Finance It!

Partners land bigger deals and report better cash flow from steering customers toward Microsoft's seldom-used financing program.

Afinety Inc. reorganized its business around Microsoft Financing. The experiences of this Los Angeles-based consultancy and of several other partner companies make the expanding Microsoft offering worth a hard look from other Microsoft partners.

"It's the best thing that they've ever done. It has absolutely revolutionized our business," enthuses Doug Hafford, vice president of Afinety, a Gold Certified Partner that sells complete networks to small professional services firms, especially law firms.

The idea behind Microsoft Financing is similar to those of the credit arms of major automakers such as Ford or General Motors, which can offer customers sweeter loan deals than banks to help dealers sell cars. It's also distinct from leasing, because customers own the merchandise outright at the end of the financing term, without having to worry about a balloon payment or a product return.

Despite being around for several years, Microsoft Financing has a low profile, especially outside the Microsoft Business Solutions community where it got its start. Under the program, Microsoft uses its substantial pile of cash to finance customer purchases of hardware, software and partner services at interest rates competitive to banks loans. Finance terms generally range from 24 to 60 months. Deals must include some Microsoft software, but they may involve as little as one license. Meanwhile, the financing for partner services is unavailable elsewhere in the industry, Microsoft and its partners say.

Although the program is in use by only a few thousand of Microsoft's 600,000 partners, the company is aggressively investing in the program. Microsoft hopes to loan twice as much money in the next year (the current portfolio is just under $500 million), while expanding from about 11 markets worldwide to 20. Meanwhile, the company recently cut the minimum deal size eligible for finance from $10,000 to $3,000, making the program an important option for partners who serve even the smallest of SMBs. At the same time, Microsoft Financing is improving upon the speed with which it can facilitate larger deals. The company recently raised the maximum deal size eligible for instant online credit approval from $100,000 to $250,000.

Afinety has reorganized its business model and its sales pitch around Microsoft Financing. When talking to customers, "we lead with [Microsoft Financing]. It's on our quote," Hafford says. Afinety's solution usually involves taking over maintenance of the network through monitoring and patching and may be as simple as standardizing some equipment or as complicated as replacing the entire network, including both servers and PCs. The proposal to the customer, however, abstracts the technical aspects beneath a purely business discussion of the business goals that the company needs to achieve with the network, Hafford says. By encouraging financing through Microsoft, Afinety gets paid in full up front, but the customer has a predictable and reasonable IT bill.

Credit Check

To qualify for Microsoft Financing, a partner must:

  • Be at least a Registered Member of the Microsoft Partner Program
  • Have at least one Microsoft license in the end customer's purchase
  • Subject the customer to the standard loan approval process

-- S.B.

"We can go in and say, Mr. Small Business, you need to spend $75,000. But when you say $2,500 a month, or $100 a user, that's not so bad," Hafford says. "We can use the financing to promote this sort of model. Is it worth $100 per user per month to solve your IT? Of course it is." Hafford doesn't have hard numbers, but he estimates Afinety's business has increased by 10 percent to 25 percent from emphasizing Microsoft Financing.

One of the main advantages can be measured in cash flow, an issue that bedevils almost all SMBs. "We have 10 times more money in the bank. It's ridiculous. We never worry about cash," Hafford says.

Other partners share his enthusiasm for the cash flow bonanza enabled by financing. "We're paid when the loan gets signed and sealed. As a result, we don't have to track accounts receivable, we don't have to go back to the customer for collections. It's an enormous benefit," says Judy Thomas, vice president of business development for the TM Group Inc., a Gold Certified Partner in Farmington Hills, Mich.

For Bryan Stuart, vice president of corporate development and CFO at Junction Solutions LLC, a Lincolnshire, Ill.-based Gold Certified Partner, financing means flexibility. "If you have nine months of implementation services and those fees are paid up front, it allows you to hire a little sooner," he says. "Instead of waiting for that next deal to happen, you can do it now." Junction Solutions has gone from a dozen people at the end of 2003 to about 130 today, partly on the financial strength of doing business through Microsoft Financing.

