Walking through the maze of financing options can be difficult for even the most experienced car wash operator. In the ever-changing lending environment, borrowing the money you need for your business can be a challenge. The good news is that car wash lending is getting better.
Generally, commercial and industrial credit is freeing up. While the major banks are still hesitant to lend to car washes, some smaller banks and non-bank lenders that are familiar with and willing to underwrite car wash loans have stepped up to give car wash operators viable funding options. Car wash owners are now seeing financing available for working capital, equipment, new construction, car wash acquisitions, and even the refinance of existing debt.
GOOD NEWS FOR COMMERCIAL LOANS
The latest numbers on commercial and industrial loans, as reported by the Federal Reserve, show a strong rise in business lending. According to the Board of Governors of the Federal Reserve System, commercial and industrial loans have reached pre-recession levels. Loans and leases at commercial lending institutions are on the rise.
One of the newest options available in car wash lending is working-capital loans. Working-capital loans can be used to buy equipment, finance improvements to a site, or for just about any business purpose. We have seen a number of different working-capital-loan programs surface over the past year. Some programs offer unsecured lending, some are tied to real estate, and others are designed for business owners with less than perfect credit. Car wash operators should pay close attention to the collateral being pledged and the interest rate being charged if they are looking for a working capital loan. The terms can vary widely.
One of the best working-capital programs available on the market today is the new SBA Working Capital Express program. This program allows car wash operators to finance up to $150,000 with little paperwork. The SBA Express offers a 10-year term and a very reasonable rate. The current rate is 6 percent (prime rate + 2.75 percent). This type of loan is normally only secured by a blanket UCC filing on the business assets or the equipment financed and it does not require the borrower to provide tax returns. One of the key features of the program is that is has no prepayment penalty. This gives car wash operators the flexibility of making larger payments when cash flow is strong and then a lower monthly payment during the slower months. The low rate, the long term, and the fact that borrowers can pay off or pay down the loan at any time makes the SBA Working Capital Express loan the most competitive loan available in the car wash industry today.
Real estate equity loans for working capital have been around for a long time. These loans nearly disappeared during the last recession. However, loans based on business real estate equity have made a modest comeback over the past year. Equity loans tend to be lower rate (because they are tied to real estate) but can be more costly. The costs for real estate equity loans can include appraisal, environmental report, title costs, and other taxes charged for real estate based loans. Real estate equity loans are generally offered by local and national banks and typically will require full financial disclosure.
Merchant Card Advance/Business Cash Advance
Unlike the low rates offered by the SBA Express loan or real estate equity loans, a recent wave of new hard money lenders have entered business lending. These lenders have been taking advantage of tight credit markets by offering high-rate, working-capital loans for small businesses that are tied to merchant card accounts or bank accounts. These loans are called Merchant Card Advance Loans or Business Cash Advance Loans. These hard money lenders advertise fast, simple credit decisions in minutes and funding in as little as one day. The key feature of these loans is that they do not care if the borrower has tax liens or bad credit. They are primarily based on how much the business processes in cash and credit card receipts on a daily basis. Payments for these loans are drawn by auto debit from the Merchant Card or checking account daily and the rates are astronomical.
If you find yourself in a position where you can’t get funds elsewhere, Merchant Card Advance or Business Cash Advance Loans may be an option. However, you may want to consider other sources like friends, family, investors, or even the extreme of using credit card cash advances before going the direction of Merchant Card Advance or Business Cash Advance Loans. While lenders in this market represent themselves as saviors to small business, they are actually lenders of last resort — the rates for Merchant Card Advance or Business Cash Advance Loans typically range from whopping 50 percent APR to over 100 percent APR.
Five years ago car wash operators could fill out a single page credit application and get approved for a lease to purchase car wash equipment. Then the bottom fell out of the market. The “app-only” programs that many manufacturers, distributors, and car wash operators relied upon went the way of the dodo bird. They were extinct — or so we thought.
Over the past two years, app-only equipment leasing has slowly made its way back. It started with app-only up to $25,000. Now, we are seeing app-only programs available up to $300,000 for operators with a good track record and strong credit.
