Despite the economy and the reluctance of many lenders to loan money, almost every car care business can secure needed funding. A car wash operator, detailer, or fast lube operator seeking to borrow will, of course, face many challenges, not the least of which is the higher cost of that funding.

Few operators are aware of all the options available or don’t have the time to explore the many possibilities. There is a vast menu of choices, each with pluses and minuses.

Keep It In The Family

It is wise for every business owner to have at least some personal funds at risk since that shows potential lenders or investors that the owner is committed to the business’s success. The most basic and frequently affordable option is to use personal or family funds to finance the car care operation.

So-called “Boot Strapping” can involve personal investment by the operators and/or their family and friends, with the owner potentially foregoing a salary. Unfortunately, our tax laws make self-funding a touchy — and complex — strategy.

Our tax laws require a fair-market interest rate to be included whenever a loan is made between related parties or when a shareholder makes a loan to his or her incorporated business. If not, the IRS will step in and adjust the below-market interest rate transaction to properly reflect “imputed” interest.

Avoiding the potential pitfalls of self-financing often means taking out small business loans. Here, a car care business owner must understand exactly how much money is needed, what it is needed for, and, most importantly, how it will be repaid.

Car wash operators, detailers, and fast-lube operators often use term loans from a bank to purchase business assets or finance expansion. Term loans provide access to borrowed funds upfront, in one lump sum, with fixed monthly payments based on the loan’s purpose.

Banks

According to the Federal Reserve’s Small Business Credit Survey, 43 percent of small businesses applied for loans from banks. Obviously, some banks are more likely to make loans than others.

The car care operation’s first stop in the search for affordable funding should be its bank. Even without a personal relationship, the operation’s bank is familiar with the business, putting it one step ahead of other applicants. And don’t forget that banks provide many services and can provide guidance to other funding resources. However, if a bank won’t lend the business money, the good news is that there are other options.

A government loan guarantee can overcome the reluctance of many bankers and help an operator secure lower interest rates and better terms. Today’s challenging lending environment adds yet another element to funding your business, a challenge that may be overcome by taking advantage of one of the government’s many funding programs.

Small Business Administration

The U.S. Small Business Administration (SBA) doesn’t lend much. Rather, the bulk of its financing comes in the form of “guarantees.” They guarantee the repayment of loans made by a financial institution, thereby lowering or reducing the institution’s risk and, in most cases, the interest charged to the borrower.

Many car wash operators, detailers, and fast-lube operators have found the SBA’s 7a and 504 programs affordable. SBA loan programs are generally intended to encourage longer-term small business financing, but not always.

In general, maximum loan maturities have been established: 25 years for real estate, up to 10 years for equipment (depending on its useful life), and, generally, up to seven years for working capital. Short-term, so-called “Micro Loans” are also available through the SBA that can help a car care operation meet its short-term and cyclical working capital needs.

Funding Locally

One of the best sources of assistance — and in many cases funding, for growing car care operations — is the many state, regional, and local economic development agencies. There are nearly 12,000 economic development groups in the U.S. whose purpose is to provide economic growth and development in their service areas. While not always a source of expansion financing, a state’s office or agency of economic development can be a guide to regional and local funding.

Even those aware of public funding often have misconceptions about who will and will not qualify. Many of these programs are looking for businesses with proven track records. The state, regional, and local agencies are willing to help them expand their sales, which in turn will help expand the tax base and increase employment.

Other Options

A car care business that wants or needs to borrow outside the traditional bank or SBA system has many options. Hundreds of specialist small business lenders can help with those borrowing needs, although requirements, terms, and interest rates will vary widely.

Like banks, credit unions offer favorable rates and loans backed by the SBA. However, unlike banks, credit unions have increased their small business funding. The number of credit unions offering small business financing has doubled, according to the CFPB (Consumer Finance Protection Bureau).

Alternative Funding

An important form of alternative financing is so-called “asset-based” lending. In general, commercial finance companies are often willing to lend funds to businesses that cannot, for various reasons, secure credit from a bank. The credit is secured by the assets of the car care operation, such as receivables, inventory, equipment, and, sometimes, real estate.

Admittedly, while asset-based lenders usually advance capital more quickly and readily than banks, they charge more for the higher risks involved. The loans are generally offered on a revolving line of credit or term basis. The revolving credit allows the business to draw on a line of credit as needed over a fixed time period.

Having the right equipment can significantly increase productivity and improve sales. Thus, equipment financing is ideal for any car wash or car care operator that needs hard assets quickly but can’t afford to purchase them outright.

Equipment financing is available from banks and with SBA guarantees. Lenders, including dealers and distributors, also offer targeted financing programs.

Subscription Funding

The increasing availability of so-called “subscription financing” has been a welcome option for many car wash operators, detailers, and fast-lube operators. Designed specifically to support businesses that generate recurring revenue, subscription financing is ideal for taking advantage of membership income.

Whether called subscription financing or a revenue-based loan (RBL), they can aid a car wash, detailing, or fast-lube business with recurring income such as that from memberships. Both options are built on establishing long-term relationships with customers who regularly pay for access to an operation’s services.

Best of all, they are typically without personal guarantees, especially those funded by alternative lenders.

The Internet

A recent report from the Federal Reserve indicated that small businesses are picking alternative financing options, such as crowdfunding, peer-to-peer lending, and FinTech platforms.

Thanks to changes by the IRS and the Securities and Exchange Commission (SEC), crowdfunding is helping many small businesses. Crowdfunding that relies on investors can help get an idea, project, or business off the ground, often rewarding investors with perks and/or equity in exchange for cash.

Although the popularity of crowdfunding has increased, there are caveats. For example, the proposal or business must be intriguing enough to attract multiple investors. With equity crowdfunding, where investors are given a stake in the business, there are strict SEC regulations that the business and investors must follow.

Somewhat less regulated than crowdfunding, so-called funding “platforms” are an increasingly popular door to Internet financing. With an online lender, bad credit is not always a barrier to getting the needed financing, although it is often expensive. However, while these lenders put up fewer barriers, drawbacks include significantly higher risk and lower loan amounts.

An often-overlooked Internet option is peer-to-peer business lenders. These lenders eliminate the middleman, such as banks, to connect borrowers with individuals and institutional investors. Unfortunately, the cost of borrowing with peer-to-peer financing can often be higher than conventional financing.

Good Credit = Affordable Funding

Things go a lot easier when potential lenders can decide to take a risk based on a car care business’s credit history and capability of repaying obligations. With strong business credit, a business can often borrow at a lower cost, with more favorable terms — even in today’s economic climate.

In fact, many small car washes, car care, detailing, and fast-lube businesses with good business credit have discovered it is possible to get loans without an onerous and often embarrassing personal guarantee.

Financing the growth of any business is a complex affair. Unfortunately, most conventional lenders avoid funding car washes because of the combined risk of the real estate and the business.

Fortunately, funding to help grow and expand the car care operation is available to those car wash operators, detailers, and fast-lube operators willing to do their homework. Comparison shopping for lenders, rates, and terms is strongly recommended.

Mark E. Battersby is an Ardmore, PA-based freelance writer, specializing in finance and tax issues.