Doug Hafford

Larger deals also result. According to Microsoft's analysis of internal sales data, to take one example, Microsoft Dynamics AX (formerly Axapta) deals are 80 percent larger when financed and discounting is less. "We can't state unequivocally that because they're financed, they're larger, but financed deals are [generally] larger," says Brian D. Madison, general manager of Microsoft Financing. Hafford provides anecdotal confirmation of Madison's trend: "We are able to do more business, larger deals, with our clients for the network."

Thomas describes a recent deal with a national personal-services company that had been struggling to afford some add-on components in addition to the TM Group's services. "They had a $50,000 budget to pay out of pocket," Thomas says. The add-ons would have pushed the total to about $150,000, which the company couldn't afford. "By using financing, they were spending less than $50,000 [a year]." Ultimately the customer got a solution to move its business forward, and the TM Group got all its money up front from Microsoft. It's not the only time a TM Group deal has doubled or tripled because Microsoft Financing was available, Thomas says.

Stuart, of Junction Solutions, which develops and sells Dynamics AX-based ERP solutions for retail, food and beverage processing, says deals done through Microsoft Financing involve less haggling and close faster. "The whole notion of nickel-and-diming during the sales cycle is gone," he says, comparing the process to an automotive purchase. "If you're buying a car, you're going to negotiate as much as you can. If you're leasing, all you're concerned about is what you're paying monthly." Junction Solutions sells to larger customers, with annual sales of about $50 million to $1 billion, but even there, the initial lump payment often gives prospective clients pause. "For most of our customers, it's hard to swallow writing that first check for $500,000 or $1 million," he says. Financing the deal with regular payments over two to five years takes the sting out.

Microsoft has played with the financing mix to come up with attractive packages. In July, the company launched its "6/50" promotion. Customers pay $50 per month for six months, then pay the balance in even monthly installments over the following 36 months. "The fact that they come up with these creative products is important," Stuart says of those deals.

Microsoft recently raised the maximum deal size eligible for instant online credit approval from $100,000 to $250,000.

There's only one downside to Microsoft Financing for customers, according to Thomas: interest. Rates are generally comparable to what banks charge. Even those rates are sometimes negotiable. While banks and leasing companies don't particularly care whether partners close a particular deal with a customer, Microsoft has a vested interest in every transaction. All three partners quoted in this article reported instances where Microsoft made exceptions on terms to close important sales. "They really come to the plate," Thomas says. "On a couple of occasions, where the interest rate was too high, but the deal was big enough to warrant it, they lowered the rate."

Microsoft began the Microsoft Financing program in 2002. The brainchild of then-treasurer and now corporate vice president and CFO Brent Callinicos, the idea was to use some of Microsoft's tens of millions of dollars in cash on hand to finance deals. "Our primary role is to drive more sales," Madison explains. "We use the financing as a sales tool-as a closing tool."

The program started inside Microsoft Business Solutions, now Dynamics, and expanded into nine countries. "Part of our discovery was that Microsoft is a lot more effective when we message across our entire platform, not just MBS," Madison says. In 2004, the company extended the program to the Enterprise Partner Group. Then in July 2005, Microsoft Financing was extended to the company's Small and Midmarket Solutions and Partners (SMS&P) group, allowing the program to reach all of Microsoft's distribution network aside from OEM sales.

Microsoft has aggressive plans to increase the number of financed deals because executives are hearing about impressive results: faster deal closes, incrementally larger deals, lower discounts. When you aim to nearly double your business each year, you usually run out of headroom fairly quickly. But Microsoft believes there's still plenty of space for financing to grow. "We've sized the market opportunity at $50-billion-plus globally per year for new software and services," Madison says. "The hardware market is larger. That being the case, if we were to hit 10 percent penetration, that would be $5 billion right there." Madison calls 10 percent a conservative figure compared to other industries where financing is available.

