Over the past 30 years, I have seen many deal-stopping issues pop up to prevent good people from making their dreams of building, buying, or upgrading a car wash come true. Many of these issues possibly could have been avoided. Half the battle is knowing the right questions to ask and not being afraid to ask them. As they say, knowledge is power. Below are some thoughts that may give you the knowledge needed to avoid roadblocks and help you find your way through the financing process.
CREDIT SCORES
In the initial stages of applying for a loan, the underwriter will review your credit report and credit score. Presenting a good credit picture will greatly enhance your ability to qualify for a loan. Your credit score is determined by the Fair Isaac Corporation (commonly known as FICO). The FICO scoring model used by TransUnion, Equifax, and Experian not only looks at your payment history, but also at the percentage of available revolving credit you are utilizing. Your payment history accounts for 35 percent of your credit score. However, most people don’t know that the second most important factor in your credit score is your percentage of credit card usage. Credit card usage makes up for 30 percent of your total FICO score. Therefore, keeping high revolving credit card balances can drop your credit score by 50 to 100 points or more. Inversely, by keeping low credit card balances, you can boost your credit score by the same amount.
A quick fix to a low credit score may be as simple as paying down credit card debt.
CONTAMINATED SITES
One of the first questions the prospective purchaser of a site should ask the seller concerns site contamination. If the site has a history of previous environmental contamination, proceed with caution. Former petroleum and auto repair facilities are the most common places to find environmental contamination. If there is currently any environmental remediation work in process, it may be virtually impossible to secure financing. Lenders get concerned with the limited marketability and potential remediation costs associated with sites that have environmental contamination. In addition, with a few exceptions, the Small Business Administration (SBA) will not guarantee loans for contaminated properties. Therefore, if prior environmental work has been completed, it is critical to ask the seller for a “No Further Action Letter.” This is a letter from the state environmental authority or an environmental firm confirming the environmental cleanup is complete and no additional remediation work is required.
Having a No Further Action Letter or clean environmental report can help expedite your loan closing.
INEXPERIENCED LENDER
It is important to find a lender who has extensive experience in the car wash industry and who can provide the type of financing you need. The last thing you need is a “YES, until it is NO” lender. That is an inexperienced lender that initially says “yes” to everything, not truly knowing if they can help you. All too often this “yes” becomes a “maybe” as your application is reviewed. Very often this is followed by a “no” or credit denial. At this point you may have lost months of valuable time, possibly costing you hundreds of thousands of dollars in revenue. In addition, for those purchasing or constructing a new wash, going to one of these “YES, until it is NO” lenders can potentially jeopardize your transaction.
Don’t be afraid to ask your lender about their specific experience in car wash lending.
This happens when you fail to close within the timeline required by the Purchase and Sale Agreement. An experienced car wash lender should be able to quickly evaluate your project in a matter of days, not months, to let you know if you really have a viable transaction. If you have to explain the benefits of your car wash format to your lender, you may want to look elsewhere. Experience does count.
START-UP EQUIPMENT FINANCING
If you are a new operator acquiring a site or planning to build a new location, get written confirmation from your lender that the car wash equipment will be included in the loan. Due to some lenders’ perceived risk in financing equipment, all too often equipment is excluded from the finance packages. This can be costly to the operator.
Most new investors are unaware that the majority of equipment leasing companies will refuse to consider financing equipment for start-ups or acquisitions. When available, financing rates for start-up equipment leases are likely to be high, borrower injection requirements may be increased, and terms greatly reduced. These factors may all negatively impact the cash flow of the business. In addition, if you’re a newer business, defined as current ownership operating the entity less than two years, you may want to consider a Small Business Administration (SBA) backed equipment loan. SBA loans offer lower rates and better terms for start-ups and newer businesses. However, if you have a choice, you’ll most likely save money and get even better terms by including your equipment needs in the initial loan to purchase your facility.
Start-ups should be sure to include equipment financing needs with the loan to acquire or build your new wash.
