Money—That’s What You Want
Finance your new carwash location

So you’ve found the perfect formula for a new carwash—an available site, good demographics, low competition, the right zoning, good visibility and access. All the ingredients for a successful carwash business are there. Now you just need to pay for the land, site development, building, equipment and initial operating capital. While it may seem overwhelming, carwash operators have many financing options.

Cash

Occasionally, an experienced owner, or even a new operator, will have enough accumulated cash to pay for a new project. At first glance, using your own money may seem less costly than financing since there are no interest or finance charges to pay. But further consideration usually shows that using after-tax cash may be the most expensive way to pay for the project.

Every cash dollar used actually costs closer to $2 since it took almost $2 of revenue to end up with one after-tax dollar. If you finance, interest and finance charges are deductible expenses that help reduce tax liability. Forty percent or more of finance charges may be recouped from tax savings on your reduced taxable income. It may be that the true cost of your own cash investment is higher than borrowed funds. In any case, funding an entire project from personal capital is not a real option for the majority of operators. Normally there’s some equity cash available but not nearly enough for the whole project.

Bank loans

Typically, land and building costs are paid with a combination of owner’s equity and loan proceeds. Having a good bank relationship is a real plus, but finding the right bank can be a challenge, especially if you are new to the business. Obtaining bank financing for 80 percent of your carwash project is difficult, since some banks won’t lend 80 percent and some won’t lend to carwashes at all.

A smart option is to network with trade association members, your CPA, the chamber of commerce and other business owners to help find a bank that is active in small-business lending. When you first meet with the banker, ask him if the bank has made other carwash loans and if they have current carwash customers that you can speak with. It may not be wise to spend much time with a bank that hasn’t had experience lending to the carwash/car care industry. Also, a bank that does lend to carwashes may only want to do the real estate and construction. In that case, you’ll still have to find financing for the equipment.

SBA guaranteed bank financing

Most banks use Small Business Administration (SBA) loan programs when lending to a new venture. The federal government, through the SBA, guarantees 75 percent of the loan, which usually is enough to make the risk level acceptable to the bank. While it’s far easier to get a bank loan through the SBA program, the additional paperwork and processing time needed for the SBA process can be frustrating.

Non-bank SBA lenders

In addition to banks, there are a number of non-bank lenders authorized to make SBA guaranteed loans. Non-bank SBA lenders offer the same terms as banks but are often more aggressive than banks because they are regulated differently. If the lender specializes in SBA loans, the process can be much more efficient and user-friendly than a bank SBA loan. However, as with the bank, they may only finance the land and building so you will still need to secure other financing for the equipment.

Terms for both bank and non-bank SBA lenders can be as long as 25 years. The rate is negotiated between the borrower and the lender but is subject to SBA maximums, which are set at prime plus 2.75 percent and will float up or down as prime rate changes over the life of the loan. With prime at 4 percent at press time, SBA loan rates are attractive. But operators need to plan for future payment increases as the rate floats up over time. Current rates are so low they have no place to go but up. While the interest rate is low, there are significant costs to close an SBA loan, including a guaranty fee of 2.5 percent for loans between $150,000 and $700,000 plus legal fees and an ongoing service fee. These fees can usually be added to the loan amount. It’s also standard procedure for SBA loans to require spousal guaranties and liens on personal real estate.

Independent finance or leasing companies

Since conventional bank or SBA loans are often geared to the real estate portion of your project, you’ll probably still need financing for equipment. An independent finance or leasing company can complement the financing provided by a bank or SBA lender. These companies often finance 100 percent of the equipment price plus most of the soft costs for freight and installation. Terms usually match the expected life of the equipment—five to seven years. Rates are higher than conventional bank or SBA financing, but they are fixed so any initial rate differences will likely decrease as floating loan rates go up over time.

Look for a company with experience in carwash finance and a portfolio of carwash loans and leases. A company with substantial experience in the carwash business should be able to offer fast processing, simple paperwork and special payment structures, such as deferred, graduated and seasonal payments. Be sure you are dealing with an actual lender (rather than a broker) who makes its own credit decisions and lends its own money.

