Creating value through finance model innovation

Ongoing economic pressure means that securing the liquidity and working capital required to drive business growth will continue to be a challenge for the foreseeable future. But last month’s Comms Dealer insight session, held in association with B2B APM, measured the potential impact of a new subscription funding model that could enable channel organisations to accelerate the cash flow they need to build value, engage better, drive efficiency and further their growth ambitions in times of challenge, opportunity and change.

As comms sector transformation continues to gather a head of steam it’s more important than ever to focus hard on cash flow management and push working capital optimisation to the top of the corporate agenda – but the funding required to underpin growth, support change and deliver long-term value is becoming far more difficult to secure. “For telecoms resellers in particular, and at service provider level, their options for raising extra cash is limited in terms of securities which need to be given and the lending that is available,” stated B2B APM Director Dan Proctor.

According to Proctor, subscription funding is the most appropriate model to drive working capital optimisation. His strategy pushes cash into channel businesses to accelerate their income and, for example, drive innovation and growth. Proctor is convinced that this is the way forward and has launched a product into the telco market that not only turns new recurring deals into immediate cash but also enables channel firms to sell on their service based contracts and gain a cash injection on day one. “Channel companies can utilise existing assets in their business in a straightforward way to improve their liquidity,” added Proctor.

For telecoms resellers in particular, and at service provider level, their options for raising extra cash is limited

CEO Andrew Dickinson noted that while the debt market in the channel is not closed, it is however squeezed and limiting. “You’re probably getting two to three and half times cover at best and paying punitive interest,” he said. “Anything you can do to smooth this and move from a non-recurring revenue model to a predictable recurring one is a good thing. Moreover, the old days of buying a box are over – with exceptions – so you have to make sure your sales people are in tune. They need to get used to the idea that they get paid when you get paid.”

Up-front payments
This scenario supports the case for a subscription funding solution that pays up-front and is geared towards working capital optimisation. After all, working capital becomes more critical in times of economic headwinds and market disruption, making it important for the channel to prioritise cash flow management.

The extent to which the cost of borrowing, for example, can inhibit channel firms and stop them from responding to future opportunities at pace was underscored by Inform Billing Managing Director Shaun Bodsworth. “The issue is not about funding the deal, but funding business growth,” he stated. “We’ve grown organically over 13 years but to fast-forward our investment the options are to put your head on the block with personal guarantees or take private equity, which is not for everybody. Subscription funding opens up another opportunity. We could accelerate our development by drawing in some cash from sound revenue from customers that have been with us for a long time. So rather than take on a developer in six months time and another one in a year’s time I can take them both on now. That’s the key. For anyone in the as-a-service business there’s legs in the idea.”

In the distributor segment there is a real need for a hybrid finance model which is semi-leasing and semi-rent, believes Viegli Business Owner Robert Nunn. “Cash is King, so anything you can do to leverage a relationship with a finance business that puts cash into your business is a good thing,” he stated. “All of my cash is in the warehouse. Why would a distributor give a credit line worth many thousands to a small reseller? We deal with small resellers that only do three or four bits of business a year but it’s good business. And accelerating cash into our business can help us.”

Cash is King, so anything you can do to leverage a relationship with a finance business that puts cash into your business is a good thing

Both Bodsworth and Nunn highlight the potential for a new funding model to be applied across the supply chain which could drive cash flow for upstream providers like billing companies, distributors and aggregators for example. Furthermore, Nimans Sales Director Tom Maxwell provided some context to underline how emerging financing solutions will be riding the wave of an already buoyant marketplace. “We’ve been offering financial services for many years and just had our best two months back-to-back,” he commented. “Two or three years ago we couldn’t get licences leased but we now have products that are 100 per cent licensed. Leasing and financial services has evolved, albeit slower than the market requires, but it’s going well.”

Accelerating change
It is Proctor’s intention to speed up that evolution by moving away from the lease to raise service revenue. And there are a number of different applications of the product, called Liquid Subscriptions, which Proctor says is the ‘antithesis of leasing’ and the first of its kind in the telco channel. There is a similar offering in the SaaS market but the advances are small by comparison. In practice, there is a 10 per cent fee payable to APM but in return the company accelerates cash and working capital that can be invested into growth strategies with outcomes that far outstrip the initial investment.

Key use cases
Shedding light on some of the applications for Liquid Subscriptions, Proctor said: “The service can be deployed on a per contract basis as new customers come on board and it can be used to support the overall commercial construct of a deal. Another example is a reseller using this to leverage the balance sheet of a company they are buying, looking at the recurring revenue in the knowledge that they can get x amount of cash back immediately, which is reducing the amount of liquid cash they put into these ventures. It all comes down to our risk and our underwriting.

“We’re also working with people in the CRM field which advertises a cost per month but bills up-front so you have to pay annually in advance. Their customers can now truly pay monthly and they still get paid annually in advance. Leasing companies won’t touch this because it’s pure services to be provided in the future.”

