Three Options To Finance Your Auto Repair Shop
When it is time to finance your auto repair shop business, there are three options available to a small business owner. The nature of the auto repair shop business requires you to have enough working capital to have the right parts, equipment, supplies and trained staffing to provide your customers the type of service they expect. Among the many challenges you normally face is the high investment in inventory plus dealing with your automotive parts and supply vendors. These vendors offer very limited credit options and terms that result in high demands on your cash flow and bottom line profitability.
As new car prices have climbed, the value of used cars has continued to appreciate. As a result the average lifespan of a used car is higher than ever. This is a positive trend for auto repair shops since there is an increasing demand for auto repair services as used cars age. Obtaining additional capital via alternative lender financing can help you get your auto repair shop business on the fast track to success.
Here are three options, with their pros and cons, on how to finance your auto repair shop business growth:
Small Business Administration (SBA) Loan
The Small Business Administration (SBA – Federal Government) provides a guarantee to banks and lenders for the money they lend to small business owners. An SBA loan is a commercial loan through a bank or authorized SBA lender network, structured according to SBA requirements with an SBA guarantee. An SBA loan reduces the risk associated with lending to small business owners who may not qualify for a traditional loan. This allows for an expanded source of funding for entrepreneurs, small and growing businesses, minorities and veterans.
Since the SBA provides a partial guarantee of up to 85% of the loan amount, this network of approved lenders will approve loans to small businesses that ordinarily would be considered “too risky” otherwise. For a small business that is unable to qualify for an SBA loan, any other financing options will normally be more costly, with less favorable terms and collateral requirements.
But there is always a price for dealing with the Federal Government. The SBA loan application process is restrictive, thorough and long (up to 3 months, after full documentation submitted). You will need to invest significant time and patience to get an SBA loan approved for your auto repair shop business.
Pros: Least expensive, long fixed rate payment terms.
Cons: Extensive paperwork, long evaluation process, restrictions to qualify.
Traditional Financial Institution Loan
Banks are where the money is, supposedly. Years ago, a small business on Main Street like your auto repair shop, was welcomed at traditional banks as a potential client for a business loan. Not anymore. After the the “financial crisis” of 2008, traditional banks small business lending guidelines became more strict in their criteria for approval. Why? In an uncertain US economy, small businesses represent greater financial risk versus other financial investment opportunities available to a traditional bank. Remember banks are in the business of making money, not losing it on potentially risky small businesses.
For a secured small business loan, a traditional bank requires that your auto repair business has a minimum of two years in operation, be profitable, has good business and owner credit history, plus a business asset to serve as collateral guarantee. The loan evaluation process will time consuming (30 days) and detailed requiring bank statements, multi-year financial reports, future sales projections, business asset market evaluation and business and personal credit reports.
Assuming your auto repair business is approved for the secured small business loan, funds are usually available 30 days later, with interest rates higher and payment terms shorter than an SBA loan. Why? The small business loan does not have a guarantee of payment by the SBA, so the risks are higher for the traditional bank. Hence more expensive for you to get additional capital. If your auto repair shop business needs the funding in less than 60 days, this is not a viable option for you.
As a result, to finance your auto repair shop business may be difficult to qualify for a small business commercial loan due to its limited business history, insufficient revenue, profitability, limited collateral or credit history.
Pros: Medium expensive, long fixed rate payment terms.
Cons: Extensive paperwork, long evaluation process, difficult to qualify.
Alternative Financial Lender Loan
As previously mentioned, traditional bank small business financing has declined significantly during the last ten years. To fill this gap, alternative financial lenders have evolved to provide the needed small business financial capital. Alternative financial lenders offer a variety of specialized financial solutions to finance your auto repair shop business when the previous options are not available or don’t fit the funding needs of the small business.
Alternative financial lenders offer two basic financial products to small businesses: small business loans (both secured and unsecured) and Merchant Cash Advance, assuming that your business accepts customer payments via credit cards. For the small business seeking additional capital, the financing process requires less paperwork, the evaluation process is shorter with less focus on credit history, with approval and funding in less than a week. The costs for the capital are higher and the payment terms shorter then the previous financing options mentioned. Why? Again, higher risk to the financial lender.
Pros: Simplified, short evaluation process, easy to qualify, rapid access to funding.
Cons: Higher cost, shorter payment terms.
Three options to finance your auto repair shop business are presented. An SBA loan is one of the most attractive financing options available to a small business owner, but is time consuming and difficult to qualify. A traditional bank small business loan is easier to qualify, but at higher cost and less favorable terms versus the SBA loan. An alternative financial lender small business loan or Merchant Cash Advance is the easiest to qualify for, but with higher costs and less favorable terms than the other financial options. Each financial solution may fit your business depending upon your specific needs.
Please call us at (888) 213-3383 to help review which financial product best serves your business needs or Contact Us via Email.