In early March, the United States saw its second-largest bank failure since 2008 when Silicon Valley Bank (SVB) collapsed due to its customers’ concerns over the liquidity of the bank.
SVB customers — mostly startup companies that deposited large sums of money from investors during the pandemic, when startups were hot and being online became a necessity — withdrew a total of $42 billion, leaving SVB cashless and with a negative balance of nearly $1 billion in just 48 hours.
There’s been said to be two major things that contributed to the collapse of SVB: risky business practices and a crisis of confidence in the banking institution itself that spread like wildfire through social media.
And though the collapse of SVB primarily impacted businesses and investors within the tech center, the possibility of something like this happening closer to home in these uncertain economic times has to be on the mind of HVACR contractors when taking into account that worst-case scenario. This is especially true for those small business owners.
Going forward, it’s time for small business owners in the HVACR industry to guard against the possibility of something like this happening in their own backyard. Three steps to take are using multiple banks instead of one, building relationships with these banks, and knowing the potential risks to their business.
Three is Better than One
For many small business owners, the collapse has been an eye-opener — Richard Bodwell, president and CEO of ISS Mechanical in Orlando, Florida, included./p>
The Federal Deposit Insurance Corporation (FDIC) only protects $250,000 per customer deposit. If the bank a contractor used went under, and the company had more than that protected $250,000 in the bank, he questioned, could that business still function?
It sparked conversations between Bodwell and his bank to see what sort of guidance they could provide. And for many other small business owners, doing that same thing — building a relationship with their bank(s) — might be the most important thing for a small business owner in the HVACR industry to do.
“Step one is to have a conversation with your main bank,” Bodwell said. “Start there. See what they recommend. I'd also have the same conversation with the certified public accountant or whoever their financial person is about that.”
Brad Bolton, president and CEO of Community Spirit Bank and immediate past chairman of Independent Community Bankers of America, said when establishing a relationship with a local or community bank, HVACR contractors should ask to speak to the president or loan officer.
“Let them know about your business: your short- and long-term goals and how the community bank can assist you,” he said. “The key is establishing that relationship with someone who lives and works where you do, who invests where you live, and who wants to see you succeed.”
While they’re at it, an HVAC contractor might as well add a few more of those banking relationships to the mix to protect more of their assets.
“As a small business owner, you should have deep relationships with your banker, and find out what their business model is and what they are lending out against ‘your’ deposits,” said Kyle Pennington, general manager at A.J. Monier Service Co. in San Antonio, Texas. “You need to have multiple banking relationships. I would say its fine to have a couple regional or local banking relationships but that you should also have a large bank that is ‘too big to fail’ included as a part of your relationships.”
As a result of the crash, many small business owners have done just that.
Many companies only have one bank account, said Jeff Stagnoli, Nexstar Network business coach, and they use it to operate all of their expenses. Things like payroll, paying vendors, rent, computer expenses, etc. all come out of that one bank account.
“I don't care if you're a small or large business, you should have at least three accounts,” said Stagnoli. “One account is payroll; the money that goes in there should only fund the payroll. (And usually I tell people to keep two to three payroll cycles, available balance-wise in that account.) And then the other account is for operating expenses: the money coming in, the money coming out. And then the last account … a trapdoor account: a high yield savings account. A lot of times it's invested in money markets or municipal bonds. But that savings account is rainy day money — you never touch it. And ideally, you want a minimum of 7-10% of your total year's revenues in that account.”
Making moves like that can instill confidence that HVAC contractors and small business owners may have lost in the banking system after the collapse. Rather than having one large sum of money in one bank, with only $250,000 protected by the FDIC, they can have smaller sums equal to or less than $250,000 spread out between institutions to guarantee more protection.
Will Schryver, managing director of investment banking at investment bank Anchor Peabody, said one thing an HVAC contractor can do is look at their institution. If it’s smaller and more of a regional bank, diversifying the banks they use may be the best option.
“Or consider partnering up with some of the larger institutions,” Schryver said.
Risks to Small Business Owners
Best-case scenario, life after the bank collapses continues on as normal, and people and businesses move on to the next big thing. Stagnoli said he seems to see signs this is happening, as if it’s already “yesterday’s news.”
Worst-case scenario would be a domino effect of other banks collapsing — which, when taking into account the collapse of Signature Bank and Silvergate that followed the collapse of SVB, remains a possibility.
“And you have all your money parked at one smaller financial institution and they go belly up, along with your hard-earned cash and working capital,” said Pennington.
Bolton said that high borrowing costs due to rising interest rates, inflation, and a weakening economy are the immediate risk. The biggest risk he sees, though, is that interest rates remain elevated for an extended period, inflation continues, and consumers have less discretionary income to make large purchases.
business coach, Nexstar Network
The future of banking probably won’t change too much. If it were to change, it’d most likely just become more consolidated.
“I kind of see it going that way, where a lot of the capital is going to gravitate towards the larger institutions over time,” said Schryver. “It’s not going to all happen at once, but that's where I see the industry consolidating going forward.”
How should it affect the future as far as contactors are concerned? While there may not be many immediate changes, HVACR contractors and small business owners still should change how they operate in their thinking going forward, in order to protect their business.
“The biggest thing is [those HVAC business owners] that aren’t very connected with their banking, need to be,” Stagnoli advised.
“Longer-term, I would be trying to limit your bank cash balances to that of which you “need” and work off a line of credit,” Pennington said. “Open a brokerage account and park your money into some safe stocks and exchange traded funds (ETFs). Develop a mid- and long-term plan for capital investment back into your business, and more importantly, back into your people. Having lots of cash is great because you’re doing something right, but having too much cash means you’re not putting it to work.”
As a result of the current state of the economy and the bank collapses, business owners are bound to run into a few challenges along the way. The same is true for their customers, so contractors should also think about what would happen if their customers couldn’t secure the financing for the HVACR projects they’ve counted on. That loss of revenue could ripple down and affect their business.
Business owners who are looking to expand — and thus looking to secure financing for things like a new training facility, more employees, and new trucks — also have to take into consideration the difficulties that may lie ahead.
“Lending standards are getting tighter by the week, by the month,” Schryver said. “So lenders are very cautious right now, and they're really holding back. Not only is the has the cost of capital changed meaningfully over the last 18-24 months, but now, credit availability is starting to contract meaningfully. That’d be one thing I’d have on my radar.”
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