SBA car wash loans are popular because the SBA guaranty enhances the loan and encourages banks to make a loan they otherwise may not make. SBA loans are typically for a larger dollar amount plus longer-period years than a conventional loan creating better repayment terms for the borrower.
Each SBA loan is one of a kind and has its own identity. First, the borrower is evaluated based on their personal financial statement and resume. Second, the business is evaluated based on the economics of the project. Most car wash loans sort under one of the following five categories:
1. Purchase an Existing Wash
Securing an SBA loan to purchase an existing wash requires the seller to provide the last three years’ tax returns plus a year-to-date P&L so the lender can determine the cash flow of the business. The purchaser will provide a personal financial statement, their last three years’ tax returns, and their business resume.
2. Purchase Plus Renovation
Purchasing an existing wash plus including major renovation cost is a popular SBA loan request lenders receive. In addition to the above requirements to purchase an existing wash, the borrower must include a line-item budget of all the renovation costs plus a proforma describing in detail how the business will perform after the renovation work is operative.
3. Loans to Restructure
Loans to restructure and monetize accumulated equity allows the owner to utilize equity to expand or renovate plus convert short-term financing to long-term debt, significantly reducing monthly debt service. Converting to long-term debt eliminates the time-consuming process of renewing short-term notes and provides a borrower the comfort level and security of long-term financing.
4. Construction Loans
SBA construction loans are more time consuming because the borrower must acquire the land plus secure an economic proforma on the site; confirm the city will issue a permit; engage architects, engineers, and a surveyor; and select a builder that will provide line-item budgets for the lender’s review and approval. Most borrowers find it helpful (and some say mandatory) to select their car wash equipment manufacturer first and work with the manufacturer’s distributor for their respective area. The distributor can assist borrowers on the above requirements and could very likely become “your best economic advisor.”
5. Partner Buyout or Buy-in
Loans for a partner buyout or buy-in are a great resource for a partnership. Over time, partnerships mature and partners may want to exit for various personal reasons, or they may be ready to retire. Ask your car wash lender to develop a financing plan that will monetize the increased equity your partnership now enjoys due to years of successful operations and use that financing tool to buy your partner out. SBA loans are also available for individuals that want to buy into the partnership.
ALL SBA LOANS ARE NOT THE SAME
Because the lender has flexibility regarding terms and conditions, all SBA loans are not the same. The lender must abide by specific SBA guidelines, but they can amend your loan to meet the respective bank’s underwriting requirements provided the change does not conflict with SBA guidelines. The SBA guidelines may state the loan can be for 25 years, but the lender wants the loan to be for a shorter period. SBA guidelines may say 10 percent equity is acceptable, but the lender may increase the equity requirement. There are numerous other adjustments a lender can make and remain in compliance with SBA guidelines, which explains why all SBA loans are not the same.
Ask your lender to share an EBITDA spreadsheet so you can review your projected gross revenue, operating cost, projected EBITDA earnings, debt service, cash flow, and the all-important debt coverage ratio. Also, you will see the projected cars washed per the proforma plus the cars washed per the projected traffic capture rate. This spreadsheet will provide you with a reliable management tool and give you and the lender a documented illustration as to how the wash should perform.
WHY LOANS ARE NOT APPROVED
There may be a combination of reasons why loans are not approved. The most important reason for not being approved is an inadequate description of the business. Be diligent in your analysis and collect all the information as described in this article so you can make an informed business decision. Make sure you provide this same information in an organized and informative manner to your lender so they can see the value of your purchase as they underwrite your loan request.
TIME TO CLOSE
It is a common misconception that SBA loans take too long to close. SBA loans do require additional documentation to remain in compliance with SBA requirements, but this should not slow the approval and closing process if your lender is an experienced SBA lender and has planned accordingly during their underwriting.
Some will say an SBA 504 loan takes longer because you are required to get approval from a certified development company (CDC). Many conventional lenders will say it takes them the same length of time to get approval from their senior loan committee as it does for them to get CDC approval on their SBA loans. Borrowers should visit with lenders that offer SBA and conventional loans to determine which is best suited for their needs.
Hershel Pierce was a co-founder of Pavillion Bank in 1982 and is founder of SBA-Capital, a car wash financing expert. He can be reached at (214) 726-9000 or firstname.lastname@example.org, or visit the website at www.sba-capital.com.