Will you choose door #1, door #2 or door #3? Wouldn't
it be great if you could find out what lurks behind the doors before
you make your selection? One thing is for sure, the prize is not a
life's supply of pork and beans. We're talking about selecting the
best way to pay for the new equipment you need for your business.
Whether you're new to the car-care business or you have an established
facility, you'll eventually be faced with this decision. Essentially,
you have three choices: cash; bank loan; or a lease/term loan from
an independent lender.
Cash
At first glance, a cash purchase may seem the least
costly, as there are no interest or finance charges involved. If other
factors are considered, however, a cash purchase can turn out to be
the most expensive way of all to pay for your new equipment. Here's
why. Cash used to pay for a new carwash is in after-tax dollars. This
means that if you have a profitable business paying federal, state
and local taxes you could be paying as much as double (dependent upon
tax rates) for the purchase. The dollars you use have already been
taxed as much as 45 percent, so you must earn nearly $2 profit in
order to have $1 left after taxes to pay for the equipment.
This scenario does not apply to less-profitable businesses,
but other factors come into play, making a cash purchase even more
costly in these cases. If profits are marginal, there are probably
serious working capital and cash-flow issues to be considered. Using
limited cash surpluses to buy equipment can deplete your working capital
to dangerous levels, and once you invest your cash into machinery,
it can no longer be considered a liquid asset. While there may be
equity value in the equipment, you cannot tap into it to meet ongoing
operating expenses. In fact, the cash you have tied up in equipment
could be that little extra you need to carry your business through
a slow period or a recession.
The bottom line is, a cash purchase takes funds from
operating cash flow and retained profits so it is usually unwise unless
very substantial and permanent cash surpluses exist.
Bank loan
A bank loan preserves your cash, but uses up bank credit
availability you may want to use for the purchase of another site
or even for other business interests. Bank loan terms can also be
inappropriate for an equipment purchase if the loan is primarily for
the purchase of real estate or permanent construction. The repayment
term may be significantly longer than the equipment's useful life.
Having 10 more years of payments for equipment that's worn out now
makes replacement difficult.
In addition, many banks will finance only 80 percent
of the equipment cost and may not finance any of the soft costs like
delivery, installation, plumbing and electric. Slow processing and
credit decisions, high closing costs, cumbersome paperwork and lack
of payment flexibility are other important considerations when contemplating
a bank loan. Finally, very few banks or individual bankers will really
understand your business. They don't specialize in car care nor do
they have established relationships with distributors and manufacturers.
Since many carwash manufacturers require a hefty deposit before accepting
your order (usually banks will not make progress payments on a term
loan) you may have to draw down the entire loan and begin payments
several months before equipment delivery. This creates additional
interest expense and possible cash-flow problems with payments coming
due well before your revenue stream kicks in. All in all, banks can
be the best source of construction financing and permanent, long-term,
real estate loans but may not be best suited to fill your equipment
finance needs.
Lease or loan
Using a lease or term loan from an independent finance/leasing
company preserves both your cash and your bank credit. Independent
finance and leasing companies can finance up to 100 percent of your
equipment purchase, including most or all of your soft costs. If the
lender you work with has solid experience in car care and is a direct
lender, as opposed to a broker, you can expect faster processing,
simpler paperwork and terms that better match the useful life of your
equipment. You should also be able to get much more creative payment
structures, such as deferred, graduated and seasonal plans to help
you manage your cash flow more effectively.
Choosing the right company to provide your equipment
financing is as important as choosing the right equipment for your
business. When selecting that company, be sure it has a solid reputation
in the car care industry and understands the nuances of a cash business.
Many manufacturers and distributors will waive their deposit requirements
when you use a lender they know and trust. This means you won't have
to settle your equipment loan until the equipment is installed, running
and producing cash flow.
Remember that the decisions you make today will impact
the success of your business tomorrow. Choose wisely.
Anita Baron is responsible for business development
in the car care industry for Butler Capital and is treasurer of the
Mid-Atlantic Car Wash Association. She can be e-mailed at abaron@butlercapital.com.
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By
Anita Baron
