When It’s Time

Deciding when is the right time to go and secure capital for an HVAC business is half the battle. Then, contractors have to figure out how they can partner with banks and find other sources of creative capital to fund growth or new opportunities in their business.

In 2016, Hoffman Brothers was a $9.5 million business. After jumping into the business, buying the company from his dad, and joining Nexstar, Hoffman realized that growth is not cheap.

“And there are a couple of things I realized early on: remain committed and match your company’s growth ambitions with your own commitment to reinvest your cash flows back into your business, and by doing so you could delay or postpone indefinitely the need to go borrow money from a bank to support your organic growth,” Hoffman said.

For the first four years of his journey, Hoffman paid himself $80,000 a year. He paid cash for every vehicle they bought and did the same thing when stocking inventory — along with making sure that his commitment to the business matched his ambition around growing the business, of course.

Going to a bank and needing money also shouldn't be a result of having a business that’s underperforming. The reality is, if a contractor’s gross margins are healthy and they’re selling work at the right price, doing the basics well, and executing industry best practices such as the Nexstar playbook, they might not need to borrow any money.

“I didn't need to borrow any money to get to $100 million,” Hoffman said. “Before you go to the bank … you should ask yourself, is my business performing the way it should? Are the organic cash flows being generated the way they should be? Or am I just trying to solve a problem in a short-term way, by asking the bank to compensate for sub-par performance?”

Hoffman Brothers decided on a greenfield (a project or investment that starts from scratch, without any existing infrastructure) in Nashville, Tennessee, using organic cash flows from their St. Louis operation.

Before Capital

Before securing capital, contractors have to ensure that their financials are in line.

When a contractor needs to borrow money, Paup said, “Can the bank easily see what your profit and loss statement is, or do you have it mixed into different buckets? This time of year is great for getting your financials and general ledgers in line so that when you come into 2025, all that messiness goes away. You've done the hard work over the past three months, and now in 2025, you have a clean financial statement, balance sheet, and cash flow statement.”

If a contractor walks into a bank with a messy income statement, the bank will likely flag it. The contractor’s risk tolerance will increase, interest rates will go up, and negotiation terms will go way down.

When just starting out or aggressively growing an HVAC business, Paup said, “Do what you can to reduce your living expenses, live within your means, and put that money into your best return on investment — which is always going to be our businesses. Invest in cash-flowing equipment or business assets that will appreciate and borrow money wisely to support these value-building investments."

Paup also shared their experience in greenfielding, which was when the business recognized a need to raise capital.

“We went out and secured a line of credit to support our Salt Lake expansion,” Paup said. “If everything goes terribly wrong, I know my cash-out will range from $800,000 to $1 million, worst-case scenario. I can fund that today because we’ve been responsible with our finances. But I also approached several banks, interviewed three or four to find the best deals, and set up a line of credit as a safety net in case anything goes sideways. Make sure that if you're securing capital, you're doing it from a position of strength, treating it as a resource.”

CAPITAL SECURED: The new Golden Rule training facility that was built with secured capital. (Courtesy of Golden Rule Plumbing, Heating, Cooling & Electrical)

Now What?

After a contractor ensures, operationally, that they are ready — meaning books are clean and they’ve identified the next big thing they want to do — and they’ve determined it’s time to go out and seek capital, there are a few other things they’ll need to do to prepare for that service, and certain things they should look for.

“When preparing for the search [of capital], the biggest thing is having your accountant make sure everything is in line and you have a balance sheet that makes sense,” Stagnoli said. “What I mean by that is perhaps even having a third party review your balance sheet and make sure everything aligns. If you don't do that, I can assure you, when that underwriter starts looking at your account, even if they sign off on it, it's going to cost you points.”

As previously mentioned, it’s important contractors are obtaining capital for a purpose and not just because they are having a moment of panic. It’s a slippery slope if a contractor is securing capital for a reason like the slow season, and they’d just feel more comfortable with some extra cash.

“But the biggest thing is just ensuring you have all your ducks in a row. It starts with a balance sheet, with really clean books, and having somebody that can speak intelligently to the bank — whether that’s your controller or even a third-party accountant that’s already done a review for you — I think that’s really a key area to help move things along,” Stagnoli said.

Not all banks are created equal, so in that search for capital, contractors have to also identify who the best banking partner would be. It’s also important to recognize that the “relationship manager” sent to talk to a contractor about their options is a salesperson. They are going to tell them that they can do everything.

But the reality is, some banks may specialize specifically in SBA loans, asset-based lending, or cash flow lending.

“The other thing that will dictate the terms that you're going to get and what bank is right for you is your business-specific attributes and the size of your current business. … Understand what your needs are, and make sure you're going to the lender that specializes in serving your size business,” Hoffman said.

Types of Capital

But the journey doesn’t stop there. After contractors have identified the need for capital and have done everything they could to prepare, they then have to decide what type of capital is right for them. As contractors think about all the options, they’ll realize there’s a parallel spectrum around control.

On one extreme, Hoffman said, is senior secure bank debt lending — the go-to commercial bank, where a contractor would go to fund a working capital facility, vehicles, etc. This side of things allows contractors to give up the last amount of control. On the other end is raising equity and parting with ownership interest in the business. In the middle are unsecured debts, coordinated debts, and mezzanine debt — options he’d advise folks not to choose, because when it comes to unsecured debt or mezzanine lending, they’ll want more equity pledges, approvals, control, and the ability to decide what a contractor can and cannot do with the money.

When a contractor brings in that equity partner, the biggest con could be parting with ownership in the business. Another lending option is an Employee Stock Ownership Program (ESOP).

“ESOPs give you both options,” Stagnoli said. “You would be on your way down, so to speak, and you could obtain capital for yourself without giving up control of your business, or if you are giving up control, you're giving it to people that you can trust, versus someone that just has a concept that they utilize for other businesses. So, it can be both ways. You can also take that money and reinvest it in the business to expand in M&A or whatever happens to be greenfield.”