Financing

Types of Financing For a Car Wash

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.

Leasing

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.

Micro Loans

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.

Local Banks

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.

Friends/Family/Investors

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.

What Does it Cost to Start a Car Wash

There are probably more variables involved with determining the cost to start a car wash than any other yet it is the most frequently asked question. If you are going to invest in a business your first question should be “How much money can I plan to make with a self-serve car wash?” The biggest mistake you could make is to under-build for the location since it makes it more difficult to evaluate or recover your investment and leaves the door open for a competitor to move in and take away customers with a nicer facility. A competent equipment supplier can be worth their weight in gold because they can advise you on expected costs based on the area, the scope of the project, and average or typical experiences of their customers.

While the final number can and will vary, here are some rules of thumb to keep in mind. Your minimal investment when working with bank financing is about 25%-30% down. Self service washes run $60,000-$80,000 per bay to build and add $100,000 for each in-bay automatic to the wash. A lot of used self service car wash sites are going from $600,000-$2,000,000. To build a car wash, a common rule is 1/3 of the total project cost goes to land, 1/3 to equipment and 1/3 to the building. The cost to start a car wash can vary but expect pricing for a new wash in many markets to range from $1,250,000 to $4,000,000 which is a big price to pay. Make sure you have enough traffic to be profitable.

Financing a Car Wash

You have put together the perfect business plan, the drawings or purchase agreement is ready, now financing a car wash is the next step. Not so fast, choosing the wrong financing can doom your car wash from the start.

I have seen so many people over leverage their car wash purchase with mortgages lasting 20-25 years to make the deal work which is crazy. Go look at 20 year old washes and think about how they compare to today’s washes

When looking at the numbers do them on a ten year loan. Remember this isn’t a residential real estate sale where a 25 year loan is common. Once you see the numbers will not begin to work, then walk away. If you must, do the numbers on a 15 year loan but be sure you note an expected rate of return, of course in addition to your management salary, of at least 20% or more. Don’t kid yourself that appreciation will make up for a bad deal. This is a quick way to go broke.

When buying an existing facility ask the owner for three years of tax returns and see how his business is really doing. If the owner claims the tax returns don’t really include all of the sales that were really made, you had better think twice about this deal. Not only has the owner admitted to tax fraud but you have to ask what else are you being lied to about. While I can appreciate saving money on taxes as the next guy, this is a bad way to start out, plus the bank will only loan a certain amount based on the document income on the property. Also if the owner won’t give you the tax returns to protect their privacy or other bogus reason, run from this deal.

Here are some things to look for when buying an existing car wash

1) Look at the water bills. Only compare gallons used, not dollar figures. This helps you to figure whether the increase in sales over the three years of tax returns and not inflated to justify a higher selling price. If an owner is devious enough (most don’t think out far enough to manipulate their numbers) but they can show their sales as being higher that actual and get someone to pay a higher price. The water bills will verify how much water is being used which is in direct relation to sales.

2) Request bank statements from the seller and cross-reference those with the tax returns. Bank deposits will show if the cash generated over the year was actually deposited and is real.

3) Ask to place security tape on the cash boxes on a certain day and come back the same day the following week with the seller to count the money, verifying that the security tape has not been broken and can verify the boxes have not been stuffed with cash. Sellers can easily stuff the changers and bill acceptors as well as falsified tax returns as cash is easy to manipulate;

4) Have a written document certifying the tax returns you are viewing for the car wash is only for that property and does not include any other businesses.

Work hard on your due diligence. It is well worth to keep from making an expensive mistake.

Car Wash Grants

There are a few places where you can find all the information you could ever care to find on business or maybe even car wash grants. A grant for a car wash? Dream on! While almost everyone has probably heard about someone who got a grant to start their business or car wash, there aren’t very many that actually give you money to start or expand a business. The following link take you to all the federal grants that are out there. Please don’t ever pay for grant information, all they provide you is the same information you will find here.

http://www.cfda.gov

This website is the Catalog of Federal Domestic Assistance. This grant website lists each and every federal government grant that is currently being offered. As you look through this website, you quickly find that nearly all the grants are offered to government entities and non-profit agencies. These account for over 99% of all grants, not to small business as wildly advertised on tv. You will also find that the few grants that are available for a for-profit business are in very specific areas that address a need for a government agency.

There are a few other sources for grants are available, but these are location specific through the city or county and typically contingent on hiring a large number of employees or bringing a large number of new jobs to an area. Therefore, most of these are not available to the small business person or car wash operator.

Don’t believe the hype about grants to start a business. Focus your time and efforts on raising money from somewhere else.