Financing an Auto Repair Business – Know Your Options

March 17, 2020
Posted in: Uncategorized

Table of Contents


If you own an auto repair business, you know that your work volume and the types of issues you’ll face can vary greatly. From one day to the next, you could be hit with a multitude of problems and not have funds readily available to handle them. This can happen to the most prepared shop owner. Should you find yourself in such a predicament, you may need a loan to keep things running smoothly. Or you may need financing for a large, planned expense such as new equipment.  

If you’re in the planning stages of shop ownership, your new auto repair business will require equipment, supplies, and inventory in order to service the customers that will soon be beating a path to your door.

Whether you’re a budding or veteran auto repair business owner, you could have various financing needs throughout the life of your business. To meet your financing needs, there are a vast number of traditional and alternative lenders to choose from. However, navigating through these lenders can be quite an undertaking. In this article, we’ll walk you through the different financing needs you’re likely to face throughout the life of your business and recommend financing options for each type of need.  




Purchasing Equipment


There will always be a need for auto repair shops especially ones that offer competitive pricing for quality service. In order to offer quality service, your shop will need equipment. By equipment, we don’t mean parts for customers’ vehicles. We’re talking about major equipment. If you’re just getting started in the industry, you’ll need high-quality gear and lifting equipment that’ll help you inspect every part of your customers’ vehicles.  Of course, you’ll need to be properly licensed in your state. But once you’ve gotten that out of the way, you’ll need the following equipment before you can start repairing cars.


Hoist for Repairing/Replacing Engines

You’ll need hoisting and rigging equipment to help you lift heavy engines from the cars of customers who request an engine replacement or repair. The engine will be too heavy to lift yourself so you’ll need a way to easily remove it from the vehicle. A hoist is especially helpful if you’re working on bigger vehicles such as trucks or machinery used in construction. When considering the purchase of an engine hoist, make sure its capacity is large enough to lift those larger engines. 


Vertical Automobile Lift

It’s hard to imagine owning an auto repair business without having some type of lifting machine.  Since inspections are performed on the underside of vehicles in order to diagnose problems and complete repairs, a lift is needed to handle the weight of a heavy vehicle and allow a mechanic to see underneath. Buying a lift from a recognizable brand is highly recommended. This will allow you to easily source parts when you need them. A vehicle lift is one of the most important pieces of equipment in a repair garage, so it’s essential that you purchase a high-quality one. 


Brake Lathe 

A brake lathe is an efficient tool for curing noise and vibration problems, often prolonging the life of brake systems. Basically, brake lathes correct thickness variations on the rotor. This is a pricey piece of equipment that can run in the thousands of dollars but is a good investment for your shop. You won’t have to do what some auto repair shops do – use third party repair facilities to perform brake repairs. This isn’t cost-effective. If you have your own brake lathe, you can perform brake repairs and maintenance at your shop and realize more profit per repair.


Battery Charger – Jump Starter 

You’ll need battery chargers and jumpers for the times when customers come into your shop thinking there’s a major problem with their cars. In a lot of cases, it’ll simply be a dead battery. You should have a few chargers to accommodate the number of mechanics in your shop. Don’t skimp on this piece of equipment; high-end jumpers are built to handle heavy-duty use. These will be large, heavy machines and will require adequate storage space. Opt for a model with wheels (so it can be moved around the shop easily) and long enough jumper cables (to reach battery terminals with ease). 


Oil Caddy & Drainage System

You’ll inevitably have to perform simple services on vehicles on a regular basis such as change spark plugs, filters, and oil. You won’t need special equipment to change spark plugs and filters, but you’ll need a caddy to drain oil out of customers’ vehicles. The caddy should be sizable enough to accommodate the largest volume of oil you’ll be draining. For example, if you’ll be working on RV’s and SUV’s, you’ll need a caddy large enough to handle the amount of oil drained from these large vehicles. A standing oil caddy will help you work more efficiently because it will allow you to drain oil while a vehicle is on a lift. Since you don’t have to lower the vehicle while the oil is draining, you can perform other repairs on it during this time.


air compressor


Air Compressor

An air compressor is an essential tool in an auto repair shop. Body shops rely on compressed air for many different tasks including to paint cars, inflate tires, and for power grinders, nibblers and sanders. Without an optimal compressor on hand, body shops can’t achieve the efficiency and results needed to run a successful business.