It goes without saying that the fast-moving business comms market has created a need for alternative payment and funding methods, a requirement that is reflected in Daisy Communications CEO Dave McGinn’s experience. “When I speak to friends in the industry I generally say to them that they need to get as much monthly revenue into their business as possible if they want to gain high multiples,” stated McGinn.

“Ninety six per cent of our business is now recurring revenue. We have moved away from on-premises and leases. But with monthly recurring revenue you are becoming the debt underwriter of your customers. You might not want to underwrite the debt or future debt of customers, and might want to subset some of that to someone else. It’s about figuring out how you want to attack it.”

One approach, noted Voiceflex Chief Commercial Officer Paul Taylor, is to use leasing as a hybrid product to help and support people transition to a recurring revenue model. Another important factor is the extent to which this strategy could be applied to existing customer bases. “Resellers need cash in the business but they have to morph,” he said. “Furthermore, the acquisition of a new customer is difficult. But telecoms is the best industry to be in because you can meet the requirements of an existing base and keep that product chain running over time. We started with PSTN and moved to ISDN, then ISDN to SIP, from SIP to UC and now UC to UCaaS. You can have the same customer for 20 years and every three or four years sell them a brand new product. Many resellers have big bases and can sell additional products. And many resellers are smart organisations with recurring revenue.”

Working capital is vital to businesses regardless of their lifecycle

Notably, recurring revenues are not leasable assets so leasing companies don’t like funding them, and subscription licenses cause a lot of risk to the leasing firm. But new funding approaches can dovetail with a comms provider’s existing sales approach and business model and help them double down on the need for a laser-like focus on liquidity whatever their size.

“Working capital is vital to businesses regardless of their lifecycle,” said Pragma Sales Director Roan Pratt. “The traditional leasing model is critical to newly established and young businesses, less so to those more mature with increasing monthly recurring revenue. If an alternative model can deliver both of these elements providing working capital in different ways then I’m sure the channel would welcome it.”

It’s also worth noting the big changes experienced by the public sector at the moment in terms of IFRS 16, the accounting standard implemented to make sure that nothing is off the balance sheet from a leasing perspective, and which could have a ripple effect across industries. “The public sector is going through a huge challenge in terms of how it can enter into a contract,” explained Proctor. “The split between service and hardware raises the question of what is and isn’t a lease. It’s an interesting example that shows how moving to a pure service based service model will help public sector organisations enter into a contact a lot quicker.”

Setting the standard
Changes to leasing standards are not only reflected in IFRS 16. Hexa Finance co-founder Stuart Mason shared insights into how his leasing firm is shaking up the traditional finance function by becoming a generator of positive value across three segments – vendors, channel partners and resellers. “We add early value where companies haven’t got the balance sheet nor the cash to invest and they need the leasing to power the business,” stated Mason. “Four to five years later they may want to exit but that means growing recurring revenue to increase multiples, which means coming off of leasing and maintaining liquidity in the business to service customers. We take these organisations to a point where they can exit, including through due diligence and credit matrices. Fifty per cent of what we do isn’t finance, it’s guiding around due diligence.”

The importance of finance transformation in the comms channel cannot be over stated, and ProVu Group Managing Director Darren Garland succinctly summed up why business leaders should focus on finance models that relieve working capital and operational pressures by prioritising the cash intake needed to run day-to-day operations and invest in future growth. “Having worked in a number of businesses with poor working capital I have learnt the hard way how important it is,” he stated. “A good working capital position allows you to protect your business from unexpected events and downturns. More positively it enables you to take advantage of opportunities that you would otherwise have to pass by.

“However, gaining a healthy working capital position is easier said than achieved. For many reasons a good business may not necessarily have a strong working capital position. In these situations companies need to look for external support through different funding methods. And as the sales mix transitions from a capex to more of an opex play there are opportunities for innovative new funding sources that can be tailored to meet the new operational approaches taken by many channel companies.

More insights...

In terms of the liquidity of the channel a big question is which distributor you chose and who is going to give you the biggest credit line and how long will they allow you to pay for it?
B2B APM Director Dan Proctor

What’s important from the banking and funding side – which is why they all love the IT and telecoms industry – is the business critical assets. Bad debt in the IT and telco world is around 0.2 to 0.3 per cent.
Hexa Finance Co-Founder Stuart Mason

Look at how resilient resellers are: The channel used to be IT and comms but with the advent of IP we’ve diversified and given customers entry into new markets like CCTV, the network and wireless LAN. The wallet share of the customer has increased.
Nimans Sales Director Tom Maxwell

The industry has created a perception that leasing has no part to play, but an educated sales person can sell against opex all day long with a capex and lease approach.
Viegli Business Owner Robert Nunn

The channel is incredibly resilient and our bad debt is ridiculously low. We deal with a thousand reseller partners and service providers and may get one or two a year with an issue.
ProVu Group Managing Director Darren Garland

The word ‘leasing’ is evolving – finance is the importance piece.
Hexa Finance Co-Founder Stuart Mason


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