Equipment leasing companies are looking to extend credit to those operators that have shown the ability to manage their personal finances in a responsible manner. To be approved for app-only equipment leasing, the owner of the car wash should have decent credit. A credit score around 675 to 700-plus is an example of what would be acceptable. In addition, the business bank account should show deposits and average balances at a level commensurate with the type of wash they operate. Having a low five-figure average balance is an example of what a lender may look for in a business account balance. So, if you have good credit, decent average business bank balances, and have been in business for at least three to five years, you may be able to get up to $300,000 for equipment with a single page application.
Equipment leases are available for businesses that fall outside the parameters of app-only financing.Whether it’s due to the size of the request, or if your credit score is a little low or the amount of time you’ve been in business is a little short, leasing can still be a very viable option for car wash operators looking to acquire or upgrade equipment. These requests simply require full financial disclosure.
According to the Equipment Leasing Association of America, approximately 80 percent of all U.S. companies lease some or all of their equipment. Business owners like the relatively easy access to cash. Other advantages to leasing include:
• Having a low down payment. Most leases only ask for one or two payments at closing. Bank loans can require 20 percent or more down.
• Getting a fixed payment instead of a floating rate loan. Leases feature a fixed payment for a set term.
• Leases use the equipment financed as collateral for the lease. Banks often tie equipment loans to real estate or other assets. While real estate loans may have a lower interest rate, they can have heavy fees. In addition, equipment loans tied to real estate can often limit the ability of the borrower to access funds they need to operate their business.
• Leases offer tax advantages. Many leases can have a 100 percent tax write off.
• Leasing can be off balance sheet financing. In some cases leases do not have to be listed as a long-term liability on a balance sheet. Therefore, giving the appearance of lower leverage, which makes the financial statements more attractive in the event you want to secure other types of financing.
• Leases offer the opportunity to conserve the working capital of a business. Instead of paying cash today, equipment that is leased can pay for itself over time as it is used.
• Equipment leasing allows operators to gain immediate access to the most up-to-date business tools without a large cash outlay.
• Leases are relatively easy to obtain. The app-only lease programs don’t require tax returns and other financial information. This is particularly popular with car wash operators who use tax management strategies.
While equipment leasing is a good tool for car wash operators, it may have a downside. Leasing commits you to retaining a piece of equipment for a certain time period. This can be an issue if you are looking to flip a location. While leases can be transferred in most cases, the new buyer will have to be approved. If they don’t qualify, the leasing company may require that the seller pay off the lease.
In any case, if you decide to lease, make sure you get a lease with a specified purchase option at the end. These are called PUT leases (Purchase Upon Termination). With a PUT lease, a small amount is owed when the lease period ends. Typically, PUT lease purchase options range from $1, $101, or 10 percent of the original equipment cost. On the other side are fair market value (FMV) leases. A FMV lease does not have a set purchase option. Borrowers who want to remove the risk of an unknown purchase price that is associated with the FMV lease should ask their lender for a lease with a set purchase option or PUT lease.
Equipment loans can be structured very similarly to an equipment lease under what is called an Equipment Finance Agreement (EFA). The primary difference is the EFA does not have a residual. In an EFA, the equipment is yours at the end of the term.
Standard equipment loans are also offered by banks. A standard bank equipment loan will typically require some type of down payment (20 percent to 50 percent) and possibly additional collateral in the form of real estate or other assets. While the rate may be very competitive, the terms required for this type of loan may make it less attractive. In addition, qualifying for standard equipment bank loan financing can be very challenging.
Leading the way in car wash lending for new construction, acquisitions, remodels, and refi’s are loans backed by the Small Business Administration (SBA). SBA backed lending has become the business loan program of choice for a good portion of the financial institutions in the United States. In fact, many of the financial institutions have reported 30 percent to 50 percent-plus increases in SBA loan volume over the past year. This is most likely due to the federally backed guarantee that comes with these loans. The 75 percent guarantee that the SBA provides for loans written under the 7(a) loan program gives lenders the security they need to extend credit.
SBA backed loans can be used to construct new car wash facilities, acquire existing sites, remodel, re-equip, and refinance existing debt. Not only can existing operators take advantage of the SBA loan programs. SBA loans are also available for new car wash operators.
The maximum loan amount under the SBA 7(a) loan program was increased from $2 million to $5 million. The maximum loan amount under the SBA 504 loan program can now exceed $13 million. Terms for SBA loans go up to 25 years and are fully amortizing. That means that if you have an SBA loan, you have a long-term loan that will not have a balloon payment or renewal clause.