In most cases, you won’t be purchasing the heavy equipment above without planning. You’ll purchase it when you’re first starting your auto repair business or you’ll have a general idea of when a piece of equipment will need to be replaced. 

In addition to these essential pieces of equipment, you’ll also need hand tools like wrenches, hammers and hex keys. Everything you purchase should be of the highest quality so you don’t experience problems and will have tools in good working order when you need them most.  


Equipment Loans

Equipment loans may be an option you want to look into if you prefer to own your equipment. Equipment loans resemble traditional installment loans in that they’ll accrue interest over time and you’ll make monthly payments. But unlike traditional installment loans, equipment loans have a built-in advantage — the equipment you’re purchasing with these loans can serve as collateral. Collateral is an asset the borrower puts up as security when they take on debt. Secured loans generally have better rates and terms than comparable unsecured loans.

Traditionally, equipment loans cover around 80 percent of the equipment’s costs, but some lenders may cover the entire cost. In most cases, this does not include transportation costs.


Equipment Leases

Although equipment leases aren’t loans, per se, they are a popular way to finance heavy equipment. There are two broad categories of equipment leases: 


Capital leases provide business owners with an alternative way to buy auto repair shop equipment. In most cases, the business owner is considered the owner of the equipment under a capital lease. If you’re contemplating this type of lease, you’ll make monthly payments for the entire lease term and at the end, you’ll pay a small amount (which could be as low as $1) to close your account. 


Operating leases more closely resemble traditional leases. With this type of lease, you’re basically renting the equipment for the length of the lease and making monthly payments. At the end, you’re given the option to return the equipment or purchase it at fair market value. Operating leases are ideal for equipment that’s more prone to obsolescence. 


Consider This

If you’re not working with a leasing agency established by the company that you’re leasing the equipment from (captive lessor) or your preferred bank, you have multiple financing options available to you. You can work with a finance broker to help you find the best equipment financing deal for your specific needs. You’ll not only gain access to a large network of lenders; you’ll also save a substantial amount of time and resources. A finance broker will present you with a variety of lenders who can offer you different financing options whether you have a low, medium, or high credit score.


car shop


Supplies & Inventory


Of course, you want your business to have an abundance of customers but you don’t want to have more customers than you’re able to effectively service. If you’re faced with an unusually high volume of customers who have similar car issues, your supplies and inventory can become depleted faster than you can collect on your invoices (if you have business accounts). 

Should this happen, you may want to consider applying for a short-term loan.


Short-term Loan

The short-term loan process has the advantage of being fast, streamlined, and inexpensive. It’s the ideal solution when you need a loan fast and want to pay it back quickly.

With a short-term loan, you can usually have access to needed funds within a couple of days, which makes it an excellent choice for emergency situations. Rather than charge interest, short-term loans typically use a flat fee formula, or factor rate, to calculate the amount of money you’ll owe. For example, if your short-term loan has a factor rate of 1.3 and you borrow $15,000, you’ll have to pay back a total of $19,500. 

Since short-term loans usually have terms shorter than a year, the repayment schedule of these loans is much faster than those of longer-term loans. If you opt for a short-term loan, prepare for making weekly or daily payments, which will often be automatically deducted from your business bank account. 


Consider This

Because short-term loans can be quick and unstable, look for a loan that will give you some flexibility regarding the terms. You’ll want to be able to customize as many elements of your loan as possible so that it meets your financing needs. 




