With banks reluctant to make loans, architecture firms are getting creative when it comes to raising capital.
Justin Larson’s firm in Fort Collins, Colo., found itself in a situation facing many small offices at the end of 2009: There just wasn’t enough work to sustain his moderate practice. His bank was steadily reducing his line of credit, and he eventually had to lay off most of his staff. Larson wasn’t alone. A competing firm in Fort Collins was also struggling through the recession. Rather than competing against one another for diminishing commissions, the two firms merged earlier this summer.
Their new firm, Vaught Frye Larson Architects, now employs 12 full-time staffers, and work is streaming in.
“We’ve been capturing more market share just because of the intertwined strength that potential clients see as a result of the merger,” Larson, AIA, says.
It’s true that the Architecture Billings Index was down for four successive months until an upswing in August, and that the economic slump seems to be dragging on. But while some firms are eyeing a belt-tighteningly uncertain near future, others see an opportunity to grow. Some, such as Larson’s, had to shrink first in order to grow, but many are approaching a down market with confidence and optimism. Is this the right time to run to the bank for a loan to expand?
Well, yes and no.
“You can’t expand just by getting credit, but you may not be able to expand without getting credit,” says Peter Piven, FAIA, who offers management advice to architects and other design professionals as principal of Peter Piven Management Consultants.
Piven advises that relying on a loan to make new hires or increase business is a bit too much of a gamble for architects, especially when billings are so uncertain. Having credit available, though, is a critical safety net. Unfortunately, credit is a lot harder to get today than it was just a few years ago, especially for small- to midsized firms.
Piven sorts architecture firms into three groups: those that have no problem getting credit, those that don’t use credit but still have it, and those that can’t get it. Each group, he says, is populated about evenly. The firms that succeed in a recession use credit as defense rather than offense.
“This is a profession and a business where most folks cannot expand simply because they have money. It doesn’t work that way,” Piven says. “You don’t staff up before you have the work to do.”
And firms tend to agree. Those smaller firms that are expanding tend to be doing so reactively as opposed to proactively. They’re nailing down the work, then adding the workers to get it done.
But expansion doesn’t just mean adding more desks to your office. In addition to hiring personnel, firms are adding new specializations and building up marketing efforts to stay afloat. Often, the partners of smaller firms tend to pull from their own resources to make these kinds of investments, essentially serving as their own creditors. Rather than borrowing a bank’s money, they borrow their own. Integrated Architecture in Grand Rapids, Mich., uses this approach, and they get particularly bullish when the market’s tumbling.
“We’re maybe a bit of an anomaly,” says founder and president Paul Dickinson, AIA. He recently added about 10 people to the 50-person firm. He and his partners used their own capital to do the hiring. “As a firm we’ve always done well when the market’s down. We look at it as an opportunity to pick up new talent.”
Most notably, Integrated Architecture created a separate company to finance the construction of its own office building in 1997. Rather than leasing generic space, the firm decided that it made sense from a marketing standpoint to be housed in a building that matched its aesthetic values. It wasn’t an expansion, per se, but a move that drew new clients, according to Dickinson. Pooling their resources was instrumental.
“You always want credit available,” Dickinson says. “There’s no question about it.”
When development in Atlanta started to dry up during the economic decline, Markham Smith, AIA, knew that he had to adapt. He began to practice during the recession of the mid-1970s and founded his firm, Smith Dalia Architects, during the oil bust of the late 1980s. “We’re familiar with how bad things can be,” he says.
So his 20-person firm adopted a strategic marketing approach focused on luring in the limited work available rather than waiting for it to come to them.
“If we had not done that over the last three or four years, we might have gone out of business,” Smith says. The firm used its own capital to invest in marketing efforts, instead of taking out a loan. “Borrowing is just not part of our business plan.”
For Larson, whose pre-merge firm had wound down to just a few people by early 2010, filling gaps with a loan was not only too risky a bet, but the loan itself was almost impossible to get. While the credit line of his smaller firm trickled away and eventually disappeared during the downturn, the recent merger with another local firm has enabled the new company to get greater access to credit than Larson had ever seen.
And that’s one of the ironies of credit: It’s there when you need it the least, according to Nic Perkin. He’s the president and co-founder of a new company called the Receivables Exchange, which is hoping to reengineer the way that small- and midsized companies access capital. The firm sells a new type of borrowing in which firms can auction off their accounts receivable. Rather than waiting 60 or more days for clients to pay, firms can essentially sell their receivables to the highest bidder.
“Small and medium companies have been disadvantaged in terms of accessing capital for far too long,” says Perkin, whose company is already in use by a number of architecture firms, as well as companies in 50 or so other industries.
By selling their accounts receivable to larger institutional lenders and funds, smaller firms can quickly get the money they’re owed, less a 1 to 2 percent fee, and put that money back to use.
Perkin says that this immediate access to capital can be especially helpful when commissions are fewer and farther between, and can even be a way for firms to avoid having to take out a traditional loan.
As the market shifts, firms recognize the need to be more nimble. Though most will concede that bank lending remains an important element to the financial health of any firm, architects are learning to rely less on money they don’t have.
“In these recessionary times, it’s a much more difficult choice to borrow because it’s not as clear for most folks that the work will be there,” says Piven, the consultant. “I was actually surprised in talking with people recently how many of them wanted to operate on a cash basis. But I do think it’s prudent.”