SAN FRANCISCO -- First National Bank of Cisco? With some customers having a tougher time raising money in the public markets, Cisco ( CSCO) is increasing its efforts to help them out by financing their purchases. The move is part of a bid by the networking giant to keep its revenue growth rising at a rapid pace. But the risk, as with any lender, is that Cisco might find itself with a bunch of bad loans, which it would have to charge against its earnings. Financing purchases has been a particularly sensitive issue in recent weeks. Shares of phone and Internet service companies, some of which are Cisco customers, have fallen to new lows, and some have seen their access to cash diminish. This environment is making it tougher for the privately held start-ups that buy from Cisco to get cash as well. ( TSC has explored this
emerging cash crunch for service providers and its impact on shares of the equipment makers in previous stories.) But at a luncheon with journalists here Tuesday, Michaelangelo "Mike" Volpi, Cisco's strategy chief, and Kevin Kennedy, the company's new head of its service-provider business, stressed that Cisco is picking its borrowers carefully. Roughly 10% of Cisco's annual revenue already involves vendor financing, or lending customers money to buy equipment. But "we have seen a greater request for financing as companies are getting less venture capital money," said Kennedy. Volpi said Cisco's failure rate has been negligible so far, with 1% or less of its financing deals having gone sour. Cisco is in a sticky position. If it doesn't extend credit, customers may go to rivals Nortel ( NT) or Lucent ( LU), which have been very generous with financing. So lending money becomes a way to gain an edge in a highly competitive market. Cisco also is a bit hobbled by the fact that it can't count on many profitable, traditional phone companies for business because its more data-centric equipment doesn't play perfectly with voice-centric equipment. This means Cisco's biggest network-equipment sales are generally to start-ups, which have had a tougher time in the public market lately. "The carriers that are the newest and the most aggressive in adopting new tech are also the most exposed to a slowdown in financing," said David Toung, an analyst at Argus Research. "And anyone that sells equipment to these carriers is most vulnerable." (Toung rates Cisco a buy, and his firm does no banking for the company.) Cisco, for example, is helping to finance the sale of its new Wavelength Router to PetroNet, a closely held, emerging, fiber-optic network builder based in Englewood, Colo. But typical of spanking new networks, the company has no revenue and hopes to compete with more-established big-bandwidth providers such as Williams Communications ( WCG) and Global Crossing ( GBLX) -- two companies that have seen their share of pressure in the public market. Vendor financing "is a useful vehicle for our customers," said Volpi. But Cisco isn't interested in getting into the finance business. In fact, GE Capital handles about 3% of Cisco's customer loans. "Cisco has $20 billion on its balance sheet, but we can't finance the whole sector; the public market needs to help out," said Volpi. But with the public market beating a steady retreat from telecom services stocks, it appears that Cisco will bear some of the burden.