Understanding SBA loans - Professional Carwashing & Detailing

Understanding SBA loans

SBA loans are a popular option for entry-level carwash owners.

Owning a carwash can be profitable, provided you’ve done your homework and researched each type of wash. According to the International Carwash Association (ICA), depending on the model you choose, operating capital ranges from $25,000 for a self-serve wash to $100,000 for an express exterior to $200,000 for a full service wash.

Navigating through the vast assortment of financing options can be a daunting task, whether you are a veteran or a rookie in the carwash industry. However, with the right planning and a comprehensive understanding of the different options, you will be on the right track toward securing the best investment strategy.

Carwash operators and investors typically have three financing options:

  • Traditional bank financing
  • Small Business Administration (SBA) loan: 7a or 504
  • Funding from other sources (friends, family, etc.).

Traditional bank financing

If you have a strong balance sheet, you can leverage your experience to obtain a loan for a carwash. This route often requires a loan-to-value (LTV) ratio ranging from 65 to 85 percent. The LTV ratio is a financial term used to describe the ratio of a loan to the value of the asset purchased and represents the ratio of the first mortgage line as a percentage of the total appraised value of the property.

If, for example, you secure an LTV of 70 percent, you must have 30 percent of the build cost in cash, and the bank will fund the remaining 70 percent. Keep in mind that these figures do not include operating capital to purchase maintenance and chemicals, which makes traditional bank financing an often difficult route for first-time carwash buyers.

SBA loans

“Entry-level carwash owners or operators can secure an SBA loan in one of two forms: a 7a and a 504”, according to Jeff Pavone, principal with Commercial Plus LLC. Rates can vary and work off of prime, so shopping around will secure the best rate. “Today’s prime is about five, but it is negotiable. Shop around to get the best possible deal,” he adds.

What’s the difference? 7a loans are an all-purpose type meant for first-time investors. This type of loan lends enterprise value as well as real estate. If, for example, you need $1 million to buy and $50,000 for working capital, 7a loans may be right for you. “It’s an easier loan to qualify [for] because lenders make more money,” explains Pavone.

Some lenders can do a fixed-rate loan but tend to be very picky. Most loans are variable, floating rates that adjust every quarter for the length of the loan. If, for instance, you have a 25-year loan, 7a loans can fluctuate significantly. 7a loan lenders are aggressive and have a big appetite. They will resell the loans in a secondary market in high demand. From a collateral standpoint, if you have zero to invest, they will ask for zero. If your carwash is appraised at $800,000 for real estate and the loan is $1 million, the lenders will take your property or other assets as collateral.

The Certified Development Company program, often called 504 loans, are designed to provide financing for specific fixed assets such as:

  • Buying land
  • Paying for property improvements, such as parking lots and utilities
  • Renovating an existing property (the interior)
  • Buying a new facility (or improving a facility)
  • Purchasing other fixed assets, such as long-term equipment and machinery
  • Refinancing debt.1

SBA 504 loans cannot be used for:

  • Working capital
  • Materials, supplies or inventory
  • Advertising or marketing
  • Normal operational expenses
  • Speculative real estate investments (medical research, shopping center developer, etc.)
  • Rental properties.

SBA limits a maximum of $5 million per borrower, and maturity rates for an SBA are typically 10 and 20 years, fixed. In addition, as an example, for a $150,000 loan, the SBA fee is $2,550 or 2 percent of the guaranteed portion (85 percent).

SBA Green loans

“One trick on 504 is to make it energy efficient — going green won’t count against your cap, so you can do multiple 504 loans,” notes Pavone. Carwashes are environmentally friendly by nature, as driveway washing consumes 80 to 140 gallons of water, and a carwash uses only 30 to 45 gallons per wash.

Carwashes provide an opportunity to participate in the Green 504 loan and a second mortgage that can be as much as $5.5 million, and loans are available on a per project basis. In order to qualify for the Green 504, you must acquire or construct a building that uses 10 percent less energy than what you are currently using. This calculation is based on energy consumption, not a reduction in energy bills.

If you own or lease, you can qualify for a Green 504 by:

  • Financing another building that will consume 10 percent less energy than the one you currently own or lease
  • Purchasing and making improvements that will cut energy consumption by 10 percent
  • Building a new facility that is 10 percent more energy efficient.2

If you do not own or lease a building, you can qualify for a Green 504 by:

  • Acquiring or building a facility that produces enough of its own renewable energy to cut its energy consumption based upon what it would have been without the improvements
  • Producing enough of your own energy to account for 10 percent of your total consumption (solar, wind, geothermal, etc.).

What you need for an application

When applying for a loan, you will need a personal financial statement, three years of tax returns on any existing business(es) you own (you will be underwritten globally), three years of financial statements on any business, a debt schedule (what you owe) and your credit history.

“It’s important to have your credit in order, with a score above 700 to get a decent rate,” according to Pavone. Fix any blemishes on your loan. As part of the SBA loan qualifications, you’ll also need to submit information about your personal background, including previous addresses, citizenship status and criminal record.

Because small businesses carry higher risk than larger corporations, lenders need to verify a lot of personal information about the owner when deciding to approve the loan. SBA loans also require anyone who owns 20 percent or more of the business to sign a personal guarantee on the loan and submit his or her personal information.

Along with your personal background, a resume is also required for an SBA loan. Your resume gives lenders an idea of your business background and how experienced you are in the industry. In addition to your resume, you will also need to submit a business plan. The business plan should include:

  • Explanation of your service and value proposition
  • Analysis of your competitors
  • Marketing/advertising strategy
  • Three to five years of your financial projections
  • Historical financial statements
  • Terms of existing debt
  • Use of loan proceeds.

Legal documents are also required to support your loan application. While they may vary from loan to loan, a few examples you may need to submit are:

  • Business licenses and registrations
  • Articles of Incorporation or Articles of Organization
  • Contracts with third parties
  • Franchise agreements
  • Leases for commercial as well as real estate or business equipment.

Tips on picking the right lender

“Do not settle for the first company willing to give you a loan,” explains Pavone. Do your homework, and then follow these tips:

  • Shop the lender and get multiple rates.
  • Be organized going in. Have all your financials and tax returns in order.
  • If a broker will ask for a retainer, walk away. Never pay a broker money up front. The SBA will pay the broker.

Of course, in the event you can’t secure as much money as you need from outside lending sources, there are other options. Asking friends and family to invest in your business is another perfectly valid route. Today, there are even crowdfunding sources that can help garner some capital. Even a little help can push you over the finish line of reaching your financial goal.

Kristen Corbisiero is a freelance writer, project manager, social media manager as well as former managing editor for Professional Carwashing & Detailing magazine. She lives in Castleton, New York, with her family and can be reached at [email protected] or (518) 635-0375.




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