Working Capital


Without sufficient working capital, an auto repair business won’t have cash on hand to handle routine business expenses. Working capital is the amount of a company’s current assets minus its current liabilities. The resulting amount also measures the company’s short-term liquidity. A strong positive working capital balance is an indicator of robust financial strength whereas negative working capital is considered an indicator of imminent bankruptcy. The factors that can strongly impact a company’s working capital are its operational efficiency, credit policies, and payment policies.

If you find yourself in a position where you’re unable to cover even small, recurring expenses, consider a working capital loan. Working capital loans offer business owners the benefit of more flexibility in terms of what the money can be spent on.  

A line of credit is an ideal solution for meeting working capital challenges.


Lines Of Credit

Working capital expenses don’t always involve predictable amounts, so a flexible financial cushion is needed to give an auto repair business owner the funding needed in a way that makes sense. With a business line of credit, the business owner is pre-approved for a certain amount (the credit limit) instead of receiving a lump sum. If you choose this financing option, you can draw on your credit line as much or as little as you like as long as the total amount doesn’t exceed your credit limit. 

This is an attractive option for business owners because, in most cases, they only have to pay interest on the amount of money borrowed (charged against the credit line). Some lenders do, however, charge administrative and access/draw fees. With a revolving credit line, you can reuse credit after you pay off your balance, similar to a consumer credit card. Non-revolving credit lines don’t offer this feature.


Consider This

Many online lenders offer quick and easy access to lines of credit. Depending on your business’ revenue, time in business, industry, and your personal credit score; you could qualify for a credit limit as high as $100K.


Marketing & Advertising


Whether you have a new business and are in the process of building a customer base or you’re an established business trying to attract new customers, you need to advertise. Word of mouth is an ideal and effective form of advertising, but to design and run a full-fledged marketing campaign, you’ll need to spend some money. 

You may be surprised by the following suggestion for covering marketing and advertising costs, but don’t be too hasty in your judgment. Read on.  


Business Credit Cards

Although business credit cards are often suggested as a way to handle emergency expenses and smooth out your cash flow, they have a feature that make them ideal for covering advertising and marketing expenses. Rewards programs.  Rewards programs allow you to get a return (cashback, points, etc.) on specific expenses – expenses like advertising.  

As long as you pay off your balance within your credit card’s grace period, your interest costs won’t exceed your rewards savings. 


Consider This

For this financing option to make sense, look for a business credit card that offers a lucrative rewards program. There are cards out there like Chase Ink Business Preferred that offer triple points on charges for advertising on social media sites and search engines. You can use those points towards travel, other business expenses, or to get cashback. To qualify for one of these cards, you’ll typically have to have good to excellent credit.




Business Remodeling or Expansion


If your auto repair business has grown to the point where you need additional bays or a larger overflow lot, you need a financing option that offers a large amount of money at a low interest rate. Remodeling and expansion costs are similar to equipment purchases in that they’re considered large, planned expenses.  

The best financing option for a large, planned expense is likely an SBA loan.


SBA Loans

The U.S. Small Business Administration (SBA) is a government agency that provides support to entrepreneurs and small businesses. SBA loans are made through banks, credit unions, and other lenders who partner with the SBA. The SBA usually doesn’t directly lend to businesses but acts as a guarantor of last resort and guarantees a portion of an SBA-approved lender’s loan in the event of borrower default. This guarantee allows small businesses to access loans at better rates and terms than their credit rating or business size might otherwise allow.

The two most common SBA loans are the SBA 7(a) and the SBA 504.

The SBA 7(a) loan offers the most flexibility in terms of what the money can be used for. Loan proceeds can be used for equipment, working capital, non-investment real estate, leasehold improvements, business acquisition, debt refinancing, or start-up costs. Under the 7(a) guaranteed loan program, the SBA typically guarantees from 50% to 85% of an eligible bank loan up to a maximum guaranty amount of $3,750,000.  The exact percentage of the guaranty depends on a variety of factors such as the size of the loan and which SBA program is used.

If your lender of choice participates in the SBA 7(a) loan program, it may also offer SBA CAPLines.  SBA CAPLines is a program that provides lines of credit with limits up to $5 million. Borrowers will still, however, need to meet the SBA’s somewhat high qualification standards (see below).

