Car dealership and auto-repair shop owners face razor-thin margins and heightened competition, making it crucial to have funds you need to compete.
Whether you need financing to start a car dealership or want an automotive business loan to expand your dealership or repair shop, you need to understand your options. To help navigate what’s available to you, we’ve put together a list of the 8 best small business loans for car dealers and auto-repair shops.
Why Car Dealers and Auto-Repair Shops Need Business Loans
Small businesses in the auto industry face cash-flow challenges, whether you sell new or used cars, parts, services or operate a body shop.
New and Used Car Sales
On the sales side, the internet has changed the game.
Years ago, it was easier to sell a car for higher profits. Consumers in the market for a new or used vehicle would go to their local dealer, pick out a car they liked and negotiate a deal that could end up being over manufacturer suggested retail price. Buyers would research average car prices through print and word-of-mouth resources.
Today, every customer on your lot can check exactly how much others are paying for the vehicle of their choice, down to the paint color and trim level. Having this information at their fingertips allows them to make informed choices and keeps dealers from raising prices.
Profit margins in the new car industry are razor-thin because consumers are more knowledgeable than ever. According to the National Automobile Dealers Association’s 2019 midyear report, there were more than 16,700 new car dealerships in the U.S. Keeping prices low is crucial to remain competitive.
While there are laws in place to create minimum distances and decrease competition between same-branded dealerships, customers are willing to take a longer trip to save a few hundred or a thousand dollars.
To combat these changes in the market, many car dealers use business loans to purchase inventory and provide working capital during seasonal lows.
Parts and Service
As vehicles become more technical—incorporating electronics and computers into nearly everything from the steering wheel to tire-pressure sensors—the cost of equipment, parts and skilled labor is rising sharply.
Technicians require more training than ever and demand top dollar with each class and certification they add to their toolbox. This means charging customers more for labor on a per-hour basis. With access to more competition trying to undercut what you charge, it can be difficult to keep customers coming to your shop for larger repair jobs.
The rise of online direct-to-consumer marketplaces also drives down retail parts costs. Customers now have access to OEM or OEM-certified parts at prices sometimes only slightly higher than dealership or auto-repair shop cost.
Unless your shop is continuously bringing in big jobs, you occasionally might need help covering some of these higher labor costs. Finding financing for your auto-repair shop could get you the technicians, tools and equipment you need to take care of major repairs.
Body Shops and Collision Centers
If you own an auto-body shop, you have the added headache of collecting invoiced payments. Much of your business relies on payment from insurance companies.
It can take weeks for insurance companies to bring a claim from investigation to completion, meaning you have to balance satisfying your customer with waiting to get paid to complete the work. Financing from a lender can help you get through the waiting periods with insurance companies.
For many body shop owners—even those who do a good amount of business—there comes a time when they desperately need funding between payments from insurance.
Best Small Business Loans for Auto Dealers and Repair Shops
Many lenders view car dealerships and auto-repair shops as a financing risk, with thin profit margins, inventory with rapid depreciation, volatile sales growth and seasonal struggles. This can make it difficult to find an automotive business loan with favorable terms and interest rates.
However, it isn’t impossible. There are funding products suited for high-risk industries.
Here are the 8 best business loans and alternative financing for small car dealerships and auto-repair shops.
1. For Inventory: Floor-Plan Funding for Car Dealerships
Floor plans essentially act like a high-limit business credit card, giving you the funds to purchase inventory for dealership showrooms or lots when you need it. Floor plan lenders offer you a car dealer line of credit to buy cars from the manufacturer. In turn, you agree to pay the financing back with interest as you sell the cars.
Floor-plan funding is common for a car dealership, and some lenders work strictly with dealerships to offer floor plans. Still, you can use other lenders to get lines of credit for inventory and other general purposes.
2. For Revolving Cash Needs: Business Line of Credit
An unsecured line of credit is a good option for a used or new car dealer or auto-repair shop owner with less-than-stellar credit. Without providing collateral, you have access to a pool of funds you can withdraw as needed to pay for overhead, payroll or inventory without having a high credit score or a ton of assets. You’ll pay regular principal and interest installments on the amount of funds you use. The repayment schedule can be set at daily, weekly or monthly intervals.
Business loans for auto repair shops require strong creditworthiness, and conventional lenders need you to show an ability to pay off debt. Lines of credit give you the funding you need now and, if your lender reports to credit-rating firms, it can help create a positive credit history that can allow you to obtain long-term bank loans.
3. For Real Estate and Expansion: Bank Term Loans
If you need a larger amount, bank term loans are the gold standard of business lending. They offer high funding amounts and the longest terms available, making them the perfect small business loan for auto dealers and repair shops looking to purchase land or construct new buildings.
