Tuesday, March 30, 2010

Dell Boosts Lending to Small Businesses

The Wall Street Journal
Dell Spurs Sales by Lending to Hard-Hit Small Businesses

For years, Dell Inc. has relied on sales to small businesses for a big chunk of its revenue. It sells more personal computers to small companies than any tech supplier. Now, it is offering more credit to spur small business purchases.

The financing strategy is showing promise. Its small-and-medium-business division posted a 10% gain in revenue in the company's fiscal fourth quarter ended Jan. 29 from the same period last year, versus an 11% gain for the company as a whole. Operating-profit rose 17% from the same quarter last year to $282 million, surpassing the $281 million in operating profit from Dell's large-business unit, which posted an 8.4% rise from last year.

The Round Rock, Texas, PC maker has spent the past year trying to stimulate spending by its small business customers. It has offered new financing arrangements to small businesses, including interest-free deals for some purchases of $25,000 or more. It even has offered free computers to some small-businesses that purchase other products. In some cases, Dell has offered discounted computers and services to companies that agree to appear in its advertisements.

The strategy of extending more financing may be risky at a time when many small businesses are struggling. And if credit markets don't improve soon, some Dell customers may have trouble repaying their loans, says Ray Boggs, an analyst with researcher IDC who studies technology purchases. Dell is "certainly taking the risk" of a default by customers, he says.

Such financing deals helped stimulate buying by customers, including Granger Community Church in Granger, Ind. Last year, the church—which has close to 6,000 members—laid off eight employees and cut its information-technology spending as donations fell. "Last year was a lean year," says Jason Powell, the church's technology director. "My IT budget went down to 2004 levels."

The church purchased two servers and software from Dell for a total of about $30,000 because the company offered a three-year lease plan that allowed it to keep the equipment when the lease expires. Dell's tech rivals, such as Hewlett-Packard Co. and Cisco Systems Inc., also offer zero percent financing on some items. But they are less reliant on small businesses for their sales.

Dell says 22% of its small- and medium-sized business customers, which it defines as companies with fewer than 500 employees, rely on Dell financing for purchases, compared with 17% two years ago.

"The percentage of our customers using our credit facilities is increasing much faster than our base business," says Erik Dithmer, Dell's vice president in charge of U.S. sales to small and medium businesses.

Dell has $7 billion in credit available for small companies, and extends most of the credit itself rather than through others, he says. The banking crisis has made it difficult for small companies to get credit, he says, and traditional lending sources have been tight.

Much of small-businesses' financing is from "credit cards and home equity, and those are still not as liquid as they need to be," Mr. Dithmer says.

Its push comes as small companies have lagged their bigger counterparts in emerging from the recession, crimping Dell's results last year. For its fiscal year ended Jan. 29, Dell booked $12.08 billion in sales to companies with fewer than 500 employees, or 22.8% of its total revenue, down from $14.9 billion in its prior fiscal year.

Even small companies that do have cash are resisting big purchases. "We've been holding onto our cash, so we haven't spent much of it because we know it's a tough time," says Michelle Madhok, the chief executive of fashion blog publisher White Cat Media Inc., which is headquartered in New York.

Ms. Madhok says she got a discount from Dell in exchange for appearing in a promotional video. In coming months, Ms. Madhok says, she hopes to avoid big expenditures on tech equipment, since she's not sure when White Cat—which got $1.3 million in venture funding 18 months ago—will get more investment.

Mr. Dithmer says Dell decided last year that it would have to start extending more credit to small customers. To help minimize the risk of default, he says, the company brought in long-time small-business customers to train Dell refurbished PCs salespeople to understand a small-business balance sheet.

As a result, Mr. Dithmer says, Dell has become "a little more prudent in our credit, just in terms of evaluating the credit risks." With startups, he says, Dell is now "much more conservative."

Still, the computer maker significantly increased its provisions for doubtful accounts including financing, a set-aside for customers whom it suspects won't be able to pay off their balances. That reserve amount climbed 38.4% in Dell's last fiscal year to $429 million, from $310 million in the prior year.

The company points to entrepreneurs such as Debra Ruh as examples of how Dell financing can help a customer with new computers or refurbished laptops. Her company, TecAccess LLC, tests computers, Web sites and software for suitability to people with disabilities.

Ms. Ruh says she started the company, which now has 15 full-time employees and about 30 part-time workers and contractors, in 2001 using cash from home-equity loans and credit cards.

She says it has been hard to buy new or even refurbished Dell computers to keep up with her company's recent expansion because customers are waiting much longer to pay Rockville, Va.-based TecAccess than in the past, and short-term credit is hard to get.

"It's impossible to find financing," Ms. Ruh says. After her bank came under federal scrutiny last year, it tightened her line of credit. Slower sales forced her to lay off some staffers and take a pay cut. As the economy recovers, cash flow remains unsteady, Ms. Ruh says.

"The banks are scared to death of small businesses," Ms. Ruh says.

Dell was willing to extend credit for Refurbished computers. Last year, TecAccess bought about $10,000 in equipment from Dell on credit Still, Ms. Ruh says the slow cash flow that hurts TecAccess sometimes comes back to bite Dell.

"Sometimes I've been slow paying," she says, adding payments are usually late by a few days, but sometimes by a month or more. "Every once in a while they say, 'You better pay.'"