Depending on your funding needs, you may want to look into the SBA 504 loan, which has a higher maximum borrowing amount. These loans can be used to purchase land and buildings, buy long-term equipment, make improvements to your lot, or refinance debt associated with renovating facilities or equipment.

If you decide to go the SBA route, keep in mind that you’ll be dealing with a government agency so be prepared for a lot of paperwork and a long wait. 


Qualifying for an SBA Loan 

The SBA helps small businesses obtain needed credit by giving the government’s guaranty to loans made by commercial lenders. The lender makes the loan and the SBA will repay up to 85% of any loss in the event of borrower default. To test a borrower’s creditworthiness, the SBA and private lenders consider the following criteria:


  • Repayment Ability – A business must show that it can meet business expenses, owners draw, and loan payments from the earnings of the business. This is usually demonstrated through historical performance and/or thoroughly documented cash flow projections. 
  • Management – A business must show the ability to operate the business successfully. For a start-up, the owner should have experience in the type of business he/she proposes to start, as well as some significant work experience at a management level. 
  • Equity – The owners must have enough of their own money at stake in the business: 
    • (a) For a New Business (or when buying a business) the owners should have approximately one dollar of cash or business assets for every three dollars of the loan. 
    • (b) For an Established Firm, the after-the-loan business balance sheet should show no more than four dollars of total debt for each dollar of net worth (i.e., a 4:1 Debt/Equity ratio). The ratio may vary by industry.
  • Credit History – Both the credit histories of the owner(s) and the business will be reviewed. Prudent lenders prefer applicants who have a history of meeting their obligations. If either credit record has blemishes but there are extenuating circumstances, owners must prepare to explain fully.


Other factors to consider when applying for an SBA loan include:

Collateral – When an SBA loan application is approved, all company assets are expected to be offered as collateral. If a company’s assets are insufficient to fully secure the loan, liens on personal assets may be required. This often means a lien on residential real estate.  If adequate collateral isn’t available, this alone won’t cause the SBA to decline an otherwise qualified applicant.

EligibilityMost small businesses are eligible to receive SBA loan guarantees; however there are factors that can make an applicant ineligible including: 

  • The applicant is not a small business. 
  • The funds are otherwise available on reasonable terms from a lender without an SBA guaranty, or if personal assets could be used without hardship to the owner(s).
  • The loan will be used to repay inadequately secured creditors. 
  • The business is engaged in speculation, lending, investment, or rental real estate. 
  • The applicant is a nonprofit company (except employee stock ownership programs). 

Size StandardsApplicants must meet the SBA definition of small business. Size limits vary by specific industry (NAICS code). 


Consider This

When it comes to finding an SBA-approved lender, you have a lot of choices. Your natural inclination might be to apply at your preferred local bank or credit union. However, if you don’t have a specific lender in mind, a finance broker can also help you with the SBA loan process.  From finding the right lender to navigating the complexity of the application process, a finance broker can keep the process as organized and streamlined as possible.




No-Credit-Check Business Financing


If you have a less than optimal credit score, there are business loans that are available to you without a credit check. Just keep in mind that your options will be limited. Traditional lenders that offer low-interest loans will always want to perform a credit check before approving a loan application. There are, however, alternative lenders that offer financing options regardless of credit score. These lenders may not place much weight on credit at all, preferring instead to focus on the performance of your business and the amount of revenue it generates. 

If you have a low credit score, that’s another reason to not add too many inquiries to your credit report. Some lenders perform a soft pull to prequalify the loan and then perform a hard pull later in the process.


Why Lenders Check Credit

Lenders make loans because it’s a good way for them to make money through interest and fees charged to borrowers. All lenders, both traditional and alternative, decide to issue loans based on perceived risk. Lenders prefer to work with low-risk borrowers that are more likely to repay their loans. One of the ways lenders assess a borrower’s risk is by running a credit check. 

