New investors in the professional carwashing industry quickly realize that financing is an important part of the business. Whether you are looking to expand the physical size of your location or add new services or equipment, making smart financial choices is critical. This article will look at some of the need-to-know information your business must be mindful of in the area of carwash industry lending.
Loan availability
Under today’s funding guidelines, buyers have three main financing options to consider. Two are supported by the Small Business Administration (SBA) Loan Program, which include SBA 7(a) and SBA 504 loans; both of these loans are “always inclusive of real estate.” The third option is the traditional conventional loan.
Of the three loans, and considering the state of the current financial environment, the SBA 7(a) remains the most favored by buyers and lenders in this industry. SBA 7(a) loans provide the most adaptable underwriting and permit loan proceeds to be utilized for a broad range of applications, including working capital, equipment, goodwill allowances, partnership buyouts, real estate, etc.
Investors may choose the SBA 7(a) loan for several reasons, such as up to 90 percent financing for a purchase, high loan-value ratios, 15 to 20 percent client down payment for new construction and up to 90 percent for a refinance transaction. Moreover, the loan is also structured on a 25-year amortization schedule.
Remember, SBA loans require an individual to submit yearly income statements and tax returns to complement the loan agreement.
Financing may be limited to one of the three choices, but new investors must consider a variety of factors before choosing one. First, location must merit a carwash business. In addition, the location must be zoned, or qualify for zoning, and a feasibility study will be required. Also warranted are appraisals for real estate and/or the validity of the business, verifying the demographics/rooftops are there to support the wash’s business, as an example.
Any of the three loan types discussed in this article will accommodate the various types of wash models; however, it should be noted that lenders are savvy. They monitor trends in every industry in which they lend. In recent years, for instance, lenders have focused on the “deluxe exterior/express wash model” simply based on the vast changes in customer demands and strong profitability margins.
Self-financing versus obtaining a loan
A banker once told me, prior to buying my first carwash, “Never use your own money when making an investment.” He was correct on many levels for several reasons. However, if one has an extreme abundance of funds available and wants to build or purchase a carwash, and remain debt-free, it might be worth breaking that golden rule.
When deciding to self-finance or obtain a loan, I would say 99 percent or more of buyers utilize SBA loans. These loans are incredibly beneficial, mainly because the lending institution or bank has the guarantee that a borrower’s loan will be backed by the SBA. This allows the investor to enter into a new business without having vast amounts of funds, and the bank will be assured the loan will be paid in full. Moreover, with SBA loans, the borrower will be mostly limited to only 25 percent cash injection.
Self-financing will likely expose a buyer to various financial risks; and, prior to making this type of decision, I strongly encourage everyone to seek professional financial and tax guidance from a qualified expert in the field.
State of financing
Since 2014, carwash financing has greatly improved. The SBA and banks started offering loans at a much greater level of ease, thus benefitting owners and new investors to either expand, purchase or build carwashes.
Some of these changes have and will continue to affect different wash types. In general, based on a bank’s best interest, the terms and conditions for each loan will presumably vary depending on the carwash model. Furthermore, fewer lenders in today’s market carry carwash loans for every type of model in their portfolio.
Because of these factors, among others, new investors should carefully choose a qualified professional when entering into a loan agreement. In our company’s opinion, firms with experience in the carwash industry and the lending profession offer a unique combination of expertise which carries a great amount of respect with banks.
Most importantly, it is imperative anyone applying for a loan must be credit-worthy, have funds to cover his or her cash injection portion, be prepared to provide and verify any required documents and have the real desire to be a successful carwash owner and operator.
When it comes to creating and following best business and financial practices, new investors should focus on making their plans customized and personalized based on immediate, as well as short- and long-term, personal and business outlooks. Implementing and maintaining great financial records for any business is critical for numerous reasons. First and foremost, it’s the law; and everyone who operates a business should conform to following the generally accepted accounting principles (GAAP) or their certified public accountants (CPAs) will.
A simple, yet highly effective, format is finding an accounting software program that will allow an individual to create monthly profit and loss (P&L) statements and a balance sheet. This program should also include inventory capabilities, payroll, accounts payable, receivables, etc.
With smart financing, a new investor is well on his or her way to owning a thriving, profitable carwash.
Over 30 years ago, Pete McKanna started his career in the carwash industry as the owner of several carwashes in Illinois and Florida. After 17 years as an owner/operator, he crossed over into the wash equipment manufacturing market, and was appointed to senior-level management positions. In 2010, he was approached by a long-time friend who asked McKanna to join his commercial lending firm, which has an emphasis on carwash loans. McKanna is now the senior vice president and principle of Gateway Capital Funding LLC, headquartered in Norcross, Georgia.
Need more advice and insight into financing a new carwash? Check out our video interview below.
