HVAC contractors typically are small, private companies with clear lines of decision-making authority. The few large, established contractors in the marketplace are completely stakeholder owned entities or have multiple investors beyond the owner and immediate family members. Consequently, governance is not a significant constraint on an HVAC contractor’s ability to develop new business strategies.
Understanding the financial structure of an HVAC contractor’s company, particularly the key profit drivers, is an important step toward developing sustainable relationships between a program administrator and HVAC contractors. Small, start-up HVAC contractors generally are funded through personal finance, while more established contractors typically are funded through business lines of credit. As the largest components of the equipment that is necessary to start an HVAC contractor business (e.g., trucks) can be leased, large amounts of debt are not immediately necessary, so most contractors prefer to use their own savings to start up the business. More established contractors can also reinvest profits into their business to improve their equipment or to expand their business. Due to the seasonality of the HVAC business, with the prime HVAC replacement and maintenance season lasting only seven months in many climates, HVAC contractors rely on lines of credit to cover their cash shortfalls. This includes the cash needed to make lease payments on vehicles and pay technicians’ salaries. To maintain profitability, despite the seasonality of the industry, HVAC contractors rely on a pricing system for their jobs that builds in a high gross profit margin on equipment and that limits labor. The gross profit margin (i.e., revenues minus the cost of goods sold, divided by total revenues) on equipment is approximately 45 percent, but the gross profit margin on labor is much lower. While material costs for a given type of job tend to be relatively consistent, labor costs are highly variable and drive down the overall profit margin on a job. Therefore, it is in the HVAC contractor’s business model to generally limit the amount of labor hours on a job, focus on quickly completing the project, and move on to the next job. An HVAC contractor’s key metric is the “gross margin per man day.” This metric, which is calculated by dividing the gross profit margin by the average number of hours worked per day, allows contractors to measure how much profit the firm has realized against the time spent by technicians on a given job. As a result, HVAC contractors generally avoid labor-intensive jobs, which lower their overall profitability. Figure 2-12 presents a sample income statement for an HVAC contractor. The target operating income is approximately 12 percent for an HVAC contractor; this metric is calculated by dividing earnings before interest and tax by total revenues. In comparing the HVAC contractor business model to that of a home performance contractor, the disparity in how labor is valued is the core difference between the two models. In general, HVAC contractors see home energy upgrade jobs as being more labor-intensive than traditional HVAC jobs and, therefore, less profitable.
It's the nature of business to be cyclical. This means your company's cash flow will find their own high and low points as well, throughout the seasons and throughout the years. Will you make it from this ebb to the next flow? Would getting a cash infusion in the form of a business loan or line of credit help you? And how can you best use this cash infusion to improve your business?
A small business line of credit (LOC) allows a borrower to draw against a lender-specified amount of financing on an as-needed basis. The advantage of a business credit line is that you only pay interest on the funds you actually draw, so you’re not stuck paying interest on capital you don’t have an immediate use for.
The traditional line of credit is typically meant for experienced business owners with proven business models. Which makes sense since the credit maximums are sizable, the rates are lower, and the requirements demand higher credit scores and annual revenue reporting. If you’re a business owner taking out a line of credit, you’ll be spending that flexible cash on seasonal business expenses, payroll and other operational costs, insurance against emergencies and for sudden opportunities. In other words, as a capital cushion. It’s there for you when you need it.
Why Your HVAC Company Should You Have a Business Line of Credit?
It's great to consistently have enough cash stored in your bank account to cover ongoing expenses. That probably means your business is doing well. But you also may want to consider the ways that having a business line of credit (LOC) can work to your advantage. Chances are, there'll be situations over the life of your business where it would make more sense to borrow, rather than completely empty your accounts.
If you were suddenly hit with an emergency, what would that do to your available cash? By spending a lot of money to fix your problem, you could end up sacrificing all that available cash—which is one of your most valuable assets. Opening a business LOC can help protect your assets by giving you a short-term boost to your cash flow.
But they're not just to help in an emergency, they fuel an HVAC contractors business. An HVAC business LOC can also be helpful when you have a chance to make a significant investment that can immediately improve your business. What if you come across an excellent deal on trucks that would surely expand your customer delivery base? Or if you have an opportunity to buy inventory at a steep discount? With access to a business LOC, a business could be in prime position to take advantage of these opportunities.
When to Use a HVAC Contractor Line of Credit:
Certain businesses, such as retail establishments, benefit more from lines of credit because of the predictable variations in cash flow. Seasonal changes in sales mean earnings fluctuate on a set schedule, and extra money is often needed to continue operations during slow times. When you’re able to anticipate these financial needs, you can rely on a line of credit to provide security.
These types of expenses may not be specific or concrete enough to allow you to qualify for a regular business loan. However, since line of credit loans are given based on financial standing rather than a specific spending plan, you can still get the funds your business requires.
Applying for a HVAC Contractor Line of Credit: The Basics
Like a business loan, a line of credit may be secured or unsecured. Secured credit lines need collateral to back them up. Unsecured lines are guaranteed by your business and require more trust on the part of the lender. In both cases, you’re at risk of loss should you be unable to make payments. The lender will either take possession of your collateral or have the choice to sue you for what you owe.
To avoid these problems, work to build up a good credit score for your business and yourself. Have a dedicated business bank account, and stay on top of all your payments. Keep detailed records of cash flow, profit and loss, accounts payable and receivable, revenue streams, assets, and income. Most lenders will want to see this information when deciding whether or not to extend a line of credit to your business.
While it’s ideal to have savings to help your business weather storms, the next best thing is to apply for a line of credit. Business credit lines were designed to help you meet short-term cash needs, such as purchasing supplies or additional inventory or covering operating expenses. Essentially, a business line of credit can help HVAC contractors thrive and grow. A business line of credit is a good option to offset fluctuations in working capital when your expenses stay constant. A line of credit will give you access to funds to continue to pay bills on time or purchase additional inventory if needed. The advantage of a line of credit over a regular business loan is that interest is only charged on the funds you actually use. Additionally, your business can draw on the line of credit at any time that you need.
Cash shortfalls happen. The month you need to pay out for a ton of new inventory could be a naturally slow month for revenue; the need for major repair work could fall in the same month half of your employees worked overtime. Whether they are due to a slow season, lagging client payments or unanticipated expenses, cash shortfalls are survivable if HVAC contractors look ahead and act early. Call (855) 998-LVRG or click below to pre-qualify.