Interest rates are low compared to other financing arrangements, often about 5% for mortgages and other large purchases. Terms ranging from around 10–15 years—and even up to a 30-year mortgage—are available, too.
Unfortunately, they’re more challenging to qualify for than other options. If you’re seeking a small business loan as a used car dealer with bad credit, you’ll have to raise your score or find an alternative lender to work with.
Likewise, if your business loan will be used to open an auto-repair shop, requirements for time in business and revenue will keep you from securing funding through a bank. However, there are other options for startups or younger companies that can’t meet these qualifications.
4. For General Purposes: SBA Loans
If you’ve exhausted other avenues to secure financing, the Small Business Administration (SBA) offers a way to obtain funding with either long- or short-term repayment periods.
The SBA isn’t a direct lender, but the agency guarantees a portion of approved loans—sometimes up to 85%, greatly reducing the risk to a lender.
There are numerous versions of SBA loans for used car dealers, new car dealerships and auto dealerships and auto-repair shops. If you’re looking to make a larger purchase, the SBA 7(a) and 504 loan programs could be right for your small business.
While 504 loans can be used only for fixed assets such as commercial real estate and equipment, funding from the 7(a) program is flexible and can be used for most of your business needs. They offer the largest amounts—up to $5 million—and longest terms of any of their programs—from 7–30 years, depending on the loan’s purpose—but require strong creditworthiness and the completion of a lot of paperwork.
If you need a smaller amount and want it fast, the SBA’s Express program offers a streamlined process to acquire up to $350,000 in funding.
5. For Equipping Repair Shops: Equipment Financing
Many lenders offer loans explicitly for equipment financing for small car dealerships or auto-repair shops.
If your auto-repair business needs funding to acquire some of the latest service-drive technology or replace a broken lift, these loans can get you up to 100% of the value of the equipment and can be repaid over a 1-year or 5-year period.
Requirements are generally less stringent than what banks need from a dealership for auto-related loans, with some lenders requiring a credit score of at least 620 and only 2 years in business. Equipment financing can be a good option for newer or smaller businesses.
6. For Body Shops: Accounts Receivable Financing
If you own a body shop that continually works with insurance companies, accounts receivable financing—also known as invoice financing—could be an excellent option.
Insurance companies can take weeks to pay you, leaving you to complete your work and pay your staff while waiting for money. Accounts receivable financing takes your outstanding insurance invoices and can fund you up to 80% of their value, shortening the time you have to wait to get paid.
Fees are accrued as the lender waits for the invoice to be paid. For example, your agreement may state that you’ll pay 2% of your invoice total per week before it’s paid off. If your customer takes 3 weeks to pay, you’ll incur fees totaling 6% of your initial balance.
Once the invoices are paid in full, the lender releases the remaining percentage of the invoices’ value, minus the fees.
This can make invoice financing a very affordable option if your lenders quickly receive the money. But it can get costly if it takes your customers a long time to pay.
7. For Bad Credit: Merchant Cash Advance
If you’ve had difficulty qualifying for conventional bank loans, merchant cash advances (MCAs) can help car dealers and auto-repair shops with bad credit.
Regardless of what you need funding for, MCAs can get you the capital you need quickly because they’re loaned against your future sales. This means that, instead of requiring collateral and a near 700 credit score, lenders will take a percentage of sales until you’ve paid in full.
MCAs use factor rates instead of common interest, meaning that the payback amount is calculated at signing. No matter how quickly you get the money to the lender, you’ll need to pay the full amount.
8. For the Slow Season: Revenue-Based Financing
If you need funding for your business, but you’re worried that the upcoming slow season will make it challenging to make payments, there are loan financing options that offer a solution.
Revenue-based financing uses your current monthly sales to adjust each payment. Some lenders will have you pay 2%–8% of monthly revenue. If it’s summertime and business is booming, you’ll have a larger payment that month. In the dead of winter, when customers don’t want to trek through the snow to test drive a car, you’ll pay much less.
Anyone who has worked in the industry knows how sales fluctuate, so it could be worth looking into lenders that offer revenue-based loans for auto dealerships.
How to Get a Small Business Loan for Car Dealers and Auto-Repair Shops
As with any process, the first step in acquiring auto-repair shop or car-dealer business loans is research. Find out exactly how much you need, why you need it and when. Then, apply that to your situation and one of the potential options listed above.
Ask yourself the following:
- Do I need money now?
- What will I qualify for?
- What option best fits my needs?
After assessing what could be a potential fit, search for lenders who best fit your needs, secure funding and build your business.