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Benchmark interest rate rises; what's the channel impact?

The U.S. Federal Reserve today hiked its key interest rate, a move that could signal additional increases that will ultimately affect channel partners.

The U.S. Federal Reserve today raised its benchmark interest rate to a range between 0.25% to 0.50% and suggested that gradual increases could follow, moves that will eventually impact channel partners and their customers.

The Fed's action marks the first increase in the benchmark rate in nearly a decade. Banks use the Fed's short-term interest rate -- also called the federal funds rate -- to set their rates for consumer and business loans. Credit card rates are also influenced by the short-term interest rate. The federal funds rate has been near zero in recent years.

The tiny initial rate increase will likely have limited impact on channel businesses. But a steady increase in the rate over the course of next year will ultimately affect a range of partners, from startups looking for loans to established companies seeking funds to expand their operations. Higher rates will also affect IT equipment financing and leasing. In addition, customers in interest-sensitive markets could cut back on IT spending.

Kelly Carter, senior director of credit development at Ingram Micro, said an increase in interest rates would make it more expensive for end users to borrow money to finance purchases, and for resellers, managed service providers (MSPs) and IT service professionals to access capital for their businesses.

"That could potentially result in less purchasing by end users and/or less profits for our channel partners," she said.

But, on the other hand, the prospect of rising rates could actually spur capital investment in IT equipment, according to Doug Sobieski, financial services executive for the Americas group at Avnet Technology Solutions.

Sobieski said a rising rate environment is good for the equipment financing world. Leasing and financing, he said, represent long-term, fixed-rate borrowing, so businesses eyeing equipment purchases are keen to lock in interest rates before they rise further. But increasing rates, in all likelihood, will be good for partners as well as equipment financing companies, Sobieski said. The rising cost of capital will drive customers to channel partners to get deals done in the short run, he explained.

"In the short term, an increase in rates could result in accelerating closing of lease proposals that have locked in interest rates for a period of time," Carter added.

Rate-sensitive industries

The ultimate impact of increasing rates on channel partners' customers may depend on the vertical market they occupy.

"Many industries have interest rate exposure," said Larry Cobrin, director and co-founder of MSPCFO. He cited hospitality, construction and retail as examples.

"So if you are working with one of those industries ... it would not be surprising to see them tighten their belts somewhat," he said.

The construction industry already faces an IT shortfall of sorts, which could be compounded by higher interest rates. A recently released annual survey of construction companies, conducted by JBKnowledge Inc. in cooperation with Texas A&M University and other partners, found that construction firms operate with limited technology budgets and "don't have much bandwidth for tinkering with potential technology solutions."

Ben Bigelow, an assistant professor with Texas A&M's Department of Construction Science, said an interest rate increase "could absolutely lead to even smaller tech and R&D spending in construction as most companies are already very conservative about spending."

In addition, higher rates "would likely lead them to direct liquid assets to pay down debt instead of investing in new tech," Bigelow said. "The exception to this are companies -- and there seem to be very few [that] do -- [that] put tech in their general requirements instead of as indirect overhead."

But Cobrin pointed out that interest rates are only one factor impacting a channel partner customer's profit and loss.

"An improving economy and cheap energy should also offset the impact of rising interest costs at client companies -- depending on which side they are on the energy sales," he said.

Benchmark interest rate: Partners protected?

Some channel partners, however, such as MSPs, may be protected from the direct effects of interest rate hikes, at least in their day-to-day operations.

Cobrin suggested MSPs are somewhat shielded from interest rate exposure.

"To a large extent, most of the revenue and margin for an MSP is not directly interest rate-dependent," he said. "MSPs do not need to carry debt like a retailer, car dealer or other company that has to hold inventory, or even like a construction company that gets paid after they incur expenses."

Retail enterprises and car dealerships need financing to operate, so their costs increase as financing becomes more expensive, Cobrin said.

To a large extent, most of the revenue and margin for an MSP is not directly interest rate-dependent.
Larry Cobrindirector and co-founder, MSPCFO

"That does not say that MSPs cannot have debt, but it is not generally seen as a requirement," he said. "The only time it really becomes a factor is in large systems refreshes where their clients may incur financing expenses through a leasing deal or otherwise. In these cases the deals may become less attractive for the buyer of the systems."

Similarly, partners may find a safe harbor from interest rate increases in cloud services. Pete Manca, president and CEO at Egenera, a wholesale cloud services provider, said his partners can protect themselves from interest rate maneuvers. He said the company's cloud services provide partners "the ability ... to broaden their IT services portfolio and strengthen their customer relationships" without incurring additional capital expenses.

Manca said his company, with its wholesale cloud services model, purchases, manages and maintains the hardware infrastructure throughout its lifecycle. That approach, he added, frees partners from "the costs of day-to-day break/fix expenses and fluctuating interest rates."

Next Steps

Read about technology financing options for VARs.

Learn how to grow your MSP business practice.

Look into the expected 2016 channel trends.

Dig Deeper on Running an MSP business

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How will the increase in the benchmark interest rate -- and subsequent hikes -- impact your channel company in 2016?
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