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.
| Estimated Home Value: |
$400,000 |
| Loan to value ratio: |
80%
$320,000 |
| Less existing mortgage: |
$120,000 |
| Available equity: |
$200,000 |
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.
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