Financing your Auto Repair Business

Published September 20, 2018 by Sarah Pritzker

The auto repair business is going through a very good period at the moment. In fact, the car repair industry in the US is estimated at $86 billion and is predicted to continue to achieve growth over the next few years.

An auto shop can mean many different things, from a family body shop to a large mechanic service. Depending on your type of auto repair business, you could be providing maintenance services like an oil change and a tune-up, minor fixes like paintless dent repair, or a full collision center including transmission repair, brake service, radiator repair, and a full vehicle inspection. No matter what auto repair services you offer, there’s one thing that every business needs: a reliable source of finance.

You can make excellent profits running a quality auto body shop, but it still takes money to make money. You’ll need enough startup funds to rent or buy a location for your body shop and to buy equipment and parts to get started. And although you might be sure of enjoying a high profit margin, most auto repair businesses still need a source of ongoing working capital and funding.

Why Do I Need Startup Financing for my Body Shop Business?

Here are some of the things that soak up your financing in the early days of your auto repair business:

  • Equipment. This includes large body shop equipment like a car lift and wheel balancers, as well as smaller items like tire changers.
  • Technology. Advanced auto repair equipment like computer alignment software for balancing the steering can be very expensive, but it is what enables you to stand out as a comprehensive auto repair service.
  • Tools. Even regular tools like wrenches cost money, and you’d be amazed at how much it can add up to.
  • Payroll. You’ll need to begin with a certain amount of liquid cash to hire your mechanics and other staff.
  • Point of sale equipment. You’ll also need to invest in credit card readers and point of sale devices to run your business.
  • Premises. Buying or leasing a location for your mechanic business is one of your biggest startup costs.
  • Marketing. You’ll get a lot more business once everyone knows what car repair services you offer and where to find you.

Why Working Capital Matters for Auto Repair Businesses

Even successful mechanic services can encounter cash flow issues. Many car leasing companies have 30, 60, or even 90-day payment terms. If you’re dealing with car insurance companies, you might have to wait even longer until your invoice is settled.

Needing to pay for parts before you begin on a big repair job can also hobble your cash flow. You won’t get paid until after you complete the job, but you need enough working capital to buy the parts first.

Business can be unpredictable for auto body shops, sometimes with short, seasonal surges in business volume. Working capital loans help you to smooth over these peaks and troughs in revenue.

You might need to expand your business – moving to new premises, adding new staff members, enlarging your current body shop, or increasing the range of services you offer by training staff in new skills or technologies.

Regular, ongoing car repair business costs include:

  • Supplies, like auto body paint and new tires
  • Equipment maintenance
  • Technology upgrades, such as diagnostics and balancing software
  • Ongoing marketing costs
  • Staff training costs

What Type of Car Repair Financing Should I Get?

Fortunately, there are numerous different financing options available for your body shop business. Each one has its advantages and disadvantages.

Government-Backed Loans

These are ideal for starting up a new auto repair business, or for making large purchases like equipment or real estate. The government guarantees to pay part of the loan amount if you default on your payments. This makes it significantly easier to find a lender that will agree to extend the funds. Government-backed loans usually have lower interest rates, too.

Government-backed loans include USDA loans for body shops in rural communities; SBA 504 loans for purchasing real estate or long-term equipment, building, or renovating your premises; and SBA 7(a) loans for equipment leasing, debt refinancing, buying materials, and working capital.

However, it can be hard to qualify for a government-backed loan. You’ll need a good credit rating for an SBA loan or to meet the criteria for a USDA loan. It also takes a long time for a government-backed loan to be processed, so it’s not ideal if you need the cash in a hurry.

  • Average APR: 5% - 11.5%
  • Loan process: Up to 90 days
  • Minimum credit score: 680 for SBA loans, 640 for USDA loans
  • Term: 5-25 years for SBA loans, 7-30 years for USDA loans
Equipment Financing Loans

If you are looking to buy new or used auto repair equipment, an equipment financing loan could be your best solution. It's a loan that's secured against the value of the equipment that you're going to buy. You can get equipment financing loans from some banks, specialist online lenders, or through equipment dealers.

Because equipment financing loans are secured loans, you'll usually get lower rates. On the downside, if you don't keep up with payments, you’ll risk losing your equipment, and the fixed rates can be hard to meet during slow business periods.

