After multiple years of strong growth, the carwash industry is facing a bit of a cooldown. The current market is seeing an increase in supply and a lower demand for new carwash locations after a two-year mad dash to buy carwash locations nationwide. The original goal was to get as many locations as possible on the market. It didn’t matter if you had two carwashes right across the street from each other — people wanted to break into the market.
This mass saturation of carwashes inevitably slowed down demand because there are just so many of them. There was a tremendous desire from groups such as bankers and hedge funds looking to get into the space. These bankers and hedge funds could easily enter the market because they had the capital to do so. However, they lacked the experience to do so successfully. The market is more fragmented than it was a few years ago, which means it is harder for prospective first time carwash owners to find financing.
Finding first time financing is more difficult today but that does not mean it is impossible. The tough market we are in today just means you need a better argument. Your convincing argument can be anything from superior location, good training or more capital, but prospective carwash owners have to find a way to stand out in a crowded field.
The cost of capital for starting a carwash is going up and anybody looking to get into this industry will be doing so at a time of less interest and a shakier economy. Lenders are looking for quality right now and prospective carwash owners need to change their perspective in order to overcome a tougher barrier to entry.
Here are a few tips to help first time carwash owners find financing in today’s market.
Find a business partner or an experienced team
If you are trying to break into the carwash industry it is going to be difficult to find financing by yourself. It is imperative you find a business partner or hire employees who have experience working in the carwash industry. The person with experience can be an employee, carwash developer or 50/50 partner. Working with someone who is experienced is important because you need someone to guide you through the realities of the carwash industry. Operating a carwash has its ups and downs and you need an expert to give you clarity and credibility in a tough market. The reality is that potential financiers are more likely to give you a loan if you work with experienced people.
Understand your space
It is critically important that you nail down your place in the market. Are you looking to build a new carwash or buy an existing one? Are you looking to do self-serve or express carwashing? Pinpoint the space you will occupy and do your market research on that space. How many carwashes are in your area? What type of carwashes are around you and what clients do they service? You need to have an answer to these questions before you try to get a loan.
You also need to do geographic research. Should you put your carwash in a major metro area or in a small market? There are upsides and downsides to each option. Metro areas have a larger customer base, but you need more capital to rent or build a space. A smaller market means less cost prohibitive real estate, but a significantly smaller market share.
Incorporate all this information into your business plan to show prospective financers that you are a worthwhile candidate to invest in. Make sure they know what your carwash brings to an area that your competitors do not. Find the thing that will make investors want to work with you.
Become financially viable
You must prove to prospective investors that your carwash is viable before they approve you for a loan. A viable carwash means you have conducted a market study and all your financials are in order. Orderly financials mean you have a strong balance sheet, and at least six months of cash reserves to ensure your carwash can deal with any bumps in the road. Cash reserves are always important but more so when an industry is facing a downturn. Lenders want to ensure you can deal with the risk.
If you are building a new carwash you need to ensure your project has municipal viability. You do this by getting your carwash approved by your local government. Make sure your carwash is following all city building codes. Hire an engineer, architect and lawyer who understand these codes. If your space can’t follow proper building and zoning codes, it is dead upon arrival.
Obtain the best loan for you
Find out what type of loan is best for your carwash. Does a conventional loan or SBA make more sense for your situation? A conventional loan requires you to put down 30%-35% of the project up front, while an SBA loan will only require you to put down around 15%. The SBA has two programs, the 504 loan and the 7a loan.
The 504 provides two loans — a first deed of trust and the second deed of trust. The first loan is with a local bank, which will finance 50% of the project cost. Then the SBA, or the CDC, will offer the other 35% in the form of a second deed of trust. The bank will fund the whole amount during construction if the project is new construction. When you close escrow, the ratios will go back to 50% to the bank, 35% to the CDC and your 15% equity. The benefits of this program include lower fees and long-term fixed rates.
The 7a is a single loan at a 25-year amortization that never balloons. They will finance up to 85% of the total project cost. Rates can be floating or fixed for up to 25 years. Fees range from 3%-3.5% for this loan. These loans do have a 5,3,1 prepayment penalty. The benefits of this program are that it is just one loan, as well as the flexibility with the prepayment penalty.
Obtaining financing in the carwash industry is not as easy as it was in the past, but that does not mean first time carwash owners cannot find success in the market. Work with experienced people, create a solid financial plan and make a good argument and you will improve your chances of finding a lender for your carwash.
Dave Kotter is the president and CEO of Integrity Capital, LLC, a commercial mortgage brokerage in Scottsdale, Arizona. Integrity Capital has obtained carwash financing for dozens of clients across the nation and is an expert in the industry. Learn more at Integrity-Capital.com.