POOR SITE SELECTION
New investor enthusiasm for acquiring or building a new wash is often overwhelming. Sometimes it’s hard to hold back this enthusiasm to clearly analyze the facts. Many people fall in love with a site because they own it or because of lower cost. While the site may be good, there are a few basic steps that should be taken before committing to buy or build on a property. Initially, you need to determine the format of car wash to be built or developed. Start with a careful survey of existing car wash locations in your target area. How many car wash properties currently exist in the selected area? Examine their wash format and pricing. Will these properties directly compete with the concept you envisioned? Will you have the flexibility to charge sufficient prices to support your debt and turn a profit? Are the area demographics and traffic count sufficient? Talk to city officials and ask questions that may help you determine if permits have been issued for any additional wash projects that may be in the planning or pre-construction phase of development.
Once you have settled on a concept, outline the needed lot requirements for the build-out you envision. What is the optimum lot configuration? How will traffic flow, entering and exiting the property? Once on site, will customers be able to easily navigate the necessary turns to enter and exit the car wash building? Experienced car wash distributors and manufacturers will gladly help with preliminary evaluation of prospective sites. This evaluation includes items like demographics, zoning, size and potential wash layout, traffic characteristics, accessibility, competition, site costs, and more. With this information in hand, you will be better equipped to screen prospective locations.
Analyze the facts and rely on seasoned professionals to help with site selection.
OUTDATED EQUIPMENT
Whether you currently own a wash or are buying an existing facility, outdated equipment can be just as bad as having a bad site. The symptoms of outdated equipment show up on the financial statements in the form of high repair expenditures, unacceptable labor costs, declining revenues, limited cash flow, and shrinking profits. The cure for this issue can be in the form of taking advantage of new technology. The new point-of-sale pay station technology is one example of how entrepreneurs in the car wash industry have reduced labor and shrinkage while increasing volume. Offering high-quality washes in an automated format by utilizing the latest technology in wash systems is another way to provide a consistent wash in less time to more clients at a reasonable profit margin. Using this new technology to capture customer data to leverage online and social media can
also help grow your business. With the increasing cost of labor, it is essential to consider the condition of the equipment. Communicating to your lender how the replacement of outdated equipment will impact your sales, expenses, and profits can be critical in obtaining financing.
Don’t hesitate to factor in the cost of replacement of outdated equipment when you’re buying a wash.
LEASED LAND CONSTRUCTION
With the increasing cost of real estate, many operators are looking to build on leased land. While leased land construction is possible, it is difficult. The reason for this is the increased risk to both the lender and borrower. This is due to the fact that both the borrower and lender now need to be concerned with the financial strength of the landowner. If the landowner defaults on the land loan, both the lender and borrower can be put in a compromised position. To help reduce this risk, a prudent lender will negotiate specific assumption and default agreements with both the landowner and the mortgage holder. This negotiation process will most likely increase the time it takes to obtain financing and the cost to the borrower.
Be prepared for long negotiations when financing construction on leased land.
HIDDEN COSTS
The cost of building a wash or buying equipment is more than just the base cost. In equipment purchases, don’t forget to factor in the cost of installation, freight, electrical, plumbing, site costs, permits, and sales tax. For new construction, beyond the base cost of land, building, and equipment, one needs to consider expenditures for architecture, engineering, utility connection and tap fees, impact fees, closing costs, third-party reports, interest during construction, and contingency funds for unforeseen construction costs along with post-construction funds for working capital and inventory during the start-up phase. When applying for financing, a borrower should include all of these items in the loan request. A good lender should acknowledge and approve your entire project costs. Remember, if it’s not in the loan, it’s coming out of your pocket.
A good loan includes all project costs. Don’t settle for less.
CONCLUSION
In conclusion, having the knowledge you need to avoid the roadblocks in a project will help you reach the goal of project completion and your new beginning. Don’t be afraid to ask uncomfortable questions. Dig a little deeper. Be informed. You’ll be happier in the end.
Michael Ford is the managing director at Coast Commercial Credit, which specializes in small business and car wash financing. You can contact him at MikeF@CoastCC.com or (800) 400-0365. To learn more about the company, you can visit www.CoastCC.com.