Financing for General Contracting

Published January 3, 2019 by Sarah Pritzker

Running an HVAC business can be a lucrative career move. HVAC technicians are in high demand all year round; installing, servicing, and repairing air conditioning units during the summer season, heating units in the winter, and ventilation systems that need attention throughout the year. HVAC businesses make most of their income from installing heating, ventilation, and air conditioning units in new buildings, so the booming construction market is good news for HVAC businesses.

Because HVAC installation and repair workers are in such high demand, HVAC businesses are seen as fairly low-risk borrowers by banks and online lenders. If you need a loan for working capital or HVAC equipment financing, you’ll probably be able to find plenty of options with reasonable interest rates.

How Much Do You Need to Start an HVAC Business?

If you're just beginning your HVAC business, you'll need some startup capital. HVAC equipment can be expensive, especially if you invest in high-quality items. It's worth it to spend more on your first HVAC equipment; for example, a top of the range vacuum pump will do the work of a lower-range vacuum pump in half the time, and with much less difficulty.

Your HVAC equipment, parts, and supplies can pile up. It’s a good idea to buy a van to transport all of your tools and supplies – but even a second-hand van can cost a lot. You'll probably need to find van financing to cover the expense of a van that's big enough and also reliable enough to meet your needs.

Other startup costs for an HVAC business are relatively low. You’ll need:

  • Office space to do your paperwork, manage taxes, and process your invoices. You might find that a quiet corner of your house is enough in the beginning
  • Business software that can help you with scheduling jobs, generating estimates, invoices, and receipts, managing marketing campaigns via email or social media, accounting, and payroll tasks, etc.
  • A marketing campaign, with some printed flyers, posters, or ads in your local advertising brochures and newspapers

Why Do HVAC Businesses Need Working Capital?

Working capital is the lifeblood of each and every business. Costs that use working capital include:

  • HVAC parts and supplies
  • Overhead like electricity and internet bills for your office
  • Insurance premiums for your HVAC equipment and van
  • Payroll costs for your HVAC assistant or secretary
  • Ongoing marketing costs

It’s worth investing in your existing HVAC business to be able to boost your revenue and take advantage of all of the possibilities for better cash flow. You’ll need access to ongoing working capital to be able to expand your business. Here are a few ways to expand your HVAC business by using extra working capital:

  • To market yourself as an environmentally-friendly HVAC business, you’ll need to supply more expensive, ecologically-approved, air filtration systems and parts. This means having enough working capital to buy the parts before you recoup the money from your customers.
  • To advance your training to become an expert in specialized areas of HVAC installation, maintenance, and repairs, such as an expert in air-conditioning and filtration units.
  • To expand your business size by taking on an HVAC assistant, a fellow HVAC repairman, or adding a secretary or bookkeeper to deal with your administrative tasks.
  • To upgrade your HVAC equipment to tools that are more technologically advanced, more reliable, or simply newer. For example, you might decide to replace your transmission fluid exchanger with one that operates much faster.
  • To add another van to your business so that your employees and assistants can get to jobs in different parts of town while you’re busy working on a job elsewhere.

How to Choose the Best Type of Financing for Your HVAC Business

If you’re looking for funding for your new or existing HVAC business, you have a few loan types to choose from. Your choice will depend on a few things:

  • The purpose of the loan. Are you looking for a working capital loan so that you can refill your HVAC parts inventory? Do you need a short-term loan to cover your ongoing overhead until your last client finally pays up? Or do you need to pay for a large, long-term purchase like a new van or upgraded HVAC equipment?
  • The size of the loan. Do you need a few hundred dollars to pay your tax bill or a few thousand dollars for better air filtration systems?
  • The length of the term. Will you be repaying the loan in a few weeks when your overdue client finally pays their bill or stretching your payments across a few years?
  • How you need the funds. If you can wait for a few weeks, you might prefer to go through a traditional bank, but if you need the money in a hurry, then an online lender could be a better choice.

The Best Types of Working Capital and Equipment Financing Loans for HVAC

Each one of these types of loans can be useful for HVAC businesses. The only issue is to identify which is the right loan for your purposes. With the above questions in mind, you can think about which of these loans is best for your HVAC business.

