Microsoft Boosts Vendor Financing, Gives Small Companies Money To Buy MSFT Products

As credit markets tighten, Microsoft (MSFT) will increasingly play the role of banker–lending more money to small companies so they can buy its products. This strategy–increased vendor financing–is often a harbinger of trouble, not because of the financial risk (Microsoft, et al, can afford it) but because it’s often a sign of weakening demand: aggressive vendor-financiers can essentially pay would-be customers to take their products by giving them sweetheart terms.

In Microsoft’s case, the core business is so strong–and the vendor financing so small in the scope of it–that the increase is still not material. But the increase is worth noting.

Ben Charny in the WSJ:

With small-business customers finding it harder to finance high-tech purchases, Microsoft Corp. plans to increase the amount it lends them for purchases, by as much as 60%.

The move — coming amid a historically tight credit market and at a time when other technology giants are considering selling their financing units — raises the risk for Microsoft, which says the number of defaulting loans will likely rise and that its exposure to bad credit is “approaching materiality.”

[Independent Street blog]
What are the pros and cons of vendor financing? Read the latest post and share your thoughts.

Microsoft said it expects to issue $1.25 billion in loans in 2008, compared with the $780 million in financing it extended in 2007. The increase may help the Redmond, Wash., software giant prop up an important sales channel for the company. “The decision to do all this was tied to the macro situation,” said Brian Madison, general manager of Microsoft Financing. “Information-technology buyers keep accelerating their leasing and financing, so we see this as a time when we can make a big difference by making things easier.”

Microsoft offers an array of loans between $100,000 and $500,000 — a “sweet spot for small businesses,” Mr. Madison said. Still, the financing Microsoft expects to extend in 2008 represent only about 2% of the company’s expected fiscal 2008 revenue.

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