Car Wash Financing

SBA Financing
For the Car Wash Industry
By Kevin Rafferty

I. What is an SBA loan

  • The U.S. Small Business Administration (SBA) 7(a) loan is a loan made by a bank, credit union, or commercial finance company that is subsidized by the government guaranteeing the lending institution a percentage of their losses in the event of a default.
  • The lending company makes the loan with their money, but uses the underwriting criteria as set forth by the SBA. Loan payments are made to the lender.
  • Lenders participate with the SBA by three methods of approving loans: the SBA underwrites the deal, a Certified Lender Program (CLP) whereby the SBA just reviews the lender's loan file, and Preferred Lender Program (PLP) whereby the lender approves the loan without the SBA seeing the file. The PLP program offers the quickest loan approval.
  • Some real estate loans can be made under the SBA's 504 loan program whereby the business owner puts in 15 - 20% cash, the bank makes a direct 1st mortgage loan of 50-55%, and the the SBA lends a 2nd mortgage directly at 30-35% of the real estate and equipment.

II. What are the qualifications to apply for an SBA loan to start a car wash, buy a car wash, or purchase car wash equipment

  • All owner's who own 20% or more of the car wash business must guaranty the loan. In some cases, the owners may have to pledge personal collateral for the loan.
  • Must be a U.S. Citizen or hold a Legal Permanent Residence card. Some additional restrictions apply as a Legal Permanent Resident.

III. Benefits of SBA financing vs. a traditional bank loan

  • Less money for down payment. Typical down payments are 20% of the project cost for a start up business and 10% for a going concern to buy or upgrade their equipment.
  • Project cost for a start up is the sum total of the following: land, construction, soft costs for construction, equipment, working capital, closing costs, a 10% construction contingency and the interest carry to build the car wash.
  • Easier underwriting. With the SBA typically guarantying 75% of the lender's losses, lenders can extend financing to more business owners and at longer terms.
  • Longer terms. Business acquisitions and start ups are typically 20-25 years with no balloon payments. Just purchasing equipment is typically 10-year financing. The longer terms, with no balloon payments, gives the business owner lower payments and not worrying about financing.

IV. Disadvantages of SBA financing vs. a traditional bank loan

  • More paper work to satisfy SBA requirements and this usually adds more time to close.
  • Closing fees are typically about a point and half (1.5%) higher than a traditional bank loan.
  • Interest rates may be slightly higher than traditional bank loans. Most rates are between the Wall Street Journal Prime rate plus a margin between 1.5% and 2.75% depending on the lender and the strength of the deal.

V. What does a lender look for when approving the loan

  • The applicant will have sufficient management experience in the industry, or other significant management experience, or has a manufacturer to provide the training to run the business.
  • The ability to put down 10-20% and document how the funds were derived.
  • An adequate credit score.
  • Know the project cost, the location, the demographics, the traffic count, and the car wash concept, i.e Express.
  • Prepare a complete loan package.

VI. What documents do I need for a loan package

  • Each lender will have their own loan application to prepare.
  • For each owner owning 20% or more of the business: a Personal Financial Statement, a resume, and three years personal tax returns. If they own an affiliate company, the last three years financials and a YTD Financial Statement.
  • For a business acquisition: a sales contract, the last three years financials and a YTD Financial Statement.
  • For a start up: a short business plan, traffic count, demographics, and itemized bids for the construction, and equipment.