A borrower with a solid credit score and flawless credit history is considered to be a low-risk borrower. This borrower would pose a lower risk to the lender. Conversely, a borrower with a low credit score likely has defaulted on loans, missed payments, or made late payments. This borrower poses a greater risk to the lender. Borrowers with no credit history at all may face the same challenges as a low-credit-score borrower because they have no history of being a responsible borrower.

Borrowers that don’t meet the credit requirements of a lender may be turned down for a loan or subjected to higher fees or interest rates. In many cases, they’ll also have to secure the loan with collateral. 


Financing Options Without Credit Check

If you’re ready to proceed with business financing that doesn’t require a credit check, here are a couple of options available to you: 

  • Line of Credit Most lenders that offer lines of credit do perform credit checks. However, you can prequalify with many lenders with just a soft credit pull. Some lenders don’t even consider credit an essential factor and instead look at the performance of your business when determining whether you qualify and the amount of your credit limit.
  • Equipment Financing – With an equipment loan, you’ll typically be required to pay a down payment of 10% to 20% of the total cost of the equipment. Once you’ve made your down payment, the lender will loan the rest of the money, which you repay through scheduled weekly or monthly payments. One of the best things about equipment financing, whether you sign a loan or a lease, is that no additional collateral is needed. The equipment that’s being purchased is the collateral and can be repossessed by the lender if your loan goes into default.




How to Choose a Lender


If you’ve zeroed in on one of the financing options above, it’s time to find a lender who will offer terms that best fit the needs of your auto repair business. This can be a time-consuming endeavor but there are ways to effectively narrow your search. Consider the following questions.


Why Do You Need A Loan?

There are funding sources that serve a variety of needs, but not every source can meet your needs. Hopefully, the type of financing options discussed above will guide you in the direction of finding a lender that helps you handle a business emergency or meet your business goals. 

If you need emergency funds, a traditional lender such as a bank likely won’t be able to help you, but an alternative lender with a shorter application process can provide you with the funds you need when you need them. On the other hand, the alternative lender (with typically higher interest rates) may not be the best choice for financing a costly shop renovation. 


Are You Qualified?

As you’re searching for the best lender for your business, you can save time by bypassing lenders who very likely won’t lend to you. Most lenders have minimum qualifications for those wishing to borrow money from them. 


Here are the most common factors lenders focus on:

  • Time In Business – Lenders want to feel confident that you’ll be around long enough to repay them. 
  • Credit Rating Some lenders use credit rating as a deal-breaker, while others use it primarily to help determine interest rates.
  • Revenue Lenders want to make sure your business earns enough to pay off the financed amount.  Lenders will sometimes give an absolute minimum like $150K per year; at other times the minimum revenue is relative to the amount of money you want to borrow (i.e. you need to earn $2 in revenue for every $1 you want to borrow).

Additional factors lenders focus on may include the number of outstanding loans you have with other creditors, your industry, the state your business operates in, and whether you have recent bankruptcies on your credit report.


Are The Terms & Rates Favorable?

Remember that you’re ultimately in the driver’s seat when it comes to whether or not the financing transaction takes place. Although it’s natural to think the lender has the upper hand (especially if you have a less than ideal credit picture), you don’t have to accept the lender’s terms. You don’t have to pay excessively high interest rates or unnecessary fees. You don’t have to agree to a repayment schedule that you can’t handle. 

Does the lender offer loans with attractive features such as early payment incentives or incentives for repeat business? What about customer service; does the lender offer multiple ways to contact them with questions or concerns?

During your initial interaction with a prospective lender, try to get a sense of whether they’ll be fair and accommodating or predatory and unforgiving. If it’s the latter, you’ll probably want to continue your search. 




Final Thoughts – Financing an Auto Repair Business


To keep your auto repair business strong and profitable, we’ve provided you with a variety of financing solutions. Not every solution above is right for every situation and every business. Take the time to realistically evaluate your needs and choose the option that makes the most sense for you and your business. 

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