For small business owners in the automotive space, cash flow can be a big concern. Today’s business owners face razor-thin margins and increased competition, making it more important now than ever to have the funds you need to compete.
Whether you currently own or want to open up a new business in the industry, 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 dealerships and auto repair shops.
Why Car Dealers and Auto Repair Shops Need Business Loans
Small businesses in the automotive industry face cash flow challenges, whether you sell new or used cars, parts, service or operate as a body shop.
New and Used Car Sales
On the sales side of things, the internet has changed the game forever. Years ago, it was much 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 MSRP. Buyers would educate themselves through print and word-of-mouth resources, which would, in turn, give them an idea of what they should pay.
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.
This is especially noteworthy to those in the new car industry. Profit margins are razor thin on new cars because consumers are more knowledgeable than ever. With the NADA recognizing almost 17,000 new car dealers in the U.S., everyone has to lower prices to compete.
While there are laws in place to create minimum distances and lessen competition between same-branded dealerships, customers are now willing to take an extra trip to save a few hundred or thousand dollars. If a competitor sells the same car 20 miles away for less than you paid for it, you’ll either have to bite the bullet and sell it at cost or risk losing a customer.
To combat these changes in the market, many car dealers use business loans to purchase inventory and provide working capital during seasonal lows, as even the heavy sales periods don’t makeup enough to cover it.
Parts and Service
If you own or plan to start up an auto repair shop, you know how expensive cars are to fix. While that means you can make a lot of money, it also means you have to spend a lot. As vehicles get more technical—incorporating electronics and computers into nearly everything from the steering wheel to the tires—the cost of equipment, parts and skilled labor is skyrocketing.
Technicians require more training than ever, and demand top dollar with each class and certification they add to their toolbox. The tools that they use for car repairs have been upgraded from a wrench and an air ratchet to diagnostic computers and laser-guided alignment machines.
This means charging your customers more for labor on a per-hour basis. With access to more and 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 your cost, making it impossible to sell at the high markups of the past.
Unless your shop is continuously bringing in big jobs, there may come a time when you need help covering some of these higher costs. Finding financing for your auto repair shop could get you the technicians, tools and equipment you need to take care of any job that drives in.
Body Shops and Collision Centers
If you own a body shop, you have an added headache in collecting on your invoices. 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.
For many body shop owners (even those who do a lot of business) there comes a time when they desperately need funding between payments from insurance.
Best Small Business Loans for Car Dealers and Auto Repair Shops
A lot of lenders view car dealerships and auto repair shops as risky borrowers. They see thin profit margins, inventory with rapid depreciation, volatile sales growth and seasonal struggles. This can make it difficult for you to find a small business loan with favorable terms and interest rates.
However, it’s not impossible. There are funding products suited for high-risk industries.
We’re going to start with a few small business funding products that aren’t technically loans but are common ways car dealers and auto repair shops fund their business.
Here are the 8 best business loan and alternative financing options for you.
For Inventory: Floor Plan Financing
Floor plans essentially act like a high-limit business credit card, giving you the funds to purchase inventory when you need it. Since vehicles are tens of thousands of dollars, it would be impossible for new or smaller dealerships to pay to keep a full lot. Floor plan lenders offer you a line of credit to buy cars from the manufacturer, and you agree to pay them back with interest as you sell them.
This financing model is commonplace in the automotive industry, as 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.
For Revolving Cash Needs: Business Line of Credit
Business lines of credit are floor plans that can be used for just about everything and not only inventory. They also differ by how interest is paid off. Instead of paying interest after selling a car, you pay regular principal and interest installments after you withdraw funds. The payment schedule can be set at daily, weekly or monthly intervals.
For car dealers with bad credit, unsecured lines of credit can be used as a great alternative to other small business loans. Instead of having to provide collateral, you can have a pool of funds whenever you need to pay for overhead, payroll or inventory without having a high credit score or a ton of assets.
Business loans for auto repair shops require strong creditworthiness, and lenders such as banks 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 bureaus, it can help create a positive credit history that can allow you to obtain long-term bank loans.
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 around 5 percent for mortgages and other large purchases. Terms ranging from around 10 to 15 years—and even up to a traditional 30-year mortgage—are also available.
Unfortunately, they’re more challenging to qualify for than other options. If you’re seeking a small business loan for 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.
For General Purposes: SBA Loans
For those that get denied for funding with banks, the Small Business Administration offers a way to obtain high loan amounts with either long- or short-term lengths.
They offer many programs, but they all help you get funding by guaranteeing a portion of the proposed loan to your lender, eliminating most of their risk. The SBA does this to help small businesses like yours get the funding they need to grow and boost the economy.
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 only be used for fixed assets like 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 and longest terms of any of their programs but require strong creditworthiness and the completion of a lot of paperwork.
If you need a smaller amount and want it fast, their Express program offers a streamlined process to acquire up to $350,000 in SBA loans for auto dealerships and repair shops.
If you’re thinking about applying for an SBA car dealership loan but aren’t sure which program suits your needs, reach one of our business advisors who will find you the perfect fit.
For Equipping Repair Shops: Equipment Financing
Although you can use some of the options we’ve reviewed for the same purpose, many lenders offer loans suited explicitly for equipment financing.
If your auto repair business needs funding to acquire some of the latest service-drive technology or replace a broken lift, these loans offer short- to medium-term lengths and can get you up to 100 percent of the value of the equipment.
Requirements are generally lower than what banks need from a dealership for auto-related loans, making equipment financing a good option for newer or smaller businesses.
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 for you.
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 can take up to 80 percent of your outstanding insurance invoices and turn them into a working capital loan, shortening the time you have to wait to get paid. Once all invoices are paid, you can pay off your lender and any accrued fees.
Fees are accrued as the lender waits for the invoice to be paid. For example, your agreement may state that you’ll pay 2 percent of your invoice total per week before it’s paid off. If your customer takes three weeks to pay, you’ll incur fees totaling 6 percent of your initial balance.
This can make invoice financing a very affordable option if your lenders receive the money quickly. But it can get costly if it takes your customers a long time to pay.
For Bad Credit: Merchant Cash Advance (MCA)
If you’ve had trouble qualifying for traditional bank loans, Merchant Cash Advances are great for 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 lent 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 uses 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 agreed to.
Find the right fit for your small business.
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 hard to make payments, there are loan financing options that offer a solution.
Revenue-based financing (RBF) uses your current monthly sales to adjust each payment. You can usually expect to pay between 2 to 8 percent of 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
Like any process, the first step in acquiring a business loan 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 questions:
- Do I need money now?
- What will I qualify for?
- What option best fits my needs?
After assessing what could be a potential fit, start to search for lenders to work with. If it means reaching out to local banks or your SBA regional office, start there. If a traditional bank loan isn’t what you’re looking for, Fast Capital 360 can help you find the best rates and terms for your car dealership or auto repair shop based on what you need and your business’s credit profile.