Financing in a down economy
If you think your belt is tight, how about checking with your local banker? Lending channels are still slow as molasses these days, despite government programs designed to free up monies and investment dollars. How will you finance your next remodeling project or carwash expansion?
Professional Carwashing & Detailing has tracked down the experts who helped operators get financing for their projects in 2010. From creative financing to government programs that actually work, learn how you can get the funding your business needs to grow and be successful in today’s marketplace.
Where we stand today
The first step in the process is understanding where our industry stands today. According to Eric Wulf, executive director and CEO of the International Carwash Association™, five years ago, it was not uncommon to hear of investors entering the carwash business with 90 percent financing.
“Today, it can be challenging for even experienced operators to obtain 60 percent financing,” Wulf said. “Generally, lenders are placing a premium on experience and reliable cash flows from existing operations.”
As an example, Wulf said a carwash operator with five profitable sites that is seeking to build or acquire a sixth location with 30 percent of their own money down is going to more successful obtaining financing than a start-up investor or an operator without those other reliable cash flows.
Robert Andre, president of CarWash College, agreed, stating that banks are “looking for people that have a track record of successful operation.”
“However even those operators who currently have a cash flowing operation have and are continuing to receive trouble getting financing,” Andre pointed out. “I have worked with a lot of people who either want to get into the business or expand, but they can’t seem to get the money.”
Andre said operators have been successful in using local or regional banks where they can build up personal relationships with the institution.
“The second approach I have seen succeed is people working with a broker who has multiple lender contacts and can shop the loan around to find someone who can get the deal done,” Andre said. “I find with the second option the fees can be higher, but not all the time. The third most popular type of financing I see is through the Small Business Administration’s (SBA) backed programs.
Wulf advised operators to consider the SBA’s 504 and 7a programs. “But, like with private lenders, experience, down payment amounts and cash flows are still rigorously evaluated,” he cautioned.
For those who may be unfamiliar, the 504 and 7a programs are lending programs made through private banks but guaranteed by the SBA, Wulf explained. “The 7a program is the most flexible because it can be used to finance working capital as well as machinery, land and buildings,” he continued. “The 504 program is for ‘bricks and mortar’ projects only and features longer term, fixed rate financing and higher maximum loan amounts.”
Wulf said the recently signed Small Business Jobs Act of 2010 made some interesting and potentially beneficial changes to the 504 program, but the actual rules and regulations have not yet been released.
Andre agreed, adding that the new maximum loan amount for the SBA 7a Loan program is now $5 million, up from $2 million.
“This is a permanent change and is great news for operators who may have already had a loan through the SBA,” Andre said.
“They can now go back for a second loan to start a new project. One of the most important factors in applying for an SBA is the completion of loan package — be sure to seek someone to guide you through the process.”
Marcus McLaughlin of Belanger, Inc., pointed out that although these loans are guaranteed by the SBA against buyer default, up to a certain percentage (75-85 percent) the loans are originated by individual banks and lenders (not the SBA), “and the specific terms are negotiated between an applicant and the financial institution, subject to the requirements of SBA.”
“This means that the 7a loans, while available, are not a ‘gimme’ for borrowers,” McLaughlin cautioned. “Borrowers must still ‘sell’ the project to lenders, with a strong business plan and compelling case for the viability of the project.”
McLaughlin said the more detailed and granular this plan is the better your results will be. “In addition to outlining the ‘big picture’ use of the proceeds, the borrower should spend time discussing how individual pieces will contribute to the wash’s bottom line – or indeed, even be the driving factors in increasing profitability,” he said.
Paint the picture
McLaughlin suggested that operators go through this “though exercise” before approaching the bank. “For example, it might be necessary for the operator to repave the parking lot (customers won’t come if it’s cratered like the back side of the moon), but the plan to add revenue-producing equipment is hugely important – especially if that equipment is central to increasing the operator’s ability to repay the loan,” McLaughlin said.
And some operators might even uncover hidden revenue potential they could easily capture with one or more new equipment pieces, McLaughlin said, adding that examples of revenue-producing equipment include:
- Automatic tire shiners,
- Wheel cleaners,
- Arches and other chemical application equipment,
- Automated vehicle prep systems (which can also reduce labor expenses), and
- Improved drying systems that allow for tiered ‘menu’ drying options, and much more.
“Good loan proposals will include these items and discuss their return-on-investment potential,” McLaughlin said. “Great proposals will go into detail on each one.”
For example, don’t just show the banker how the proposed tire shiner will allow the wash to charge another $3 per car or sell more top packages, McLaughlin said. Instead, demonstrate how the exact tire shiner you’ve chosen will reduce chemical expenses, shine tires “rim-to-tread” to increase customer satisfaction and repeat purchases, and keep tire dressing off the floor, walls and customer vehicles – improving the bay’s appearance and eliminating costly rewashes caused by ‘sling.’
“For in-bay washes especially, the user experience of the wash system should be explored, especially if it sets the wash apart and gives it a competitive advantage,” McLaughlin advised. He suggested asking these questions:
- Is the wash bay attractive and attention-getting – even from the street?
- Does the wash make good use of colored lights and other visual cues, to send an unmistakable ‘open for business’ signal, provide a user-friendly experience and build the site’s brand?
- Is it easy for customers to navigate the bay and get their vehicles loaded quickly?
“As always, bankers want to back the winning horse – and will be more inclined to lend for an appealing wash designed to attract new business while growing a loyal customer base,” he explained.
Stay on budget
Once you obtain financing, it is imperative to stay within your budget. Too many operators underestimate the importance of estimating for common hurdles and oversights.
“If you want to stay on budget, you must have a realistic budget and a good project manager,” Wulf said. “Particularly for those entering the business, this can be a real challenge.”
Wulf suggested that new investors follow the path of experienced operators who know that it is essential to work closely with supplier partners (e.g. their carwash distributor and/or general contractor) to properly estimate costs and keep the project running according to plan.
“It is also incumbent for investors to spend time with local authorities to make sure the proper approvals, permits and costs are included in the project plan,” Wulf advised.
Andre suggested that operators consider pre-fab buildings that can help get the projects on-line faster “allowing you to start making money sooner and provide great curb appeal.”
“Pre-plumed pump stands can save thousands in plumbing and electrical cost,” Andre explained. “The stands come from the manufacturer with the majority of the electrical and plumbing work done and are designed for quick install to save both time and money.”
In addition to more ‘plug and play’ type equipment, Andre advised operators to consider the cost of operation once they are open and select equipment that can reduce labor while still offering high quality service to the customer.
“Manufactures have even developed machines that can dry the cars almost 100 percent and give the car a great shine at the same time,” Andre said. “Also look for technology that can reduce operational costs like chemical, water and electric.”
McLaughlin suggested that operators be careful to choose equipment that is driven by the market, not by an arbitrary budget number. “Customers patronize the businesses they like, and provide the funds for future expansion,” he explained. “Operators who continuously work to meet their customers’ evolving needs will grow their businesses as customer appreciation and loyalty keep increasing. Put simply, no piece of equipment is ‘too expensive’ so long as the wash’s customers will pay for it, and the return on investment is real and rapid.”
Last, but not least, Andre said it is imperative to make sure the property you’re purchasing for the location is right in terms of size and location for a successful carwash operation.