In the good ol’ days, it used to be a common sight to see a business owner make a handshake deal with his or her local banker over the opening of a new line of banking credit or an increase in an existing line of credit. That was how business was done. The operative word for the time being is “was.” But with the teetering global financial crisis of 2008, the ease of getting new credit or credit extensions with affordable interest rates is quickly disappearing from the small business landscape.

To compound the problem, the tightening of credit has had a “trickle up” effect on small business customers, too. Banks are beginning to place a higher importance on credit scores, something that lacked scrutiny in the days when anyone with a pulse could get credit. Today, even people with good credit are seeing new caps put on their credit card limits, while others are struggling to even get small loans to pay for major purchases.

“Sixty percent of domestic banks reported having tightened standards on commercial and industrial (C&I) loans to medium and large firms,” said Linda Shea, managing partner of CFO Capital Partners, Bridgeport, N.Y.

“Some 32 percent of a recent small business survey said they were experiencing worsening bank terms, forcing many to use credit cards more. It’s a tighter market. It means it takes a little longer and there is a more scrutiny.

“One of those new tighter hoops is tighter scrutiny of credit scores. But that particularly complicates small businesses because many owners’ personal and business credit histories are co-mingled, with the debt businesses normally have to carry pulling down overall scores. Because of a general credit tightening, everyone wants to get paid back sooner, much faster than the customary 45-60 day payback period, even while banks are taking longer to process loans. This in turn reduces the ability to grow, it cuts into profitability.”

Michael Senter, CEO of ABCO Refrigeration Supply Corp., Long Island City, N.Y., gave a snapshot of how the credit crisis affects the HVACR trade.

“The ability of a wholesale distributor to secure or expand lines of credit and the ability of HVACR contractors to qualify for credit to purchase equipment and parts are parallel pressing concerns with both being anchored to the lack of fluidity right now in our banking systems nationwide,” he said. “This lack of readily available financing at all levels has the potential to create terrible stagnation.”

But Sonny Knobloch of Help! Air Conditioning & Heating, New Orleans, La., said he isn’t ready to jump out of any window. Business is humming right along for him. “Our company does not require credit to operate, but we do maintain a credit line with our local bank,” he said. “As it stands today, we have not experienced any difference in getting credit approval for our customers.

“I would say that approximately 80 percent of our work comes from existing customers, and we average an 80 percent credit approval rate.”

In fact, most of the HVACR contractors and distributors interviewed for this article hold the same beliefs as Knobloch - it’s business as usual for the well-positioned contractors.


Arthur Picket of Royal Air Systems, North Reading, Mass., said the problem is with his customers and not with him. “We have credit available for customers right now offering no payment until 2010 and a second line for poor risk customers,” he said. “We just finished a home show and had people that really needed product tell us they were afraid to do 2010 because they didn’t know if they would still have a job by then. Three of them declined our offers.”

“About 50-60 percent of our residential retrofit is financed with six months same as cash,” said Scott Robinson of Apple Heating & Cooling, Ashtabula, Ohio. “If credit gets too tight, it will affect sales and profitability.

“We keep a line of credit available. I do not intend to suffer during these troubled economic times but who knows. My plan for right now is to continue to grow the company in spite of the woes. We have always worked the top half of the market. Even in tough times I believe people need heat and air conditioning.”

Maintaining a strong customer base through tough economic times can often help contractors ride out the storm. That’s the philosophy of Ken Bodwell of Innovative Service Solutions, Orlando, Fla.

“Most companies need to draw on their credit at some point, whether it’s to fund a project, buy material or purchase a truck,” he said. “With that said, my first concern is to protect my credit. That starts with a good credit policy and procedure in-house before we provide credit to clients.

“It also means being diligent in our collection process. We make follow-up calls and send out statements and do not allow clients - to the best of our ability - become diligent.”

Hank Bloom of Environmental Conditioning Systems, Mentor, Ohio, said that the current financial crisis has not impacted his company’s credit status, but he has seen some changes in his market.

“Customers already are backing off on projects and asking for alternate ways to finance which tells me they have a lot of debt,” he said. “We haven’t lost sales because we are offering internal financing to good, solid customers to secure the project at higher margins so it doesn’t go out to bid.”