Business Loans

Business loans are flexible loans that can be suitable for working capital or equipment financing needs. You can find short-term business loans with terms of just a few months, and long-term loans with terms of up to 7 years, depending on the purpose of the loan. Business loans are usually unsecured, so the rate that you'll get depends largely on your business credit score, your average income over the past 6 months or 1 year, and how many years you've been in business. It can take up to several weeks for business loans to clear into your account, especially if you go through a traditional bank, so it's not a fast source of funding.

  • Average APR: 4% to 10%
  • Loan process: A few days to a few weeks
  • Minimum credit score: 600
  • Term: 3-18 months for a short-term loan, 1-15 years for a long-term loan

Equipment Financing

Equipment financing is a type of secured loan that uses your new equipment as collateral. As the name implies, it's ideal for buying new or refurbished HVAC equipment. Equipment financing is usually spread across a long term of a few years, with interest rates that are relatively low. Some equipment financing deals include the cost of maintaining your HVAC equipment, and others allow you to upgrade to cutting-edge HVAC tools within the loan framework. Equipment financing is offered by HVAC supplies dealers, online lenders, and some banks.

  • Average APR: 7% to 20%
  • Loan process: A few days
  • Minimum credit score: 550
  • Term: Varies

Auto Loans

Auto loans are best for funding a new or second-hand van for your HVAC equipment. You can get auto loans from online lenders or from van and car dealerships. Some dealerships offer 0% financing, but others ask for a high deposit and charge high interest rates, so always read the fine print. Because an auto loan is secured against your new van, you can qualify for reasonable terms even if you have poor credit. Generally, online lenders can process your auto loan in a few hours, while many dealerships will offer financing, sign the terms, and let you drive away with the new van all within an hour or two.

  • Average APR: 3.5%-15.2%
  • Loan process: Instantly to a few days
  • Minimum credit score: 500
  • Term: 36 to 72 months

SBA Loan

Banks and online lenders offer SBA loans, which is a type of business loan that is backed by the government. Because the government promises to pay up to 85% of the loan if you should default on it, banks and other lenders are more willing to accept your application. Interest rates on SBA loans are usually lower, too. That said, it takes a long time – a month or more – to get the funds through from an SBA loan, and it's not easy to qualify for it. Since it takes so long to be accepted for an SBA loan, it's best for large purchases like equipment financing, rather than for working capital.

  • Average APR: 7.25% to 11.5%
  • Loan process: Up to 90 days
  • Minimum credit score: 680
  • Term: 25 years

Business Line of Credit

This works like a cross between a business loan and a business credit card. Like a credit card, you'll be given a maximum credit limit, and you can borrow money up to that limit. But like a business loan, there’ll be a repayment term. The main difference is that once you’re approved for a particular loan amount, you don’t have to take out the entire amount in one go. You can withdraw it in smaller amounts, repay some of it, and then take out some more. You’ll only pay interest on the amount you’ve borrowed, not on your maximum loan amount. It’s ideal for working capital loans since you won't need to pay interest for money you aren't using. Banks and some online business lenders offer business line of credit loans.

  • Average APR: 5%-25%
  • Loan process: A few days to a few weeks
  • Minimum credit score: 600
  • Term: 3-36 months

Business Credit Cards

Every business needs a business credit card for emergencies, but just like with a personal credit card, it’s not a good idea to spend more than you can repay by the end of the next balance cycle. Credit cards have some of the highest interest rates around. You could use your business credit card to cover small gaps in your working capital, like if you expect that your client will pay their bill before you need to pay your credit card bill. But it’s not recommended to use it for large purchases or big working capital needs that you can’t pay off within the next month or two.

  • Average APR: From 19.99% for new accounts
  • Loan process: online approval can be arranged in minutes
  • Minimum credit score: 700+ for the best rates
  • Term: Monthly billing

Invoice Factoring

Invoice factoring helps you get income from your accounts receivables. When you have invoices that haven't yet been paid, but you need the working capital right now, you can sell these open invoices at a discount to an invoice factoring lender. They will give you immediate funds, and then help you get your client to pay up. It's a fast way to access working capital and usually doesn't require a credit check, so it's ideal for someone who is just beginning an HVAC business and/or has a poor personal credit rating. However, you'll often be charged a fee according to how long it takes before the client pays up, so if your customer is very tardy, you could end up paying a lot in fees.

