Financing for a carwash
Presenting two popular options
Carwash buyers applying for a loan to close their ESCROW and existing carwash owners applying for a loan for refinancing, all have the same challenge: How do we get the money? This loan dilemma is the same challenge for existing wash owners who choose to convert antiquated full-service washes into today’s popular express or flex operations.
Banks and borrowers unanimously have a “love-hate” relationship. Banks “love” to talk about lending money but “hate” to give it up easily, and they are even more “relentless” to collect. To make the process easier, borrowers need to be prepared with what lenders require. The “perfect” information that a banker wants is commonly accumulated in what is called a “package”
Institutional (bank) financing
When a carwash is typically listed for sale the seller transfers bit-by-bit information relating to the business to a broker for a potential buyer. The big problem is planning, pricing, organizing the books and records in preparation of marketing their business for sale. To maintain the attention of buyers for lenders, pertinent information must be assembled at the beginning, to avoid buyers and lenders losing interest. Paramount to the sales/financing process, is getting all of the complete information up front for multiple lenders to review. The buyer’s accountants and lenders can then immediately start mustering the seller’s books and records and simultaneously appraisers can begin their study since all the facts are available. The obvious delay factor is time, which is the common deal breaker and is avoided when a proper package is prepared and then a deal can commence.
Each package will include the items on the partial list below. Any lender will require these items to do an “acid test” on the borrower as well as the strength of the carwash as collateral. Remember, the borrower and carwash business are both under the bank’s microscope, and both have to be financially strong and history clean.
LIST OF ITEMS NEEDED:
PURCHASE AND SALE AGREEMENT (WITH ASSET ALLOCATION BREAKDOWN)
From the seller:
- Year-to-date business financials (Income statement & balance sheet)
- Seller’s last three years of IRS tax returns
- Seller’s last three years P&Ls with balance sheets
- Last 12 month’s of rolling P&Ls
- DRB or comparable monthly report for the last rolling 12 months
- All leases (including but not limited to a landlord lease, if applicable)
- Complete list of all equipment
- Complete list of personal property
- Complete list of all employees with payroll records (DRB)
- Copy of current appraisal (if available)
- Current surveys, if available
- Current Phase I, if available
- Current plot map, if available
From the buyer:
- First year sales and expense projection after purchase
- Business profile to support projections
- Personal financial statement
- Source and documentation of buyer’s cash injection
- Bank statements, gift letters, brokerage house statements, etc.
- Last three years of the buyer’s individual tax returns
- Management resume on buyers and existing management
- FORM 4506 – Request for transcript of tax form (Page 9) Signed and dated only. Lender will complete information.
- Authorization to pull credit
Note: Once the information is gathered, call the lender to pick up the information. Prequalification or decline notice typically will be provided within 48 hours by the lender. A prequalification letter a will be delivered to the buyer directly by the lender and an initial interview will be set. The selling broker and borrower should attend.
This well prepared list will allow the lender to expedite their decision. Most likely any borrower will shop two to three lenders, so speed up the process and give the borrower a negotiating position.
Keep in mind, a full-service carwash is a “Single use Business” and therefore it’s considered more risky for lenders. Targeting banks that specialize in that market are to your benefit. CarWash Brokers Inc. web site www.carwashbrokers.com has a REFERENCE list of qualified lenders for your perusal.
The above previous information is a fast track model to obtain a decision from a lender for a sale, a conversion to express and or remodel. However, the following equation is a basic forumla that will self qualify a borrower for an institutional loan:
- 25 percent down payment (75 percent of the purchase price to be banked).
- Excellent borrower credit
- Experience in the carwash business
- Carwash business includes the land in a “nutshell.”
These items can assure most borrowers that a loan will be approved
Seller carry back
This form of financing is when the carwash owner (the seller) is the “bank”. As an example, the buyer will put typically 25–35 percent cash down and the seller will take a promissory note for the
- $1,000,000 Sales price
- $250,000 Down
- $750,000 Promissory Note from the seller to the buyer including 8 percent interest amortized over 10 years payable in equal amortized payments of $__________ (no prepayment penalty) commencing 30 days from the close of escrow. The buyer will give a personal guarantee note with a due on sale clause.
This type of financing is typically designed when the carwash is on leased land or if there is soil contamination.