  • Average APR: 6% - 30%
  • Loan process: 2-5 days
  • Minimum credit score: 600
  • Term: 7-15 years
Asset-Based Financing

This is a type of loan that uses your existing assets as collateral to get a secured business loan. The assets could be your existing equipment, real estate, inventory, or unpaid invoices. You could then use your loan as a source of working capital, to buy more equipment, or for more or less any business purpose. It’s a very flexible financing option – you can structure it like a standard loan, with fixed rates and terms, or like a variable line of credit that you withdraw from and repay like a credit card.

Asset-based financing is easier to qualify for than an unsecured business or government-backed loan, and your credit score isn’t very important to the final decision. However, it’s only recommended for large, established businesses that have a monthly revenue of at least $1 million. You’ll generally be able to borrow between 50% and 85% of the value of your assets – the more liquid your assets, the more you can borrow – so unless you have sufficient assets, you won’t get a big enough loan to be worth the fees.

  • Average APR: 7% - 17%
  • Loan process: 1-3 days
  • Minimum credit score: 550
  • Term: varies
Merchant Cash Advance

A merchant advance gives you a lump sum loan, which you’ll then repay through a percentage of your credit card sales. This is called a holdback – the lender will simply withhold a fixed percentage of every sale until your loan is fully repaid. It is suitable for growing businesses that have a steady revenue but need fast working capital. However, there is a risk that you won't make the future sales that you expect, and end up taking a very long time to repay your loan.

  • Average holdback: 10% - 25%
  • Loan process: 1 day
  • Minimum credit score: None
  • Term: 3-24 months
Invoice Factoring

Invoice factoring involves selling unpaid invoices to the lender, who pays you a percentage of the invoice and then settles up with your creditor for the full amount. You’ll take a drop in the final invoice amount, in exchange for fast cash. Be warned that some invoice factoring providers charge a percentage of the final amount, depending on how long the customer takes to pay. These fees can add up to a lot more than the initial costs of the loan.

It can be a good solution for auto repair businesses that are struggling with cash flow and have large, outstanding invoices. However, you could end up losing a lot of money if your customer takes too long to pay. Invoice factoring isn’t recommended to finance large purchases.

  • Average costs: 1.5% to 4.5% per 30 days
  • Loan process: 1 day
  • Minimum credit score: None
  • Term: N/A
Business Loans

Short- or long-term business loans can be used for any type of business need, including equipment purchase, working capital, or inventory. You’ll usually get good repayment terms and rates, and they are more flexible than equipment financing loans.

Most business loans have fixed repayment rates, which makes it easier to predict your expenditure, but can also be a burden during slow periods. Unfortunately, it can be really hard for small businesses to get a business loan today. Business loans take a longer time to process – up to several weeks. You’ll need to meet a number of requirements such as your personal and business credit score, minimum average revenue, and number of years in business, and present a detailed business plan.

  • Average APR: 6% - 9%
  • Loan process: A few days to a few weeks
  • Minimum credit score: 500
  • Term: 3 months to 10 years
Business Line of Credit

Instead of borrowing a single lump sum, you'll be given a credit limit, and you can withdraw money and repay it up to the maximum credit amount whenever you’d like. It allows for much more flexibility than a standard business loan, with better rates than a business credit card.

Once you’ve been approved for a business line of credit, you’ll have the reassurance of the safety net, but you’ll only pay interest on the funds you withdraw. It’s ideal for auto repair working capital and cash flow issues, but less so for large purchases.

  • Average APR: 13.99% to 40%
  • Loan process: 1-3 days
  • Minimum credit score: 600
  • Term: Around 6 months
Personal Loans

These could include unsecured or secured personal loans or your personal credit cards. If you have very good personal credit and your business is too new to qualify for a business loan, you might be tempted to use a personal loan for working capital, cash flow, or to lease or buy equipment. It's not recommended, though. You could end up losing your home, ruining your personal credit score, or losing out on a vital emergency safety net.

