When security integrators first break into the industry, many fail to reflect on the potential costs involved with expanding the business over time. There’s no shame in that; in my experience as a financier, that occurrence is fairly common across many industries. But once integrators are established, they will eventually need more capital to maintain RMR.
As the most successful integrators know, there are ample opportunities for expansion, and they all require some level of investment. Here are three of the most popular reasons why an integrator would want to raise additional capital:
1. Authorized Dealer Programs: There are innumerable benefits to authorized dealer programs, including instant brand recognition, sales incentives and marketing materials. Some authorized dealer programs allow dealers to participate with little to no upfront costs, which is obviously very beneficial. Still, the idea that any dealer program is completely free is a bit of a mischaracterization. First, any dealer that wants to become a certified or authorized dealer of a specific manufacturer is obligated to attend training, and in some cases, that training may require substantial travel.
At Bosch, for example, authorized dealers get incredible advantages — everything from a lead generation website to Super Bowl tickets as a sales incentive. But a dealer that does not operate near one of the four Bosch training facilities in the United States will be required to travel to the nearest facility. The larger the business, the more staff members will need to undergo training. “If they have a large organization, we want a large number to be trained,” says Tom Mechler, Product Marketing Manager at Bosch. “We want them to understand there is some value as a whole.”
There is also a minimum inventory purchase required, which is a given because the integrator needs to have Bosch products in stock. “The minimum purchase requirements depend on the population and size of the area where the business is operating,” Mechler explains.
Honeywell, which also offers discernable advantages to its authorized dealers, requires product and training investments for which capital may be needed. Marek Robinson, President of Authorized Dealer Programs at Honeywell, says that minimum orders are a requirement of the Honeywell program: “There are no upfront costs per se,” Robinson says, “but we typically have a minimum stocking order. When we come in to train somebody, we want to make sure they have product to train them on.”
Honeywell also requires its integrators to use a Microsoft- or Cisco-certified engineer, another expense for which the integrator will need capital. “They can contract that out,” Robinson says, “but at certain levels of the program, it is needed to obtain a certain peer status.”
The benefits of authorized dealer programs are widely regarded to be worth the expense, but it is an expense the integrator must be prepared for.
Editor’s note: Did you see SD&I’s inaugural roundup of active authorized dealer programs in our November issue? Check it out at www.securityinfowatch.com/11735497.
2. Training: As mentioned, becoming an authorized dealer with some manufacturers requires integrators to make sure that someone on staff has undergone training with a certified technology provider, such as Cisco. The cost of taking a Cisco certification exam may be only a few hundred dollars, but frankly, it is impossible to pass any technology certification exam without substantial training. Fortunately, there are numerous online and in-person classes available — for prices that range into the thousands. In order to train staff members for proper technology certification, a security integrator will need to have capital at the ready.
It is also worth mentioning that Cisco certification, or certifications obtained in a vendor-neutral program such as CompTIA, GIAC or ISC Squared, would likely be necessary for any integrator that wants to expand into offering information security services. Information technology security is a lucrative market that can give any integrator a major advantage over his competition, but breaking into it requires an investment of time and capital.
3. Marketing: Every security integrator needs to commit some effort to marketing the business, no matter how innovative their services are. After all, what good are remote video monitoring or advanced fire systems if nobody knows about them? When it comes to marketing, you have two primary options: traditional advertising and new media marketing. Most experts agree that some combination of the two is most effective.
Despite the notion that traditional advertising is on the decline, it remains just as expensive: Out-of-home advertising, for example, can run as much as $1,200-$1,500 per billboard, with a minimum cost of three to eight billboards required per package. New media marketing is highly effective, but a fairly standard package of website design, search engine optimization and social media management can cost up to $10,000 or more, depending on the experience level and clout of the firm being hired.
Then, there are more advanced services designed to help the integrator track and manage leads. These tools can be very effective, but very pricey. One firm I spoke with quoted $2,000 for a 30-day campaign. The bottom line: Marketing is a necessary expense, and integrators need capital to do it effectively.
Factoring: The Alternative to Bank Loans
Integrators may have a difficult time obtaining a traditional bank loan for a number of reasons. One scenario I frequently encounter is a lack of business credit. Often, this is the case when the owner inherits the business from a retired or deceased family member. Another issue that may hold a firm back is a lack of collateral. Now that the Small Business Administration requires lenders to secure all available collateral from principal borrowers in its loan guarantee program, collateral is prime criterion for a business loan — and yes, “all available collateral” can include personal assets, including homes and vehicles. For an integrator lacking that collateral, or who does not wish to put up personal assets as collateral, that may rule out a business loan as an option.
Fortunately, there is a way to circumvent the need for a bank loan in the first place. When a security integrator needs capital and a lack of business credit or collateral is standing in the way, of a bank loan, an alternative financing method such as factoring can be the next best option. Factoring is one of the most widely accepted alternative financing methods in practice, because it involves buying a business’s invoices — essentially, taking over its most creditworthy accounts receivable.
Factoring is generally defined as an arrangement whereby a factor purchases an account(s) receivable from a business at a discount to the face value of that receivable. The factor earns a fee based on the number of days that receivable remains unpaid. Effectively the business is no longer dependent on the conversion of the accounts receivable to cash from the actual payment from their customers which takes place on typical 30 to 90 day terms. Today, factoring is used more than all other types of business financing combined.
Banks make decisions based on a company's financial history, cash flow and collateral. Factoring decisions are based on the creditworthiness of your customers. Since factoring is not a loan, you do not carry a liability on your balance sheet. Most importantly, the funding is available in days, whereas banks generally take weeks or even months.
For established security integrators looking to supplement the funds needed to participate in an authorized dealer program, train staff or expand marketing efforts, selling invoices to a financier who specializes in factoring can be a viable way to do it. This is especially important for small dealers hoping to elbow out competition in their local markets.
Donald D'Ambrosio is an expert in factoring, an alternative financing option for small to mid-sized businesses. For more information, please visit www.oxygenfunding.com.
