Like many businesses, channel partner organizations may need to finance operations or impending growth. While there are typical go-to financing options—bank loans, lines of credit, personal savings, credit cards—other choices can be easier and more cost effective. As such, many financing options enable channel partners to acquire new technology faster, provide solutions to clients more efficiently, and grow more profitably as a result.
When it comes to SMB growing pains, financing concerns are at the top, according to a recent survey of 692 SMBs by BlueVine, a small business financing company in Palo Alto, Calif. Among the challenges cited by respondents are: funding day-to-day expenses such as inventory and payroll, funding longer-term expenses such as equipment, contending with long payment cycles, and invoice processing.
Despite these challenges, more than 80 percent of SMBs surveyed resort to tapping personal finances for funding. Paul Stemler is president of Global Technology Finance LLC (GTF), a Newport Beach, Calif.-based company that specializes in channel financing. “In my experience, most VARs are really not focused on their financing options,” he says.
Yet there are plenty of options that channel partners should consider. One is invoice factoring, a B2B commercial financing method that involves a factor company purchasing the receivables or invoices of a company for a discount. A channel partner that has invoices outstanding for $10,000 can sell those to a factoring company that will provide most of the funds to the channel partner within days; a partner then has the funds to make payroll in two weeks rather than wait the 30 days or longer it may take for customers to pay their invoices.
Typically, companies get “80 percent of the invoice value up front, with the remainder kept in reserve until the invoice is paid and the factor company takes a 3 to 4 percent fee,” says Bert Goldberg, executive director of the International Factoring Association trade group in Avila Beach, Calif. (When factoring purchase orders rather than invoices, the fees are higher due to higher risk.) As Goldberg sees it, factoring is ideal when companies have a short-term cash flow crunch and need a quick and relatively affordable way to get financing. The factoring company validates an invoice and the credit worthiness of the customer and takes on all the collection duties, relieving a channel partner of those administrative tasks.
On the downside, factoring is “more expensive than if companies can get a line of credit from a bank,” Goldberg says, and the amount and terms are based on the invoice amount and the end customer’s credit. However, credit lines from a bank require collateral and a history of solid financials—two things factoring eliminates. Goldberg says a typical tenure with a factoring company lasts one to two years. “It’s a great way to be funded over the short term,” he says.
Financing for the Channel
According to Stemler, GTF offers financing that is more specific to channel partners’ needs and addresses their unique challenges. Among them, he says, are limited equity and therefore limited bankable credit; project-related variable revenue and unpredictable profitability; and a varying degree of capital requirements month to month. “A reseller needs money from when the purchase order is placed to the time of collection, and that is what we finance,” he explains.
GTF offers financing against the end customer’s purchase order, which means “we don’t have line restraints, covenants, or the typical terms that a bank or lender would have,” Stemler says. GTF has relationships with more than 500 vendors; when a reseller receives a purchase order for equipment from an end customer, the reseller orders from a participating vendor via GTF’s account; the vendor then ships the order and invoices the customer. GTF then finances the purchase based on the invoice and GTF pays the vendor.