As we begin 2008 there is a great deal of uncertainty regarding our economy. The big unknowns as we move forward are the impact this would-be recession will have on wash volumes, and how it will affect the ability to secure funds for new development.
Lending institutions are faced with major problems as a result of sub prime loans that have resulted in foreclosures. The residual impact of this fallout has created a lowering of real estate values, and the domino effect that lower real estate values have on any form of financing where real estate is a major source of collateral.
Challenge: Securing financing
The impact on the real estate market has lead to a tightening in lending criteria, making it more challenging to secure financing, as lending sources look to head off risk. As noted by Shirah Kellman of Butler Capital, an independent lender to the car care industry, “The values of real estate — residential in particular — have dropped so significantly in some areas that the equity position we had when first funding a project is not what we have now.”
This scenario places lenders in a high risk position, increasing the amount of collateral required to acquire financing. Residential properties as collateral were once valued at 100 percent, today these same properties are valued at 80 percent or less.
For new investors into the carwash business, there are a few major considerations involved in securing financing:
- Greater collateral: As real estate values fluctuate and risk to lenders grows, there will be a greater need for collateral to secure funding for a project. Your personal financial strength will play a major role in the amount of collateral required. Based on your financial strength and type of asset pledged as collateral, the percentage of collateral required to secure financing could range from 80 percent of the total project to over 200 percent.
- The “new” factor: Increases in delinquencies, bankruptcies and cash flow issues of many businesses, particularly new businesses, are negatively impacting the ability of new investors to finance a new business. Some lenders will not finance a project for an individual who does not have at least three years of successful operating experience in that industry. Without this experience, the Small Business Association (SBA) guarantees are required for project funding.
- Equipment leasing: According to Curt Newsome of Summit Funding, a full-service mortgage broker, the market for carwash equipment financing has held up well compared with other industries. “Equipment leasing will become more prevalent as banks continue to tighten credit guidelines on non standard lending — which is what carwash equipment is classified as,” Newsome explains.
Carwash industry fall out
Virtually all of the financial experts predict a continued downward trend for the economy, with many talking of a recession (the depth and duration of which is the subject of much speculation). How such an economic down turn would affect financing for carwash projects is unknown. But as the economy slows, the strain on personal finances and the real estate market will continue.
Over the past few years there have been many new, very expensive carwashes built throughout the United States. Given the many factors that impact our industry, poor weather, local economies and the ever increasing number of new carwashes built, competition for the motoring public that washes their vehicles has never been greater.
Steve Michuta is the vice president of sales for MacNeil Wash Systems, a designer and manufacturer of carwash systems, based in Barrie, Ontario.