Having a strong balance sheet and few financial needs is what makes “riding out the storm” easier for contractors like Russ Donnici of Mechanical Air Service Inc., San Jose, Calif. “We are very conservative when it comes to the use of business credit,” he said. “We do have a credit line, however, we also have cash investments equal to our credit line. The credit line is so we don’t have to disturb the cash investments.”


The distributors interviewed for this story are more concerned for their customer’s well being than their own, mainly because they are confident that their own businesses are on pretty solid ground. Dennis Larson of Refrigerative Supply, Burnaby, British Columbia, held that popular viewpoint.

“We are more concerned with our contractor customers securing lines of credit,” he said. “There is tightening of lending to unsecured creditors by banks. We haven’t seen loss of equipment sales but some contractors have seen some projects put on hold or postponed because of the credit tightening.”

John Staples of US Airconditioning Distributors, City of Industry, Calif., agreed. “I am more concerned about our customers inability to qualify for credit,” he said. “The dealers love to use the distributors as their bank by not paying for 60 days and even stretching out to 90 days before they pay. Of course this also causes the distributor to have to borrow more from the bank in order to have the cash flow they need.”

The “trickle-up” effect of tight credit goes beyond the contractors, according to Joe Rettig of the Habeggar Corp., Cincinnati. “Financing is becoming more challenging for consumers which means it is more difficult for HVAC contractors to close sales,” he said.

“If contractors cannot close sales, then their ability to pay bills and to secure credit becomes a challenge as well. “As a Carrier distributor we have been very fortunate. Our dealers have focused on selling high-end products to the Traditionalists and Baby Boomers who have money. Fortunately, 2007 was a record year for our company and year-to-date 2008 is ahead of 2007.”

But poor or lack of credit may not be the root cause of some of the woes facing the HVACR trade, at least according to Mike Michel of the R.E. Michel Co., Baltimore, Md. “Primary equipment sales are flat, but that could be the result of several factors,” he said. “One, a sluggish economy isn’t producing the necessary sales opportunities at the consumer/contractor level. Two, certain contractors are curtailing purchases in order to maintain liquidity. Three, some may be facing curtailment of working capital loans.

“Truth be known, any number could be dealing with all of the aforementioned as well as other contingencies. The end result is flat sales, but we wouldn’t want to think we are so damn smart that we could say it is the outcome of any one thing.”

Sidebar: Solutions Offered

Michael Senter, CEO of ABCO Refrigeration Supply Corp., Long Island City, N.Y., offered his insight into the current credit crisis. Senter noted five key points:

“Unlike the previous five robust years, wholesalers now must be careful not to burden their cash flow with once fast-moving A items that suddenly are slow moving and not nearly as essential to every repair as one previously might have thought.

“With this in mind, we also have to tie the risks associated with limited financing options for wholesalers and HVACR contractors to the burdens confronting our customers’ customers - that is, the lack of readily accessible banking funds for real estate developers, restaurateurs, food service entrepreneurs, grocery and specialty food store owners, as well as, of course, owners and/or managers of existing commercial and residential developments.

“This lack of financing impacts the entire HVACR channel in a severely negative way from end-users to HVACR contractors to wholesale distributors to manufacturers.

“It is easy to imagine highly leveraged manufacturers being unable to survive the cash crunch that will occur unless and until the banking system is able to provide accessible funds for investments involving HVACR equipment, whether it is the construction of new projects or the renovation of existing facilities. Of course, providing funds for over-developed segments of the economy is unlikely to significantly spur sales for wholesalers or HVACR contractors unless and until true demand is created anew.

“Communication among and between manufacturers, wholesale distributors, and contractors is more essential than ever in order for all of us to share perceptions and insights on market demands. We must achieve this communication on a day-to-day, one-to-one level as well as on an industry-wide level.

“This is where timely, accurate and perceptive reporting in reliable trade publications, such asThe NEWS, plays such an important and necessary role. Timely, accurate, and accessible communication also should occur on the Internet and on the Websites of all involved in the HVACR industry. This financial challenge just might provide the impetus for our industry to embrace the Internet for its incredible potential for the timely communication of ideas, trends, advice, and news.

“To be successful in this severely challenging financial environment, wholesale distributors will have to be even more operationally and financially agile than ever before, responding quickly and precisely to product demands while managing financial investments in inventory carefully and prudently.

“With bank financing less accessible, we’ll have to help our customers manage project-financing concerns while our customers help us manage cash flow demands. Partnering throughout the channel of HVACR distribution will be more important than ever.”

Publication date:11/24/2008