Finding financing for a car wash is a critical step in starting or expanding your business. While there a number of ways to find financing, here are a few of the most common.
A portion of your car wash financing may include equipment leasing and can be a good source of financing if you are short on funds or want additional manufacturer support. Leasing institutions will typically require a detailed business plan that will include proposed equipment quotes and projections of revenue and costs. Your equipment supplier should be able to provide much of this information.
An entire class of small business financing that is largely overlooked, but is a powerful alternative to commercial bank funding are micro loans. There are literally thousands of micro loan programs across the U.S to finance businesses and they are available everywhere. These programs are not typically well advertised but are found through your local cities, towns, counties, chambers of commerce, etc. This money is available to lend to small businesses that are creating or retaining jobs.
Funding for these programs comes from the Small Business Administration (SBA), U.S Department of Agriculture – Rural Development (USDA), Economic Development Administration (EDA), State & Federal government, economic development agencies, not-for-profits, banks and other groups interested in economic growth through business activity.
Micro loans are typically available up to $150,000 (but some go much higher) and these business loan funds are typically at lower interest rates than bank loans (3-5%) and don’t have the same lending requirements that banks have.
www.businessloanfunds.com is a free online directory of local revolving loan funds, micro loans and loan guarantee programs for small businesses looking for alternative sources of financing.
Peer to Peer Lending
Peer-to-peer lending also called person-to-person lending or social lending is a loan directly between individuals without bank involvement. There are several entities that are developing online to facilitate these transactions, the largest being the Prosper Marketplace. Borrowers credit scores are used to evaluate the appropriate interest rate and risk of the loan. The borrower also has an opportunity to describe the situation and what the money will be used for. This model is effective because it allows people who have credit issues or no credit history the opportunity to get funding at a better interest rate than a bank.
Despite the media coverage of big banks failing and not making loans to businesses, the focus of these stories tend to be about the large banks who can’t make loans. While not all of the large banks got into trouble making loans, many of the small banks are still healthy and are making loans to businesses. The loan game has changed somewhat with the more strict oversight of banks which has made credit and collateral very important in the loan process, especially with a start up business. Banks are typically looking for people with a credit score in the range of 650 (as a general rule but exceptions exist) and sufficient collateral. In addition the bank has loan guarantees available from SBA and USDA to help make the loan less risky.
SBA & USDA loans are not made through these entities. The SBA guarantees a loan to the bank, so in case the borrower defaults, the bank is guaranteed a portion of the loan by the SBA. (You are still liable for the loan, so your obligation does not go away)Keep in mind that the SBA does not provide financing which is a popular myth but the give the bank a guarantee that if the loan does not get paid back, they will reimburse the bank for a percentage of the loan. The SBA and other government programs provide subsidized loan guarantees that relieve the bank’s risk in a project which increases your chances of getting funded.
People are increasingly shunning the stock market and looking for other places to put their money. Bringing in outside capital brings its own set of challenges, so make sure to manage expectations in the beginning and put agreement on paper, no matter how informal the relationship. Deciding on whether to raise investment or borrow money is the subject of another article, basically equity sales are good because they don’t require any repayment (the hope is you will though), and most businesses don’t turn a profit for a significant time period, which makes paying back loans extremely difficult. The downside to equity is that it is expensive when you consider selling a part of the company. If you are an established business and have ongoing financing needs, then loans make a lot more sense. Loans are easier to deal with when a company has a financial history to prove reliable repayment and an established company likely has more collateral to secure the loan. Note that most investors are probably not going to be interested in small, home based businesses but are looking for businesses that can quickly scale and can potentially make them a lot of money.
Friends and family typically need fewer assurances than investors because they are investing in you as much as the idea and are usually more patient if the business takes longer than expected to be profitable. Regardless of whether you are borrowing from family and friends instead of asking them to invest, maintain a very businesslike and impersonal relationship. Be aware of the old adage that friends and money sometimes don’t mix, which is especially true in business and can strain relationships. Profits rarely come in as you projected and cash flow during the first few years can make it really difficult to pay back on a consistent schedule. To avoid putting strain on the relationship, don’t over promise and draw up a formal agreement.
Outside of friends and family there are people in the community looking for investment possibilities. People such as doctors, dentists, accountants, attorneys and other business people either invest individually or join groups of other investors to make investments in small businesses. Typically investors look to invest in businesses within a certain industry that they know.