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Let's focus on your finances

Two industry experts talk how to best finance new equipment, and how to keep credit scores in check.

June 05, 2012
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Along with understanding how to run a carwash, get the cars clean, maintain a top-notch staff and keep utility usage in check, it's imperative to also understand the many facets of the financial side of things. All of the variables — from financing new equipment, to keeping a good credit score, to obtaining a loan — contribute to carwash success and longevity. To help you in understanding more on those aforementioned variables, we turned to two experts in the financial industry. Jim Phelps is president and owner of Capital Equipment Leasing, and Michael Ford is with Coast Commercial Credit, LLC, and they let us in on everything from boosting your credit score to avoiding costly mistakes. They also aren't afraid to paint a realistic picture of what banks are looking for and what the future holds, financially speaking.


How to finance equipment upgrades and other random thoughts on credit

By: Jim Phelps, Contributing Writer

Jim Phelps is president and owner of Capital Equipment Leasing Inc., in Beaverton, OR. He has more than 25 years experience in the equipment leasing industry. Phelps began his leasing career in the carwash industry. He can be reached at jphelps@leasingdollars.com or at 800-269-7810.

Business is picking up. But the recovery is slow and seems to be happening in spurts. That is why smart business owners reserve their cash assets for payroll, consumables, inventory, maintenance and the unexpected. As for capital expansion expenditures, they finance!

Did you know it's easier to qualify for a lease than for a bank loan? Though banks say they are lending, I'm hearing just the opposite. And that is why equipment leasing is almost always the best option for established businesses that are ready to upgrade or add equipment.

Thoughts on leasing

Leasing works best for companies with at least two or more year's time in business and for transactions greater than $5,000. You can secure a lease for equipment costing up to $75,000 on an application-only basis. And leasing is also possible for start-ups, but the cost of funds is more expensive.

Leasing frees up existing lines of credit for additional operating expenses you may incur because of your new equipment or to pay for downtime while you are remodeling. You may be tempted to use your credit line for these expenses. But I advise my clients against that. Your credit line is your emergency back up. You use it to get by for a short while. You shouldn't use it to finance equipment. Another trap to avoid is using credit cards for equipment purchases. Don't do it!

Getting approval

Now, if you can get a loan from a bank without putting up your house, business real estate or a blanket lien on your business, do it. But remember, a bank will generally want 20 percent or so for a down payment.

Leasing credit criteria is far more forgiving. Approvals are based upon time in business and your personal credit. The lessor takes only the equipment you are acquiring as collateral, not your house, not your business, and not your first-born. The better your credit and the longer you've been in business, the lower your monthly payment will be. A lease usually requires a first and last month's payment in advance, approximately 3 to 5 percent. A lease can even be structured to meet seasonal cash flow.

There are a wide variety of lease terms from 24 to 60 months and in some special cases 72 to 84 months with a wide range of end-of-lease purchase options.

Know your credit score

Credit reports are notorious for being inaccurate, so address any errors you find. If you do settle a debt, make sure you negotiate that it will be reported as "paid as agreed" and not settled for less than the full amount. Get it in writing from the debtor or collection agency that they will do so. Sometimes it is not possible, but try any way.

Keep some money in your business checking account. I see too many applicants that drain their business accounts. The balance of your business bank account demonstrates that you have the ability to make a payment. When I am considering a $50,000 equipment lease, I like to see at least an average of $7,000 or more in the bank. I can approve leases with lower balances, but then the payment goes up because that element is missing. Smaller leases, say $25,000, obviously can get by with a lower average balance.

Don't be afraid to show a profit in your business. I know we are all trying to beat the taxman, but if you need to show financial statements or tax returns, little or no profit will result in a turn down.

A lot of carwash operators pay for supplies with cash or credit cards. More and more vendors want instant payment. If you can, establish some open accounts with terms and pay them like clockwork. Make sure these are companies or businesses that will provide a credit rating when asked.

Don't make this mistake

Smart business owners like to shop around for the best prices and terms. And you should do that. But, and this is really important, do not make multiple applications for loans or leases. Each time you put in an application with a lender it results in a credit inquiry. Each inquiry lowers your credit score. I am ashamed to say that some lease companies are often the worst offenders. Your credit score is the most important criteria used to determine approval.

Keys to good credit

Multiple inquiries are a red flag. Lenders will not consider an applicant with too many inquiries. Any reputable company will give you a written estimate, including terms and conditions, without you having to complete an application and run your credit report. Make sure your "quote" is in terms of dollars and not interest rate. Also, if it is a lease, make sure the residual (the final payment you need to make to own the equipment) is spelled out in writing. Your final lease or loan terms as outlined in the estimate will be contingent upon satisfactory credit.


How to finance a carwash

By: Michael Ford, Contributing Writer

Michael Ford is with Coast Commercial Credit, LLC, a company that specializes in carwash, franchise and small business loans. For more information on Coast Commercial Credit, visit www.coastcc.com/index.html.

Walking through the maze of financing options can be difficult for even the most experienced carwash operator. In the ever changing lending environment, borrowing the money you need for your business can be difficult. It becomes even more difficult when you're in an industry that is based on cash receipts and uses "Special Purpose" buildings. In many cases, carwash operators make it difficult for lenders to extend credit because many use "tax management strategies" when it comes to reporting cash receipts on tax returns. In addition, the Special Purpose buildings that are used in the carwash industry can be difficult for a lender to sell in the event of default.

