October 11, 2010
In today’s booming tunnel market, investors and operators alike are faced with many hurdles in completing their tunnel ventures. Rising real estate costs and building costs have sent most tunnel projects well into the millions to construct. Inadequate or poorly structured financing can send a promising business venture right into bankruptcy.
Now, more than ever, it’s essential to make sure that you are prepared both personally and professionally to secure the capital needed to ensure your project is a success.
What’s out there?
Capital for your conveyor project can still be sourced with the usual lenders: Small Business Administration loans, traditional financing and private source funding. Leasing is also available for those to wish to finance their equipment.
In the case of traditional financing, most loans will require 25 percent down to achieve a 75 percent loan-to-value ratio. For start-up businesses or owners with no industry experience, obtaining a traditional loan can be challenging. One important thing to remember is that you’ll need to set some operating capital aside since a traditional loan will not usually include it in the loan.
Private funding can come in the form of venture capital, friends, family or other private investor source. Venture capital investors are usually looking to invest in businesses with high-growth potential and high margins. Obviously, the conveyor model fits nicely into this niche.
Private investors or silent partners are additional options that fall into this category. Usually, the silent partner will take an equity position in the company in return for providing the necessary funds.
Bringing in friends and family to contribute funds has worked well for some in this industry and been disastrous for others. It is important in all these cases that a personal assessment of risk, stress and management skills is done, especially those who are new to the conveyor business and are not aware of the requirements of each tunnel model.
Leasing can be used for equipment only. It will not cover things such as real estate purchases. Typically, leases on equipment last about 60 months and allow the customer to take possession of the equipment with little or no money down.
At the end of the lease term, the lessee may purchase the equipment under the buyout clause they chose at the beginning of the term. These options would include: $1 buyout, 10 percent buyout (allows for lower monthly payments throughout the term) or FMV (fair market value) buyout. If you decide to go with a lease on your equipment in addition to your other loan, be sure and get approved for the lease before you start construction.
Unless you have prior industry experience, you most likely have to be prepared with a down payment of 15-25 percent depending upon the lending source. In the conveyor model, this can mean at least $225,000 for someone with no prior experience. In some cases, investors or operators with experience and good financials will be able to secure funding with only 10 percent down.
Building the business plan
A solid business plan is required by most lenders and is developed for a host of reasons. It is used to map out the complete feasibility, marketing and operations of the carwash facility and to attract funding. The business plan will also cover how much money the project will need and when it will be needed.
In addition, the business plan will analyze the local competition and what strengths and weaknesses they possess. Overall, the business plan will define the business and establish a system of checks and balances.
The financial data required will be your personal income tax returns for the last two years, personal financial statement and, if you already own a carwash, you should include the federal tax returns for that business for the past two years. These documents will allow the lender so measure your financial strength by looking into your assets and liabilities.
You will also want to provide the lender with a pro forma and cash flow projection, usually comprised of the first 24 months of income generation. These documents will show how much income your project stands to lose or (hopefully!) gain in any one month or overall year.
Your local carwash provider can often help you assemble this document since they have the necessary industry experience both locally and nationally. These documents will be examined closely since they will provide the most visibility to the lender of the how viable your endeavor is going to be.
SBA loans Pony
An ever increasing amount of conveyor washes are being financed by SBA loans. Regardless of whether the wash exists or is brand new, these loans can come in the form of a 504 loan or a 7a loan. Each of these loans has different criteria that offer the borrower options to best suite the needs of the project. In either case, you’ll have to come prepared with the above mentioned documents to get pre-qualified for the loan.
The most important of those documents are the demographic information, traffic counts, site location information, management resume, estimated project costs and of course your personal finances.
The 504 loan has been increasing in popularity as of late. The 504 is usually a fixed rate program for larger loans, or those in excess of $1.5 million. The first mortgage loan is provided by the borrower’s lending institution up to 50 percent of project cost. The second mortgage loan is from CDC and SBA, up to 40 percent of project cost. The term of the 504 loan can be as long as 20 years for real estate and 10 years for equipment.
The down payment in the carwash business is usually 10 percent or 20 percent of the total project cost depending on whether you have industry experience or not. Since most conveyor projects exceed $1.5 million these days, you can see why this has become a great option for those wanting to gain entry into the tunnel segment.
This loan can be used for real estate and equipment only. It does not cover working capital for the project. It is also very important to list the number of employees that your tunnel will require. This number needs to match the number you have listed in your business plan to ensure that your project will be creating enough jobs to satisfy the certified development company’s requirements.
You will generally provide this information in the questionnaire you fill out in the pre-approval process. The 504 loan may be pre-paid, however there is usually a declining pre-payment penalty during the first half of the term.
The 7a loan is for project sizes of $2M or less. In certain parts of the country, tunnels can still have a total project cost of less than $2M, especially with the recent trend toward mini-tunnels. One of the main differentiators of the 7a loan is that it includes working capital or operating cash as part of your total project cost. This generally allows you to have the lowest possible capital deposit into your project.
The 7a loan generally adjusts monthly or quarterly based on prime rate. The spread over prime will vary from lender to lender, so do research to ensure you get the best possible rate to fit your business needs.
A pre-payment penalty applies should you decide to pre-pay 20 percent or more up to the entire amount of the loan. The penalty is calculated on the amount in excess of 20 percent with a five percent penalty the first year, three percent penalty the second year and one percent in the third year. With the 7a, it’s possible to pay off the entire loan in four to five years with no pre-payment penalty.
As you can see, both the SBA 504 and SBA 7a have their place. These loans have benefits that overlap in that neither contains a payable on demand clause. Most conventional loans contain such a clause and can require a loan payment in the event that the lender changes its loan requirements or is not meeting its liquidity requirements.
Another advantage to SBA loans is that they don’t have balloon payments, so you won’t have to deal with trying to renew your loan every 3 -5 years. Another nice benefit of the SBA is that they are assumable and the lender will not require you to maintain any deposits, certificates of deposit or minimum financial ratios. Is an SBA loan for you? That’s for you to decide as put your business plan together. For more information on SBA loans, you can visit www.sba.gov.
There is no doubt that we are experiencing a boom in the conveyor wash business all over the country. In some cities, it’s been going on for years and the markets our saturated. In others, the first conveyor washes are just now being installed.
Regardless of where you currently plan to build your conveyor wash, and regardless of which business model you choose, securing funding that meets your long and short term goals will be the most important decision you make. Take your time, do your homework, but most importantly, be prepared.
Ryan Beaty is business development manager for the investor market at Mark VII Equipment Inc., the US subsidiary of WashTec AG of Germany. He has over 13 years of sales, marketing and management experience. Prior to joining Mark VII, Beaty was general manager of a carwash distributor. He holds a BS in Marketing from Ferris State University in Michigan.