Com­put­ers, Ben­galuru. In rare cases where the loan amount in­volved is large, the bank may even ask the dis­trib­u­tor to give a writ­ten guar­an­tee to part pay the loan in case of de­fault.

Pur­chase bill dis­count­ing usu­ally helps sub­dis­trib­u­tors more than VARs ad­dress­ing end-user cus­tomers. Many banks such as the Ca­nara Bank have set up sub­sidiaries to help part­ners re­ceive fi­nance against sales bills or even pur­chase or­ders from large re­puted cus­tomers.

“Un­for­tu­nately, very few part­ners are mak­ing use of this ex­cel­lent op­tion. For a small re­seller who would like to ser­vice a large en­ter­prise cus­tomer, this is one of the best ways to get work­ing cap­i­tal to fund the or­der,” says S Sri­ram, CEO, iValue In­fos­o­lu­tion, Ben­galuru.

Fac­tor­ing in­volves an in­ter­est rate which is about

“We have bagged sev­eral large or­ders over the past two years by us­ing in­no­va­tive cus­tomer and project fi­nanc­ing schemes avail­able with most banks to­day” PRARTHANA GUPTA CEO, Cache Tech­nolo­gies

14-16 per­cent for an es­tab­lished part­ner ad­dress­ing a well-known busi­ness en­tity.

“Fac­tor­ing is one of the best mod­els whereby you read­ily con­vert credit payables to im­me­di­ate cash. Once a cus­tomer es­tab­lishes credit wor­thi­ness, and the pa­per­work is done, the amount can be cred­ited within the next busi­ness day,” says Philip John, VP, Finco Con­sul­tants, a fi­nan­cial con­sult­ing firm.

Project fund­ing

While sales and pur­chase bill dis­count­ing are ex­cel­lent op­tions for short term fund­ing, for long term projects where the ges­ta­tion pe­ri­ods and pay­ment cy­cles are longer than four months it is im­por­tant to look at al­ter­nate fund­ing mod­els.

In ad­di­tion, many of these projects of­ten run into multi-mil­lion dol­lars where both part­ners and dis­trib­u­tors face credit is­sues from the ven­dors. “One of the rea­sons why ven­dors and even cus­tomers pre­fer na­tional sys­tems in­te­gra­tors such as Wipro or TCS to ex­e­cute large or­ders de­spite bet­ter value be­ing of­fered by some of the smaller SIs is their abil­ity to fi­nance the or­ders,” ex­plains Ra­jesh Ku­mar, Busi­ness Head, In­flow Tech­nolo­gies, Ben­galuru.

To work around this many value added dis­trib­u­tors have come up with a model whereby the cus­tomer, part­ner, dis­trib­u­tor and in some cases the ven­dor agree on a multi-party agree­ment and form an es­crow ac­count where the cus­tomer re­mits pay­ments against dif­fer­ent bills sub­mit­ted as per the con­tract. The bank then makes re­mit­tances as per the con­tract with fixed per­cent­ages to the part­ner, dis­trib­u­tor and ven­dor.

“This is one of the safest mod­els where the OEM is as­sured of pay­ment while part­ners and dis­trib­u­tors do not have the risk of fund­ing the pay­ment. Most large banks have tem­pla­tized con­tracts, and if the cus­tomer can be con­vinced, an es­crow ac­count and a con­tract can be made ready within a cou­ple of busi­ness days,” adds Ku­mar.

Many dis­trib­u­tors say that they have ex­e­cuted mul­ti­ple con­tracts over the past 18 months, and that this has boosted the chances of a smaller part­ner.

“For a part­ner also, this is a great op­tion. A tri­par­tite agree­ment with pay­ment to an es­crow ac­count al­lows the deal to be treated dif­fer­ently and en­sures that our credit lines are not choked. We have ex­e­cuted sev­eral high pro­file or­ders over the past two years us­ing this model,” says Prarthana Gupta, CEO, Cache Tech­nolo­gies, New Delhi.

Hy­der­abad-based Shell Net­works re­cently won a ten­der as part of the e-district project in Andhra Pradesh. “The project cost was around ` 16 crore. We took the pur­chase or­der and project re­port to our bank, and asked them to in­crease our ex­ist­ing fa­cil­i­ties.

The bank agreed on con­di­tion we opened an es­crow ac­count, and that the re­mit­tances from the cus­tomer be made only to the ac­count. We man­aged to fund the en­tire or­der at around 16 per­cent fi­nanc­ing cost,” re­veals AL Sri­nath, CEO, Shell.

While banks and NBFCs of­fer project fi­nance, most part­ners have availed them for in­ter­nal projects and not for fund­ing projects that are ex­e­cuted for the cus­tomer. This is be­cause the mar­gins in many cases do not al­low a part­ner to fund a project us­ing stan­dard longterm fi­nanc­ing mod­els. “In a large or­der where project ex­e­cu­tion times are in ex­cess of 6-9 months it is just not ad­vis­able to opt for any reg­u­lar fi­nance model. Rarely are the mar­gins for a part­ner in ex­cess of sin­gle dig­its, and that would not cover the in­ter­est value of more than 7-8 months,” ex­plains Sri­ram.

“Project fi­nance through banks and NBFCs may make sense if you are ex­e­cut­ing a large ser­vice con­tract where mar­gins are in ex­cess of 40 per­cent since these loans are struc­tured for 3-5 years,” adds Sri­nath.

Other op­tions

Many part­ners are look­ing at op­tions to raise more cap­i­tal out­side the stan­dard money bor­row­ing op­tions. Sev­eral com­pa­nies have looked at sell­ing a stake ei­ther to pri­vate eq­uity in­vestors or other sys­tems in­te­gra­tors to cre­ate a larger en­tity with more work­ing cap­i­tal.

About two years back, Iris Uni­fied Tech­nol­ogy, a Delhi-based soft­ware re­seller, sold a ma­jor­ity stake to a

“We were able to bag and ex­e­cute a 16-crore gov­er­nance project by lev­er­ag­ing project fi­nanc­ing. Our to­tal fi­nanc­ing cost for the project was 16 per­cent” AL SRI­NATH CEO, Shell Net­works

Europe-based sys­tems in­te­gra­tor, Com­parex.

“It was the most log­i­cal step from our side to cre­ate an or­ga­ni­za­tion that can grow faster, wider and deeper. We be­came a sub­sidiary of Com­parex, and to­day our growth rates are sev­eral times that of the in­dus­try,” says Navin Ka­pur, CEO, Com­parex In­dia, New Delhi.

While sev­eral part­ners ad­mit­ted that they have ap­proached pri­vate eq­uity in­vestors, very few of them have been able to get a pos­i­tive an­swer or even feed­back. “PEs typ­i­cally look for big­ger re­turns and are usu­ally wary of the hard­ware mar­ket with its lower re­turns. That is why some of us are build­ing a ser­vices pie which makes it eas­ier to at­tract PEs,” says Shankar.

The road ahead for chan­nels is not go­ing to be easy un­less they are able to sig­nif­i­cantly grow both the work­ing cap­i­tal and the in­vest­ments in their com­pany. How­ever, as the com­mu­nity pro­gresses, it is im­per­a­tive that they start ex­plor­ing smarter fi­nanc­ing op­tions too.

Cover De­sign : Deep­jy­oti Bhowmik

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