Why Dell's Small Business Growth Strategy Could Backfire

(MoneyWatch)  Dell (DELL) has tried to offer more credit to small businesses as a way to grow its business in these troubled economic times. The market has been a strong one for the company and it seems to have worked. However, Dell is taking some big risks that could turn today's triumph into tomorrow's tragedy.

For years, technology companies have tried to expand their sales into small and medium businesses. Large corporations have frozen or even reduced IT budgets under economic stress and vendors have stuffed many of their traditional big-spending clients to the gills with products. Small and medium businesses offered a route to continued sales growth, which has long been a tech industry addiction.

Dell has positioned itself particularly well to chase the so-called SMB market. The company is organized around market segments, not product line technologies. According to the company's 2010 fiscal year 10-K, the small and medium business division represented 23 percent of total net revenue and with divisional operating income of 9 percent of revenue. The only business unit that did better was the public one, which targets government, education, health care, and law enforcement. And so Dell sees SMB as a potential growth engine, with expanded credit to the customers a way to draw in additional purchases:

The Round Rock, Texas, PC maker has spent the past year trying to stimulate spending by its small business customers. It has offered new financing arrangements to small businesses, including interest-free deals for some purchases of $25,000 or more. It even has offered free computers to some small-businesses that purchase other products. In some cases, Dell has offered discounted computers and services to companies that agree to appear in its advertisements.

The results sound marvelous, and you can see why small and medium companies might warm to Dell -- or anyone else who would give them credit. Government guidelines are dissuading banks from lending to many small businesses. That makes cash tighter and any reasonable way to finance expansion a blessing. Unfortunately, Dell faces two major obstacles. One is that many SMBs have been reluctant to invest, given current economic conditions:

Its push comes as small companies have lagged their bigger counterparts in emerging from the recession, crimping Dell's results last year. For its fiscal year ended Jan. 29, Dell booked $12.08 billion in sales to companies with fewer than 500 employees, or 22.8% of its total revenue, down from $14.9 billion in its prior fiscal year.

The other problem is that out of the $7 billion is has available as credit for the SMB market, Dell is fronting most of that itself. If the economy takes another hit, the company will bear the brunt of payment problems.

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