  • Average Fees: 5-20%
  • Loan process: On the spot to a few days
  • Minimum credit score: Not relevant
  • Term: 4 weeks - 6 months

Personal Funds

If you just need a small amount of extra working capital to pay an unexpected tax bill, or you want to invest in your personal training, you might decide to fund it personally. This could mean tapping into your savings, remortgaging your home, taking out a personal loan, or borrowing some money from friends or family. Although this could seem like the simplest approach, it's risky to tie up too much of your personal income in your business. You'll risk losing your home if you can't keep up with repayments, or losing a friendship if something goes wrong with the loan. However, if you have excellent personal credit, you might be able to get better rates on a personal loan than a business loan. Online lenders, peer-to-peer lenders, and banks all offer personal loans. Online lenders can often process your application and clear the funds on the same business day, but peer to peer lenders can take a few days, and banks are notorious for taking up to a couple of weeks to approve a personal loan.

  • Average APR: 4% to 32% for a personal loan
  • Loan process: A few hours to several weeks
  • Minimum credit score: 500 for secured loans, 680+ for unsecured loans
  • Term: 3 months to 10 years for a personal loan

Where Should You Buy HVAC Equipment?

When it comes to buying your HVAC equipment, you have a few choices. Some HVAC businesses enter into a partnership with HVAC equipment brands like Goodman or Rheem. This might give you a small discount on their branded parts and equipment, but it also means that you’re obligated to buy their items even if you find another brand for a better price.

Thanks to internet shopping, it's now easy to compare prices and shipping options for HVAC equipment like vacuum pumps, air filtration systems, and transmission fluid exchangers. Although you can buy HVAC equipment on marketplaces like eBay and Amazon, it's not usually the best approach. You might not be able to pass on a manufacturer's warranty if you buy from a retail outlet since manufacturers often have a blanket rule about nullifying the warranty when an item is bought retail. You'll also miss out on the discounts that come from buying wholesale.

If you have an HVAC parts and equipment wholesaler near you, you might get the best deal by visiting in person and discussing your needs with the store owner. If you are regularly buying a certain volume of parts and supplies, you might be able to negotiate a discount. Plus, there's nothing that compares with the knowledge and support of a helpful wholesaler.

What Do You Need to Get Working Capital and Equipment Financing for HVAC?

It's important to begin by pointing out that every lender has their own requirements for eligibility. Before you apply for any kind of working capital or equipment financing, you should read the regulations very carefully and make sure that you are suitable for this loan option.

However, there are certain requirements that are almost universal, no matter what type of financing you apply for or which lender you approach. You’ll save yourself time if you gather together the relevant documents in advance and prepare yourself to answer some common questions.

  • Your credit report. For most types of financing, the lender will check either your business or your personal credit score before confirming rates and accepting your application. You should always check your credit report regularly to catch any signs of fraud, identity theft, or mistakes that drag your credit rating down.
  • Your business license, incorporation documents (if relevant), and other paperwork that shows that your business is legal and licensed, as well as showing the number of years you’ve been in business for.
  • A business plan. If you’re applying for a business loan, SBA loan, or business line of credit, the lender will want to see that you have a realistic and detailed business plan.
  • Average monthly revenue for the last 6-12 months. Most lenders will ask for proof of minimum monthly or annual revenue so that they can feel reassured that you’ll be able to make your regular loan repayments.
Sarah Pritzker
About Sarah Pritzker
Sarah Pritzker is a professional writer who specializes in financial markets and trends in the U.S. She grew up in Virginia, went to university in Boston, lived in New York City, circumnavigated the globe with stops in San Francisco, Hong Kong, Thailand, Laos, Cambodia, Kenya, Uganda, and Israel, and then eventually settled in Israel, where she currently resides.

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