One thing car wash operators should know is that all SBA Loans are not created equal. That is, each financial institution has the right to use discretion as to what types of businesses they will loan money to under the SBA loan program. So, while you may be eligible for an SBA backed loan, your lender may choose to not make a loan to your business simply because it is a car wash. In fact, many of the major banks are still very hesitant to lend to the car wash industry. Therefore, car wash operators may need to look for a local bank or a non-bank lender that specializes in car wash lending to secure your SBA Loan.
Conventional loans are loans written by banks and financial institutions that do not have a government guarantee. For this reason, conventional loans can be much more difficult to get. In most conventional loans, the lender is looking for existing cash flow to pay for the loan. So, while refinancing an existing site may be a reasonable option for a conventional lender, getting approved for a new construction, acquisition, or expansion loan may prove to be difficult and may not offer the best terms.
To offset the lack of a federal guarantee, conventional lenders typically compensate by requiring higher down payments, shorter terms, or cross-collateralization of other assets. The amount of down payment can range from as little as 20 percent up to over 50 percent for a conventional loan. The typical term for a conventional loan may be as little as 10 to 15 years. In addition, most conventional loans will come with balloon payments, calls, or renewal clauses. When evaluating a conventional loan versus other options such as an SBA loan, borrowers should take into consideration all of the factors. While conventional loans may have slightly lower fees up front, the fees can actually be higher over the long run.
Conventional loans can be a great option for car wash operators if they are structured properly. To mitigate the risk of having your loan called and to eliminate the cost of renewals associated with conventional loans, borrowers may consider asking their lender for a fully amortizing loan with a longer term (20 to 25 years). Doing this will keep your costs down and your payments at a reasonable level.
OPPORTUNITIES IN THE CAR WASH MARKET
One of the biggest areas of growth in car wash lending has been the surge in acquisitions of bank-owned car washes. Savvy car wash operators looking for bargains are scooping up distressed or closed car wash facilities for a fraction of the cost of new construction. These bargains have been found all over the country. Many of the full-serve sites being purchased are converted to either express-exterior washes or the flex-serve format. With the lower cost of doing business, experienced operators are finding the acquisition and conversion of these bank-owned properties a relatively easy business decision. The challenge is financing.
Financing a closed site can be easier than you think if you use the right tool. In many cases, the right tool is an SBA loan. The reason an SBA loan can be better than a conventional loan is because of the loan-to-cost and the purpose of the SBA. A conventional loan for a closed site can be very difficult to get because the buyer may not be able to obtain the previous owner’s tax records. Therefore, there is no documented cash flow. If you can get a conventional loan, the lender is more than likely going to require a significant down payment.
SBA loans for car washes typically require as little as 15 percent to 25 percent down. In addition, the SBA is here to help support the interests of small businesses and entrepreneurs. The reason for this is that they recognize the fact that business, especially small business, is vital to the country’s economy. To that end, the SBA can and will guarantee loans for business entities based on projected income versus requiring a documented track record (when tax returns are not available).
OTHER TRENDS IN CAR WASH LENDING
As the economy is well on the road to full recovery, we have seen a strong increase in the area of new car wash construction for both new and experienced operators. With raw land costs still at reduced prices, investors are finding car wash construction projects more attractive.
The key to success in obtaining a loan for these new construction projects is a well-thought-out business plan supported with reasonable documented projections. The biggest mistake we see is when a borrower uses over-inflated sales numbers that make the projections seem unrealistic. Successful applicants typically have clean credit, sufficient liquidity, and the all-important location, location, location.
FUTURE OF CAR WASH LENDING
In our experience, we feel that economic growth is getting better and will remain positive in the near term. We see a huge pent-up demand to replace obsolete equipment in the car wash market, which will result in an increase in equipment orders. This should provide positive growth for both car wash manufacturers and distributors.
Strong car wash operators are starting to make the move toward developing new sites. New investors are flowing back into the market. The past few years have created profitable expansion opportunities for those operators that have the vision and smarts to know that the best time to buy is when the market is starting to rise.
With the surge in the number of commercial loans being written, the increase in the loan products becoming available for car wash operators and the economy heading in right direction, we are very optimistic about the future for lending in the car wash industry.
Financing car washes for over 25 years, Michael Ford serves as the managing director of Coast Commercial Credit, a full service nationwide financial institution specializing in car wash lending. He can be reached at MikeF@CoastCC.com or at (800) 400-0365.