The waiting game
Institutional (bank) financing is a process that may take as long as three to four months to complete. The bank will have to order appraisals, environmental reports, surveys and title policies which all consume valuable time. There are very strict guidelines for both conventional and government SBA (Small Business Administration) loans. Today the bank lending rates are very desirable (1½ points over prime 4.5 percent) 6–7 percent total. Therefore, the exhausting process of using bank financing is very unpopular. The challenge of course is qualifying both the borrower and the carwash business to the satisfaction of the bank to lend.
“Show me the money” is easier said than done. Carry back financing is the easiest financing to obtain. Often, sellers’ tax implications of taking all the money from a sale at closing is ultimately not favorable. Therefore, both the buyer and seller can speed up the sales process with a carry-back promissory note from the seller to the buyer. In this type of financing the seller retains ownership to all the assets (as collateral via a recorded lien ― known as a chattel security agreement and UUC filing) until the note is paid in full.
Both types of loans have their benefits. However, the borrower should be aware that legal representation is recommended due to an array of issues:
- Prepayment penalties
- Due on sales clause
- Personal guarantees
- Balloon payments
- Interest increases
- Note assignment clause
For further information, visit www.carwashbrokers.com to view the referral section. In addition, the packaging section provides buyer and seller information and shows how to prepare a package to lenders for a quick decision.
Editor’s Note: CarWash Brokers, Inc. is not MAI Certified or in any way claims to be Certified Appraisers, nor purport to be experts in appraisals. CWB’s acid tets, opinions of value or market value analysis are estimates and purely based on real estate expertise in listing and selling carwashes. For purposes of bank financing, CWB Inc. recommends a Certified MAI that specializes in carwash appraisals.
Roger A. Pencek (Author) is the President and founder of Car Wash Brokers Inc., and has been selling and brokering carwashes since 1985 and now licensed in nine states with 14 offices within the USA.
Credit, loans and capital
A Q&A with Jim Phelps, the president and owner of Capital Equipment Leasing Inc.
Q: What are some of the worst ways to go about getting an SBA loan?
A: A lot of people think they increase their chances of success by submitting multiple applications at the same time. This is untrue! Putting out applications to two to three SBA lenders will only hurt your chances. Each inquiry will show up on your credit bureau, and lower your credit score. Right now a good credit score is the most important thing in getting a loan or equipment lease.
Another pitfall borrowers fall into is that prior to their application for an SBA loan being approved, they borrow money from their friends or family to tide them over. They all think it will be a short-term loan. In reality, the process takes a lot longer, up to eight weeks. It can put a lot of pressure on the small business owner when their friends and family become impatient and demand repayment. It seems counter-intuitive, but they should secure their SBA loan first, before seeking a secondary source of funds.
Q: What is considered a good credit score?
A: A good credit score is 700 or higher. For equipment leasing, we can go down as low as 630, but we prefer them to be closer to 700, the closer the better. The higher your credit score and the longer your time in business, the lower you lease or loan payment will be. We regularly do leases for up to $100,000 application only, but that’s for clients who are well established with a good credit score.
Q: What are some of the factors that will hurt your score?
A: There are some key things to avoid, including:
- High-revolving debt
- Maxed out credit cards
- Open tax liens
- Unpaid student loans
- Unpaid child support
- Unpaid mortgage payments
We are seeing a lot of people who have refinanced their homes under the Home Affordable Refinance Program (HARP) who were advised by their mortgage company to let their mortgage go into default. Don’t listen to them. A default on your mortgage hurts your credit score and the negative impact can lasts for two years or longer.
Credit is predicated on making your payments on time. Since credit has tightened, credit reporting agencies have changed their models. If there’s a default, the penalty is more severe than it was in the past. Keep your payments current!
Q: What about those online programs you see where you can check your credit score for free?
A: Those are a trap. Some are only free for the first month, and then you pay monthly. I advise against it. You entitled to one free report annually.
Q: What is the difference between leasing and applying for a loan?
A: See chart on page XX
Q: From the lending side of things, are you seeing a lot of carwash owners borrowing money?
A: Yes. A lot of our clients are applying for money to automate their carwashes to reduce labor. For example, we’re doing a lot of leases for self-serve vacuums, streamlined accounting and tracking systems and automatic payment systems.
In terms of the economy shifting, I agree with the economic experts. We are seeing a slow, but sure recovery and 2013 will be better than 2012, providing the political situation stays stable.
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 email@example.com or at 800-269-7810, www.leasingdollars.com.