Everyone’s talking about growing these days. From expanding their IT services offerings and employee head count to opening new markets and facilities, if you’re not going up many will say your company is going nowhere (or worse). Of course, that’s an over-exaggeration, but the vast majority of IT professionals do have some sort of a business transformation in their long-term plans.
The easy part is thinking through ideas and flushing out the strategy. The biggest challenge these days is finding the money to execute those plans without seriously impacting the company’s cash flow. It’s been several years since the big banking meltdown and the credit market is still quite limited for the small business community. The reality is that the environment for money lending has changed. Channel firms (and other companies) looking to raise significant amounts of cash face hurdles they rarely would have encountered a decade ago.
In fact, Nav’s Small Business American Dream Gap Report found that 45% of small business owners get turned down by banks more than once, and 23% of those entrepreneurs have no idea why their applications were denied. The loans approval process can be complicated and there are no guarantees.
Those with multiple projects underway frequently find their lines of credit stretched all too quickly and, based on my discussions with numerous VARs and MSPs, getting a sizable loan without an equal amount of cash (or more) already in your bank account can be a challenge in some areas. Lending institutions also tend to limit credit to companies that have been in businesses less than three years (sometimes longer). With micro and cash flow loan rates as high as 90%, and credit card terms not much better, IT services firms can really run into issues accessing capital when opportunity comes knocking.
With that in mind, there are new options available to those looking for ways to support large projects and IT services expansion plans. From alternate “money” channels that didn’t exist a decade ago, to ideas that boost cash flow, there are several ways channel firms can skirt or better leverage the traditional bank lending systems.
- Leverage recurring revenue: everyone knows the best way grow a business is organically. A portfolio of long-term contracts will not only ensure a healthy cash flow, but it also serves as collateral when extending lines of credit or for obtaining better bank financing terms when funding major projects. The stronger the language (guarantees) and longer the duration of those customer agreements, the higher the value of your organization…and the better its credit position. That can help reduce financing rates and can save providers hundreds, if not thousands, of dollars over the life of a loan — savings which can be used to fund other projects, to hire new employees and to conduct advanced training.
Looking to improve the equity position of your IT business? The CompTIA Quick Start Guide to Mergers and Acquisitions contains great insight for improving your cash flow and strengthening customer contracts from experienced channel professionals.
- Vendor and distributor support: The value of collaboration has never been higher. While channel vendors and distributors have taken their knocks from providers over the past few years, especially as they coped with business model transformation themselves, many have shifted even greater attention on their IT services partners. Some have gotten very creative with and expanded MDF, and sales and marketing support options continue to grow. Those upfront services can offset the amount of provider capital required to launch a new offering, develop a vertical expertise or open an office in a different market. The best way to find out what they’re willing and able to do? Show them your business plan and ask how they can help before going to a bank or seeking out investors. They may surprise you.
- Angel investors: The typical loan in this category is $25,000 to $100,000 (or higher) and the terms can be quite high since most borrowers that tap this market are newer, high risk businesses. The key thing to remember is these are not loans. Owners typically give up some control and equity to investors. Due diligence can be lengthy and their expectations may be high, so unless the end result will be a major payout for all involved, it should be considered an option of last resort.
- Venture capital: the channel model continues to offer great returns and, though maturing, IT services firms are a solid VC target. The best candidates are MSP businesses with a good portfolio of long-term managed services contracts generating a steady stream of recurring revenue (and reasonable expenses). Solid cash flow is collateral to potential investors. Again, this type of fund-raising is a great way to raise significant cash if a provider is willing to give up some equity and control in the business.
- Crowdfunding: anyone can help fund your business through the internet. These online investment programs can be a fast way to raise capital with no upfront fees if you have a compelling story to tell. They can also boost brand awareness and garner media attention. But at what cost? After going through the online approval process to get set up a specific platform, providers will have to promote their cause through online and traditional awareness campaigns. That takes time and money, and if you don’t reach your funding target, the funds are returned to the investors and your company will receive nothing. Failed projects can damage your company’s reputation and, if you haven’t protected unique ideas with patents or copyrights, anyone can adopt them as their own. It’s still an interesting (and real) opportunity for IT firms that need to raise a lot of cash to market a lucrative solution.
Those are just a few non-traditional methods for financing expansion today. The options seem to grow as quickly as the demand for capital, so keep your eyes open for the right funding fit for your particular strategy. If it doesn’t make sense today, it may tomorrow.
Brian Sherman is Chief Content Officer at GetChanneled, a channel business development and marketing firm. He served previously as chief editor at Business Solutions magazine and senior director of industry alliances with Autotask. Contact Brian at Bsherman@getchanneled.com
