Professional Carwashing & Detailing

SBA loans to the rescue!

October 11, 2010

Look! Up in the sky! It’s a gamble! A long-shot! Why, no, it’s the Small Business Administration!

When times get tough, there is always one avenue that is still available to small businesses that want to modernize or build a new facility. The Small Business Administration (SBA) is a sort of Superman to the small business owner, who feels the pinch more than anyone in an economic downturn.

Get your hands on operating capital
The SBA, an independent agency of the federal government, exists to help owners navigate the twists and turns of operating a small business, as well as preserve free competitive enterprise in America. This is especially appealing to carwash business owners who need additional operating capital, according to Jim Phelps, president of Capital Equipment Leasing, Inc.

“The SBA is specifically designed to help small businesses,” he said, “and the loan criteria is less strict than with a conventional loan,” Phelps said, adding that conventional lenders are requiring one dollar of net worth, hard collateral or assets, whereas the SBA does not ask for nearly as much. He added that the SBA is lending where many banks are not, or if a bank will lend, it will only be with SBA participation.

Mike Ford of Coast Commercial Credit, LLC, agreed that the SBA is a good place to go to first. “Currently the SBA is offering programs that can help carwash operators obtain loans with very favorable rates and terms, up to 20 to 30 years.”

SBA loans: From point A to point B
Admitting you need a loan is a big part of the process, but once that’s out of way, how does one go about obtaining one?

Phelps suggested approaching a local banker or loan broker who specializes in SBA loans first. You will need to fill out an application and supply the last three years of federal tax returns for both yourself and the business if they are separate entities.

“If you have your tax returns, financial statement and application all together in the beginning, it will take less time,” Phelps said. “Don’t be discouraged if you have to keep supplying additional information as you go along. It is part of the process and there is no way to anticipate what questions a loan officer may have.”

Ford said that the time it takes to obtain an approval for financing will depend on the type of financing requested and the borrower. “Equipment leasing can take as little as a week or less. Real estate loans can take 45 to 90 days or longer,” he explained. “The biggest variable in expediting the process is providing the requested information in a timely fashion.”

Upping the chances of approval
The trick in obtaining an approval is being able to demonstrate the ability to repay, said Ford, adding that the ability to repay can come from existing cash flow, cost savings, or through revenue generating measures. “In the current climate, simply asking for money without justification will probably not get the desired approval and expediting the approval process can be as easy as treating the underwriter how you would like to be treated,” Ford said.

According to Ford, the most successful applicants will:

1. Provide all of the information requested up front;

2. Quickly answer any questions that may come up during the process, and;

3. Quickly respond to subsequent requests for information.

Phelps said that lending criteria has tightened and more cash or collateral is required than, say, two or three years ago. Other factors considered for a loan approval, according to Phelps, are the credit score (should be at least 700), the net worth, down payments and additional assets to pledge as collateral.

“If you are borrowing $200,000, you should ideally have a net worth of approximately three to four times that,” Phelps said. “Additional collateral can be real property, equity in your carwash or CDs.”

What about refinancing?
The cause of financial stresses is not always related to overpaying for a wash, or due to a catastrophic drop in business, according to Ford. “The cause,” he said, “can be more basic. The cause can be as simple as improper financing.”

Historically, banks have been offering 10 to 15-year financing for carwash properties and as little as five years for carwash equipment, Ford said, adding that simply refinancing that debt to a longer term loan can cure the cash flow crunch. For example, Ford offered the following scenario:

A carwash operator with a 10-year note on $1 million in real estate and a five-year note on $500,000 in equipment would pay $21,845 per month. If that same operator refinanced at 6 percent over 25 years, the payment would drop by $11,845 per month. That’s an increase in cash flow of over $142,000 per year.

“Simply refinancing can potentially turn that dog carwash into a shooting star that generates significant positive cash flow. This scenario gives this operator 142,000 reasons to reconsider shutting the doors,” according to Ford.