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If you own a car dealership, you likely face razor-thin margins and fierce competition, making having capital crucial to compete.
Whether you need financing to cover costly expenses at your car dealership or want an automotive business loan to expand your operations, you need to understand your options.
To help navigate what’s available to you, we’ve compiled a list of the best small business loans for car dealers.
7 Best Small Business Loans for Car Dealers
Many lenders view car dealerships as a financing risk, with thin profit margins, rapidly depreciating inventory, volatile sales growth and seasonal struggles. As a result, finding a car dealer business loan with favorable terms and interest rates can be challenging.
However, it isn’t impossible. There are automotive business funding products suited for these high-risk industries.
Here are the 7 best business loans and alternative financing for dealerships, whether you’re in the new or used car business.
1. For Inventory: Floor-Plan Funding for Car Dealerships
Floor plan financing essentially acts like a high-limit business credit card, giving you the funds to purchase inventory for dealership lots or showrooms. 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 financing is standard in the vehicle sales industry, and some lenders work strictly with dealerships to offer this type of automotive business funding. 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 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. You’ll pay regular principal and interest installments on the funds you use, typically weekly or monthly.
Business loans for car dealerships require strong creditworthiness. Borrowers need to show lenders they’re able to pay off their debt. If your lender reports to credit-rating firms, a business line of credit can help create a positive credit history that can allow you to obtain long-term bank loans.
3. For Real Estate and Expansion: Term Loan
If you need a more significant amount of capital, term loans are often considered the gold standard of business lending. They offer high funding amounts and some of the longest terms available, making them the perfect small business loan for auto dealers looking to purchase land or construct new buildings. Additionally, interest rates can be lower when compared to other financing arrangements.
Unfortunately, term loans can be more challenging to qualify for than other financing options. If you’re seeking a small business loan as a used car dealer or new car dealer with bad credit, you’ll have to raise your score or find an alternative lender to work with.
Could you benefit from a term loan or credit line?
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 some approved loan programs — often up to 85%, greatly reducing the risk to a lender. Several SBA loans could benefit used car dealers and new car dealerships. If you’re looking to make a larger purchase, the SBA 7(a) and 504 loan programs could be suitable for your small business.
While 504 loans are primarily intended for fixed assets, such as commercial real estate and equipment, funding from the 7(a) program is flexible and can be used for most business needs. These loans are available up to $5 million and terms range from 7-30 years depending on the loan’s purpose. That said, SBA loans require strong creditworthiness and 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 $500,000 in funding.
5. For Dealership Equipment: Equipment Financing
Many lenders offer loans explicitly for equipment financing, which can benefit small car dealerships.
If your business needs funding to acquire some of the latest technology, these loans can get you up to 100% of the value of the equipment and can often be repaid over a 1- to 5-year period.
Requirements are generally less stringent than they are with other loans. For example, through the lending partners at Fast Capital 360, borrowers may qualify with a credit score of 620 or higher and 2 years in business.
6. For Bad Credit: Merchant Cash Advance
If you’re a car dealership owner who’s had difficulty qualifying for conventional bank loans due to bad credit, merchant cash advances (MCAs) can help.
MCAs are a type of financing loaned against your future sales. They allow business owners to get the capital they need quickly, regardless of funding needs.
MCAs use factor rates instead of common interest, meaning the payback amount is calculated at signing and will not change.
7. 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. 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 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.
Small businesses in the auto industry face cash-flow challenges, whether you sell cars, parts or services. Here are a few reasons you might consider a new or used car dealer business loan.
Improve Online Presence
When it comes to car sales, the internet has changed the game. Years ago, 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. Today, expansive online inventories tempt buyers to shop around. Car dealerships may use funding to improve their online presence and invest in advertising to remain competitive.
Get Through Seasonal Lulls
Some months can be more challenging than others for car sales. Take January, for instance. The start of the year is one of the slowest times for dealerships, as many consumers are recovering from the holidays. In times like these, taking out a business loan for your car dealership may offer the boost of funds you need to improve working capital.
Cover Parts and Service Costs
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.
Car dealership technicians require more training than ever and demand top dollar with each class and certification they add to their toolbox. Unfortunately, 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 challenging to keep customers coming to your dealership for service and repair jobs.
The rise of online direct-to-consumer marketplaces also drives down retail parts costs. Customers now have access to original equipment manufacturer (OEM) or OEM-certified parts at competitive prices.
Unless your dealership is continuously bringing in big service jobs, you occasionally might need help covering some of these higher labor costs. A car dealership loan could help you get the technicians, tools and equipment you need to care for your customers who need their vehicles serviced.
How to Get a Small Business Loan for Car Dealers
As with any process, the first step in acquiring a car-dealer business loan is to conduct research. Find out exactly how much capital you require as well as when and why you need the funding. For example, consider if you need a business loan for a used car dealership, invest in new technology or simply need working capital to get through a financial lull.
Then ask yourself the following:
What’s my credit score?
What does my revenue look like?
What does my cash flow look like?
What option best fits my needs?
How much of a payment can I afford?
How long do I want to pay back borrowed funds?
After assessing what funding option could work for your business, search for lenders who best fit your needs, secure funding and continue to build a dealership that attracts a steady clientele.
Technical SEO Specialist at Fast Capital 360
Mike McLeod is a former senior SEO specialist at Fast Capital 360. He has a passion for giving small business owners, like you, the financial and strategic tools they need to realize the American dream.