What is a Special Purpose building?

A Special Purpose building is generally defined in the banking industry as a facility that has limited uses. Carwash buildings are considered Special Purpose because they are basically limited to being used for a carwash (or possibly a drive-thru beverage shop). Therefore, in a distressed situation, the number of potential buyers is limited to carwash operators or investors looking for land to build a different type of business.

Needless to say, lenders are still skittish after suffering heavily from the most recent economic slump, including the tightening of credit for commercial real estate loans, the virtual standstill in new construction lending and the elimination of the application-only equipment finance programs.

Good news on the horizon

The latest numbers on commercial and industrial loans, as reported by the Federal Reserve, show a strong rise in business lending. Loans and leases at commercial lending institutions increased by over $10 billion in March, bringing the total rise in loans and leases up to $95 billion for the first quarter of 2012.

Leading the way are loans backed by the Small Business Administration (SBA), which has become the business loan program of choice for a good portion of the financial institutions in the United States. In fact, many of the financial institutions have reported 30 to 50 percent plus increases in SBA loan volume over the past year. This is most likely due to the federally-backed guarantee that comes with these loans. The 75 percent guarantee that the SBA provides for loans written under the 7(a) loan program gives lenders the security they need to extend credit.

SBA-backed loans can be used to construct new carwash facilities, acquire existing sites, remodel, re-equip and refinance existing debt. Not only can existing operators take advantage of the loan programs, new operators can use them as well.

The maximum loan amount under the SBA 7(a) loan program was increased recently from $2 million to $5 million. The maximum loan amount under the SBA 504 loan program can exceed $13 million.

One thing operators should know is that all loans are not created equal. Each financial institution has the right to use discretion as to what types of businesses in which to loan money. So, be prepared. In fact, many major banks have virtually red-lined the entire carwash industry. Therefore, carwash operators may need to look for a local bank or a boutique lender that specializes in carwash lending.

Equipment financing

Five years ago a carwash operator could fill out a single page credit application and get $150,000 to purchase equipment. Then the bottom fell out of the market. The "App-Only" programs that many manufacturers, distributors and carwash operators relied upon became extinct … or so we thought.

Over the past year or two, the App-Only equipment finance program has slowly made its way back. It started with App-Only up to $25,000 for operators in business over five years. Now, we are seeing programs available up to $100,000 for operators in business as little as two years. There is even the hint that the $150,000 "App-Only" program may be returning.

Equipment lenders are looking to extend credit to those operators that have shown the ability to manage their personal financing in a responsible manner. To be approved for "App-Only" equipment financing, carwash owners should have decent credit and a score from 680 to 700+. The credit report would most likely need to be free of any recent derogatory remarks and the borrower would have relatively low credit card balances. In addition, the business bank account should show deposits and average balances at a level commensurate with the type of wash they operate.

If you have good credit, decent average business bank balances and have been in business for two years, you may be able to get up to $100,000 for equipment with a single page application.

The opportunities available

One of the biggest areas of growth in carwash lending has been the surge in acquisitions of bank-owned carwashes. Savvy carwash operators looking for bargains are scooping up distressed or closed carwashes for a fraction of the cost of new construction. Many full serves have been converted to express exteriors or flex serves. With the lower cost of doing business, experienced operators are finding the acquisition and conversion of these bank-owned properties a relatively easy business decision. The challenge is financing.

In many cases, the right tool needed is an SBA loan. It can be better than a conventional loan is because of the loan-to-cost and the purpose of the SBA. A conventional loan for a closed site can be very difficult to get because the buyer may not be able to obtain the previous owners' tax records. If you can get a conventional loan, lenders are more than likely going to require a significant down payment. We've seen conventional lenders require as much as 40 percent or 50 percent down.

SBA loans for carwashes typically require as little as 15 to 25 percent down. In addition, the SBA helps support the interests of small businesses and entrepreneurs. The reason for this is that they recognize the fact that businesses, especially small businesses, are vital to the country's economy. To that end, the SBA can and will guarantee loans for businesses based on projected income versus requiring a documented track record (when tax returns are not available).

Other trends in carwash lending

As the economy has been recovering, we have seen an uptick in new carwash construction for both new and experienced operators. With raw land costs at reduced prices, investors are finding carwash construction projects more attractive.

The key to success in obtaining a loan for these new construction projects is a well thought-out business plan supported with reasonable documented projections. The biggest mistake we see is when a borrower uses over-inflated sales numbers that make the projections seem unrealistic. Successful applicants typically have clean credit, sufficient liquidity and the all important location, location, location!

Economic growth is getting better and will remain positive in the near term. The huge pent-up demand to replace obsolete equipment in the carwash market will have to result in an increase in equipment orders. This should provide positive growth for both carwash manufacturers and distributors.

Strong carwash operators that have been waiting for things to get better are starting to make the move towards developing new sites. New investors are starting to flow back into the market. The past few years have created profitable expansion opportunities for those operators that have the vision and smarts to know that the best time to buy is when the market is starting to rise.

With the surge in the number of commercial loans being written, the increase in the loan products becoming available for carwash operators and the economy slowly heading in the right direction, we are very optimistic about the future for lending in the carwash industry.

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