Section 179 + Microsoft Financing = Customer Opportunity

You may know the Internal Revenue Code's Section 179 as the tax loophole that lets some businesses write off the purchase of luxury SUVs. But Section 179 isn't just for Hummers anymore. Congress clamped down on the SUV loophole in October 2004, but the rest of Section 179, designed to stimulate business spending with an up-front tax break, remains in force and has even improved with age. Some partners have discovered that combining Section 179 with Microsoft Financing can give customers another reason to do a deal.

Asked if many partners are taking advantage of Section 179, Microsoft's Brian Madison jokes, "The smarter ones."

Most business property that is useful for a few years is accounted for as depreciating over time. For tax purposes, a portion of the cost can be deducted each year. What Section 179 does is allow a business to receive all those tax benefits in the first year. In 2003, the one-year write-off limit was quadrupled from $25,000 to $100,000. Indexed for inflation, that amount is now $108,000.

One other important change came through in 2003. The IRS added off-the-shelf software to a list of property eligible under Section 179, joining another relevant category for Microsoft partners -- machinery and equipment. The changes will last at least through 2009.

Microsoft periodically puts together messaging for partners about taking advantage of Section 179. "You ought to be having conversations [about this with your customers]," Madison says. "We started coming up with creative payment solutions to work around [Section 179], as well. A customer can acquire, but not start paying until the fiscal year." In other words, they can get the tax benefits one year and begin payments the next.

One Gold Certified Partner putting Section 179 to good use is Afinety Inc. "A really good thing about [Microsoft Financing] is it qualifies for Section 179," says Afinety's Doug Hafford.

"You can buy a network in December. Let's say it costs you $100,000. You don't start making payments for several months. You get to write off $100,000 against your income. The client can actually use tax savings to pay for the entire first year of ownership for their computer system," Hafford explains. "We typically go with three-year financing. The typical corporate tax rate is 34 percent. You take that and you figure, of the $100,000 you're going to pay a third of it each year. Your tax savings almost identically match your first year's payments."

In fact, Hafford says, some customers opt for two-stage deals, with part closing in Q4 of one year and the rest closing in Q1 of the following year. The arrangement allows for up to $200,000 of a project to come under Section 179. -- S.B.

Right now, the program's growth is being driven by financing in the United States, although the company is seeding markets worldwide. "The United States is a bit more of a mature market for us, so it's on a real hockey-stick [growth pattern] right now. The other markets usually take two to three years to develop," Madison says. In the short term, executives expect strong growth in the United States, he says. "Longer term is when the other markets that we'll be adding will start to kick in. Ultimately, financing originations will pretty much mirror Microsoft's new business."

Meanwhile, there's a lot of room in the program for new partners to come aboard. While Madison wouldn't specify how many partner companies take advantage of Microsoft Financing, he did provide a range: between 1,000 and 3,000. The addressable universe of partners who actually resell Microsoft products in some capacity is probably somewhere between 200,000 to 300,000, he says. In any case, Microsoft's goal is customer-focused. "We want to see a financing offer for every customer," Madison says.

In addition to the extra money, Microsoft is ramping up the financing department, which currently includes about 50 employees and is increasing fast. That fact actually raises a concern. Partners currently engaged with the program cite the can-do attitude and flexibility of Microsoft employees as a huge factor in the program's value. Can Microsoft maintain that ethos amid rapid growth?

Right now, the program's growth is being driven by financing in the United States, although the company is seeding markets worldwide.

Madison believes it can. "It's one of my big concerns, that we would lose that level of interface. If anything, with the scaling up of the business, we've actually gotten better," he says. He acknowledges that with a relatively small team, Microsoft Financing has been able to handpick employees. He knows the job falls to him to set standards at his level that everybody adheres to as the staff gets larger.

Partners using the program have reason to hope the quality of people in the Microsoft financing department stays high.

"The best client relationships we have are on those loans," says Thomas, of the TM Group. "There's no calling over a $40 invoice. There's no arguing over an hour of time. It just goes into the loan payment and they're happy. It improves the working relationship between us, the customer and Microsoft."