  • Average APR: 5% to 40%
  • Loan process: Up to a few days
  • Minimum credit score: 700
  • Term: Varies

What to Consider When Choosing Auto Repair Financing

If you’re not sure how to choose the right type of car repair business financing, ask yourself these questions:

  • How much do I need to borrow? Some finance options have much higher caps than others.
  • What do I need it for? The best finance option for cash flow to buy new tires isn’t best for buying an expensive new car lift.
  • How long a term do I need?
  • What are the overall costs of the loan? Add up loan arrangement fees, underwriting costs, valuation costs, etc. – it could come to more than you think.
  • How soon do you need the funds? If you have to close an amazing equipment purchase opportunity tomorrow, you might not have time to arrange a long-term bank loan.
  • Are you eligible for the loan? Do you have the necessary credit score, number of years of business history, or monthly revenue?

Where is the Best Place to Get Auto Repair Equipment and Working Capital Financing?

Once you’ve decided which type of car repair financing is best for your body shop business, you’ll be ready to choose where to go to get your choice of loan. Fortunately, you have a few options.

Banks

Banks can offer a range of business financing options, including:

  • Short- and long-term business loans
  • Business line of credit
  • Government-backed loans
  • Asset-based financing

It's best to start at your own bank since your existing relationship will make it easier to qualify for funding. Bank loans usually carry lower APR rates, longer repayment terms, and can lend much larger amounts.

However, it’s currently very difficult to get small business financing from traditional banks. The qualification process is long, and you’ll probably find it difficult to meet your bank’s requirements.

Online Business Loan Lenders

In recent years, many new online lenders have sprung up which specialize in fast, low-cost business loans. These include:

  • Short- and long-term business loans
  • Business line of credit
  • Government-backed loans
  • Invoice factoring
  • Merchant cash advance

Online business lenders have much faster application and approval processes. You can often get approval on the same day and funds can clear on the next business day, making it ideal for working capital loans and small equipment purchases. You can access fixed or flexible terms, and because the lender is online, you can apply any time, anywhere.

However, most online business lenders have a cap to the amount that they’ll lend for small businesses like a car repair service. You might not have the option to borrow enough for a large auto equipment purchase. It's also very important to check out online lenders – some are unregulated and unreliable.

Auto Repair Equipment Dealers

Auto body shop equipment dealers are a reliable source of funding for:

  • Car repair equipment leasing
  • Mechanic equipment purchase finance

Equipment leasing means that you lease your expensive equipment instead of making a single large purchase. It enables you to upgrade during the lifetime of your loan without losing the money you spent on the initial purchase, and you can structure it to include maintenance and upgrade costs. Equipment purchase finance is a way of tailoring your loan according to the cost of your auto repair items.

Both equipment leasing and equipment purchase finance are good options for body shop owners who don’t have a good credit score since your rates and terms are connected to the value of your equipment and not your credit history. It's usually a quick approval process, taking as little as one working day to complete.

However, due to interest payments and depreciation rates, there is a risk that you’ll end up paying more than the equipment is worth across its lifetime. If you take out equipment financing through a manufacturer, you might also face pressure to buy a more expensive brand.

Alternative Lenders

Both online and offline, alternative lenders can offer tempting auto repair financing options. These include:

  • Short-term business loans
  • Business line of credit
  • Merchant cash advance
  • Invoice factoring

Alternative lenders have the fastest approval process, with funds usually clearing into your bank account on the same day. You can frequently get the financing you need even if you have poor credit scores or a very short business history.

However, you'll need to be very careful with alternative lenders. Many short-term business loans have stratospherically high APR rates which are hidden by the short repayment term, and merchant cash advances and invoice factoring can be shortcuts to debt.

What Do You Need to Qualify for Auto Repair Business Financing?

Each lender has different requirements before considering your request for auto repair financing. But you can accelerate the process by preparing certain documents and information before you apply:

  • Proof of income or revenue
  • A detailed budget and business plan
  • Your personal documents to prove your identity and your citizenship
  • Clear documentation of your debts and your assets
  • Verifiable business history that confirms how long your business has been in existence

Fix Your Car Repair Business Financing Today

Now that you know all about your options for auto repair business equipment financing and working capital funding, you’re ready to apply for the best car repair financing loan for your needs.

Sarah Pritzker
About Sarah Pritzker
Sarah Pritzker is a professional writer who specializes in financial markets and trends in the U.S. She grew up in Virginia, went to university in Boston, lived in New York City, circumnavigated the globe with stops in San Francisco, Hong Kong, Thailand, Laos, Cambodia, Kenya, Uganda, and Israel, and then eventually settled in Israel, where she currently resides.

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