Business plan

Regardless of which type of lender you approach, you can maximize your chances for a favorable response by having a detailed but concise business plan. Pay particular attention to financial projections. Explain all your assumptions—number of cars per day, number of sunny days, fixed and variable costs for labor, utilities, taxes and insurance. Provide a “sources and uses” of funds chart with a detailed breakdown of project costs and the source of funds to cover each of those costs. Any lender will want to be sure you will have adequate funds to complete construction and equipment installation, open the business and cover any initial operating losses. Sources would be your own equity capital, loan proceeds and equipment lease commitments. Be detailed and thorough. The lender will use your plan to evaluate the project. The plan will also be viewed as evidence of your own business acumen and understanding of the carwash business. Leaving out important items or being too optimistic about volume or revenues can imply that you don’t really have a good handle on the business.

Borrower equity

No lender will finance 100 percent of a start-up project, so you’ll need to make a significant equity contribution to the cost of the project. Exactly how much equity you need depends on the size of your project. Consider the cost of land, site prep, building construction, equipment, freight and installation, opening supplies, marketing and promotion, operating capital and cash reserves. You should plan on providing at least 20 percent of the total project cost from your own funds. If you have never run a carwash business before or if this is a startup project, there’s really no such thing as 100-percent financing.

If you need to come up with 20 percent of a $1 million project, that’s going to take $200,000. In case you don’t have that much money lying around, the following are some ideas on where to find it:

Home equity. Thanks to the runup in home values over the last decade, there may be substantial equity in your home. Calculate a conservative value for your home, multiply that number by 80 percent and then deduct the amount of your existing mortgages from that number to estimate how much you can borrow against the equity in your house.

If you are using home equity for your capital contribution, be sure to have the line in place before you apply for a bank loan. You will be considered a much more serious loan prospect when you already have your equity cash in hand and can write a check to start the project. Don’t forget that you’ll need to include debt service on the home equity loan in your projections.

Retirement funds. If you are developing your carwash after a career in another business, then you may have enough funds in a 401 (k) or IRA to provide the needed project equity. But you will pay a big premium to tap into the money in these plans. Since your contributions were tax-free, you’ll have to pay ordinary income tax plus a 10-percent withdrawal penalty on any money you draw out of a tax-deferred retirement plan. Clearly you need to consult with your accountant or financial advisor before you take any distribution from a retirement plan.

There is another alternative that some entrepreneurs are trying. If you have the ability to create a self-directed IRA, you can, under certain circumstances, direct the trustee of the IRA to invest in real estate for you. This approach definitely requires expert help from a CPA or tax attorney.

In both cases, you are taking money currently earmarked for your retirement and putting it at risk in a speculative investment, so make sure you give serious consideration to the consequences if the business does not succeed.

Friends and family. Some entrepreneurs are fortunate to have access to family capital. If you decide to go this route, remember, you now have family members as de facto partners. Family reunions and Thanksgiving will never be the same. If you don’t mind Uncle Ralph giving you advice on how to run your business, this could work.

Structure any family investment in the business as an “arms length” transaction. This means having a written loan or investment agreement, a defined plan for repayment, the promised return to the investor and the clearly defined responsibilities of both parties. Money spent to have an attorney draft these agreements would be well spent. These agreements, especially if written by an attorney, can help avoid some very unpleasant family misunderstandings that can develop later.

Outside investors. Unless you are an experienced operator with existing locations or a strong financial track record from previous locations, the chances of getting an outside investor are slim. If you need an investor to provide some portion of the equity, you may find the most interested potential investor to be a current carwash owner rather than a strictly financial investor. A true financial investor will not have enough knowledge of the business to evaluate the project or your management skills. If you have the location locked up and the business plan in place, consider approaching another owner. An experienced operator should be able to see the same potential you do and accurately judge your knowledge and ability to manage the business.

Anita Baron is the Director of the Car Care Division for Butler Capital in Hunt Valley, Md. Kyle Stevenson is the Executive Vice President Region Manager of Business Loan Express. Baron can be e-mailed at abaron@butlercapital.com.