By Brandon Pho, California Business Journal
When Paul Stemler was COO/CFO at SARCOM, an IT service management company that catered to the Fortune 1000 with technology services, the constraints of financing Value Added Resellers (VARs) hit him square in the face.
VARs, which resell software, hardware and networking products with an added value, are broken down into two lines of business, according to Stemler: a distribution business that delivers product under thin margins and high volume, and a service business that requires technicians and product managers for consultation.
“Managing that on one balance sheet was very difficult,” he says. “So when you add in the constraints around acquisition financing, growth financing and so forth, it was hard.”
That was how Global Technology Finance (GTF) got started — to solve that constraint by providing technology financing in the industry channel to businesses.
“Our notion was, if you can rely on the credit quality of the end users, not the VAR, then you ought to get more money. So we formed GTF to solve our own problem at SARCOM to get more liquidity, get out of the bank constraints and operate in a financing strategy that’s more specific to the channel needs,” Stemler says. “That construct proved to be very successful for SARCOM.”
Relying on a company well-versed in the VAR and technology industry — a company like GTF — is more effective than relying on a bank for financing, Stemler says.
“Our process, knowledge and expertise is in this business, whereas for a bank, this is not the case,” he adds. “For example, if there’s a vendor that you are doing business with, and you need to get something from that business, the bank can’t help them do it. They don’t do regular business with that vendor, whereas we do. We can make a phone call and get something solved and help win the business. There’s a lot of value in having an expert in our world supporting them.”
GTF’s business model, which requires no personal guarantees, no capital use restrictions and no financial covenants, proves more profitable when a business is given more reign with its funding.
“If you are an owner of a business, you’re taking enormous risk. You own the business, you’ve got to pay all the people. On top of it, you’ve got a personal guarantee from the bank. It adds up to a lot,” Stemler says. “A lot of times the bank covenants say, ‘you can’t take any money out of this without telling us.’”
Foregoing such tight restrictions creates more flexibility.
“We want that cash to go to the company and we want the company owner to do what’s right for them,” Stemler says.
Stemler categorizes businesses as either a ‘three’, a ‘two’, or a ‘one’.” By his definition, a ‘three’ has financial challenges that need solving; a ‘two’ is in slightly better shape; and a ‘one’ is “really humming.”
Companies classified as ‘three’s’ are generally GTF’s entry point.
“The reason being is, they have a constraint they need to solve. We can step in very quickly, provide the capital and intellectual support to solve that,” Stemler says.
One such company was Sayers Group LLC, which had initially experienced problems with financing its technology services.
“GTF enabled us to do sizeable deals that would have been difficult to do on our own, especially early on in the relationship,” says John Kasser, COO for Sayers. “They just kind of simplified our life.”
That simplification was a result of GTF implementing and ensuring faster collections and increased cashflow, lower capital costs due to reduced borrowings and higher quality collateral, and lowering Sayers’ operating cost by “doing it right once” and eliminating any “redo’s” in production orders.
“We provided Sayers with vendor credit, so orders flow smoothly and their technology vendor partners were more confident in partnering with Sayers,” Stemler said.
GTF also provided faster, easier delivery and customer support for Sayers, which helped it in the marketplace.
“Sayers is a great example of a company that’s clearly now a ‘one,’” Stemler said.
The business model GTF uses to support Sayers is one that it has operated on since its conception in 1998.
“We rely on the credit quality of the end user, or the customer of the channel partner, not the channel partner,” Stemler says. “By doing that, we do not have bank covenants, we have very few restrictions on uses of capital and we are very focused on getting the orders out and the industry knowledge that goes with it.”
Paul Stemler, President
Global Technology Finance, LLC