Credit always comes down to collateral and its ease of liquidation. That’s why credit cards charge higher interest rates than auto finance. For most contractors, their collateral walks out the door at the end of the day. They might have an inventory of equipment, a fleet of trucks, and maybe even a commercial property, but that only adds up to a few hundred thousand dollars at most. The real value comes from the owner, the employees, and the customer base — items a bank can’t sell for cash.

HVAC Contractors Need To Tell a Story

Frank Sorrentino felt frustrated that no bank met the needs of his construction firm as it grew. Fifteen years ago, he started his own bank, ConnectOne Bank. The commercial community bank now operates 28 branches in New York and New Jersey. Sorrentino said the bank focuses on providing a personal touch and quick turnaround.

“Banks in general haven’t been great about this,” Sorrentino said.

KNOWS THE NEEDS: Frank Sorrentino, CEO of Connect One Bank, started his own commercial community bank when he found others failed to provide the service he needed for his construction firm.

Most small businesses need somebody they can talk to so they can overcome the concerns about collateral.

“Sometimes you need to tell a story,” Sorrentino said.

Of course, that relationship works both ways. Some contractors chase after savings, either through lower rates or fees, and wind up sacrificing connections. That works today, when interest rates are low and the economy is strong. But as many business owners learned the hard way during the last downturn, conditions change quickly. Banks cut clients in hard times and will drop entire lines of business. This happens when both sides view financing as a commodity, Sorrentino said.

“It’s critical that you select the right banking relationship,” he said. “It’s critical to give as much thought to that as to other critical vendor relationships. Make sure you’re in a relationship with a bank that understands your business.”

Some contractors seek diversification in their finance sources to lower both costs and risk. Scott Merritt, owner of Fire & Ice Heating, Air Conditioning and Electrical Inc. in Columbus, Ohio, finds that two banks are better than one for his business. Merritt started with Huntington Bank, a large regional bank headquartered in Columbus. When Huntington was unable to provide him with a company credit card, he started a relationship with Chase, the largest bank in the U.S.

A few years ago, Merritt found Huntington was limited in what it could offer him for a line of credit, so he moved over to Chase for that. He kept other accounts, including payroll, at Huntington. Today, he plays them off each other to get better rates and lower fees.

“Both of them are always trying to get my full business,” Merritt said. “I shop them out every year. I haven’t changed much in the past couple of years.

“It’s just like anything else — if there’s no competition, they’re not trying.”

The Size of Banks Can Matter

Pursuing this strategy works best for a company with at least $1 million of business, Merritt said. Merritt plans on sticking with his two banks. If nothing else, it ensures him access to a bank if one suffers a system outage.

Despite concerns about big banks ignoring small businesses, Merritt finds Chase offers more to his company; he said the bank’s online platform is better. That’s typical of larger banks, but it also caters to his needs better than smaller Huntington. Chase offers more mid-size products. Huntington has products for small and large firms, but less for companies the size of Fire & Ice.

Reaching the size it takes to draw a bank’s interest often requires funding to grow, creating a vicious circle for many contractors. They lack the funds to grow, but funding sources ignore them due to their size.

“Credit is a funny thing,” Sorrentino said. “It’s available when you don’t need it and not available when you do.”

Alternative for Contractors Seeking Funding

Some contractors have turned to fintechs — tech startups that offer financing online — in recent years. These companies approve more funding than traditional banks, but they charge higher interest rates. Funds backed by the Small Business Administration provide another alternative for some contractors seeking financing. SBA loans work like other government-backed loans. The guarantee from Uncle Sam makes lenders willing to offer lower rates with less collateral.

Brandon Bolen of LiveOak Bank attends events such as AHR to better understand the needs of his customers.

Brandon Bolen handles HVAC contractor financing at Live Oak Bank, a national direct bank headquartered in North Carolina. The bank operates one physical branch and does everything else online. Live Oak focuses on only a few industries, and bankers like Bolen provide even more focus to meet the needs of their clients.

Bolen said SBA loans come with longer terms so firms can maintain their cash flows rather than spending all their money on payments. The average rate right now is around 6 percent. The funds can be used for a variety of purposes, including buying an existing business or expanding into a new product offering.

The main requirement for an SBA loan is good credit, said Brandon Jacob with Contractors Financial Opportunity LLC. He works to connect contractors with banks like Live Oak. Despite the appeal, it remains an untapped source of funding, Bolen said.

“A lot of contractors don’t know this financing is even available to them or what it is or how to use it,” he said.

Despite a lack of physical locations, Bolen said Live Oak bankers shake hands with their clients on a regular basis. So again, relationships matter in banking. Sorrentino said a contractor still needs one primary bank regardless of how many banks he works with; one to turn to for advice as much as for service.

In the end, what each party can do for the other creates the basis for a relationship between a bank and a business, Merritt said. A small contractor offers too little to have much leverage with a bank. And a contractor with no real growth plans needs less from a bank than one with plans to expand. For those with a bigger vision, Bolen said, opportunities are available.

“There’s a lot of folks out there who want to help folks grow their business,” he said.