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CIOs find alternative funds for startup growth in vendor financing

Midmarket companies are feeling the soft economy when acquiring growth capital, and vendor financing is ready to step in. Are you ready to put others’ money where your mouth is?

Everyone's talking about when Bubble 2.0 will strike and wondering where we are in the chain of growth. Banks are nervous about lending to startups, but how can companies fuel economic growth if they can't even get up off the ground?

Most midmarket companies have burned through the money stashed under their mattresses and are finding themselves in a money crunch when it's time to take that next vertical leap. Creative CIOs are turning to vendor financing to lease computer equipment and software, allowing them to bridge the gaps between venture capital and traditional lending institutions.

Canvera Digital Technologies Pvt Ltd., a photographic printing company in Bangalore, India, is on the cusp of major growth at a time when credit has become extremely difficult to obtain. According to CEO Dhiraj Kacker, banks in India are much more cautious than in the U.S.; while the 3-year-old company has secured venture capital, it had to choose between spending it on cost-of-business items like high-end commercial printers or investing the capital in growth-enabling functions like sales and marketing. Canvera's printing vendor, Hewlett-Packard Co., offered up its business equipment financing branch, HP Financial Services, as a way to support the acquisition of the needed hardware.

"It was a very straight-forward process. I have no complaints. The salespeople are very motivated and moved it along quickly," Kacker said. He added that he’s now very optimistic about Canvera's business resource planning for fast growth in the next 18 months. Those new industrial printers are elemental to support Canvera's increased sales and marketing activity, allowing extra capacity and giving the company the freedom to focus on its tech-heavy infrastructure.

"It was definitely the most painless way to get this done," Kacker said. "HP Financial Services has served as a key enabler in allowing us to deploy the state-of-the-art technology equipment we need to remain competitive. By working with HP, we are able to consistently provide our customers with the high-quality imagery they demand."

Other vendors, including Cisco Systems Inc., Microsoft, Oracle Corp., IBM and EMC Corp., have offered to finance large IT purchases for years -- but just as banks compete for your mortgages, the IT vendor financing arena is now seeing juicy deals like 0% financing and payment adjustments used to lure small and medium-sized businesses into signing on the dotted line. With the tightening of everyone's belts, the fight has gotten fierce. For instance, Cisco Capital offers 0% financing with an eye on the midmarket CIO and upped the ante by offering a $1 buy at the end of a 36-month lease term. IBM Global Financing calls out HP Financial Services specifically on its financing FAQ in an effort to even the playing field.

By working with HP, we are able to consistently provide our customers with the high-quality imagery they demand.

Dhiraj Kacker, CEO, Canvera Digital Technologies Pvt Ltd.

From a midmarket CIO perspective, the idea of leasing and/or vendor financing is very alluring. The pay-as-you-go model helps reduce the budgetary burden of extreme growth and gives a much more streamlined approach to investing in new technology. It can also provide a degree of flexibility by spreading the pain of expense across the years rather than taking a huge bite out of a smaller business' bottom line at a time when capital is required for agility. And there's no denying the benefit to breaking the cost of IT initiatives down into monthly and daily expenditures to appease a growly CFO.

However, financing with a vendor does have some element of risk. Your company is beholden to a vendor perhaps more than is comfortable. Breaking a financial agreement can be expensive, not to mention the cost to business of uprooting all of your primary hardware for a monetary decision that may be outside the CIO's control. Additionally, some lease agreements allow you to buy your own used equipment at the end of the term at a rate that may not be equitable to the same used, 2- or 3-year-old equipment from the marketplace.

Randy Lhowe, CIO of Commercial Vehicle Group Inc. in New Albany, Ohio, said he felt that the benefits outweighed the risks when he talked to TechTarget about creative financing strategies with Cisco Capital and Dell Compellent. "Let's say you have equipment that's 4 years old today. You are paying a higher maintenance fee for that than you would with today's money, because computer equipment basically is better, better equipment and lower total cost of ownership."

Clearly, it's all in how you look at the bottom line: Typically, the overall cost of vendor financing is going to be higher than buying the technology outright from the beginning. For companies like Canvera, however, the ability to seize growth in their startup days is an investment in the future that they’re willing to make.

Let us know what you think about the story; email WendySchuchart, Site Editor.

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