If you are reading this article, you may be looking to purchase or build a car wash, or perhaps to upgrade or refinance a car wash you already own. If you have not talked to a bank lately, you will likely be surprised at how eager they are to work with you.

Banks that survived the great recession are now vigorously competing for business, especially for borrowers who are a good fit for Small Business Administration (SBA) programs. Lending sources are more prominent, leverage is up, and construction financing is more widely available. All in all, it is a solid time to seek financing.

There are three main programs to consider when financing a car wash business: 1. traditional bank financing, 2. SBA 504 loan, or 3. SBA 7(a) loan. Of the three programs, SBA 7(a) loans remain the most popular. SBA 7(a) loans are reliable in terms of funding, offer the most flexible underwriting, and allow loan proceeds to be used for a wide range of uses (real estate, equipment, working capital, partner buyouts, etc.)

UNDERSTANDING THE SBA 7(a) LOAN PROGRAM

First and foremost, SBA 7(a) loans are funded by banks, not the SBA. The SBA essentially acts as an insurance company to the lender. When an SBA lender structures a loan to meet SBA requirements, the SBA guarantees a certain portion of that loan will be repaid, thus reducing the lender’s risk. However, not every SBA lender is the same. Every bank establishes its own credit criteria, risk appetite, loan structure, and eagerness to lend. For example, some SBA lenders are okay lending to borrowers who have had personal credit issues, while others are not. A borrower can be declined by one SBA lender but get a loan approved by a different SBA lender.

CHARACTERISTICS OF A TYPICAL SBA 7(a) LOAN

Leverage

• Purchase: For the purchase of an existing car wash, you should be able to get financing up to 90 percent, assuming the car wash has decent numbers and cash flows. High leverage is perhaps the biggest benefit of the SBA 7(a) program.

• Construction: For new construction, you should be able to get your project done with only 15 percent to 20 percent down. The down can be a combination of cash and equity in the land if you already own it. This level of leverage is rare, as most banks want to be in the 65 percent to 70 percent range for new builds.

• Refinance: For a refinance, 90 percent loan-to-value financing is widely available. With a refinance, you can roll in new equipment, working capital, renovation costs, partner buyout, etc. Flexible use of proceeds is another big benefit of an SBA 7(a) that is not typically available with an SBA 504 or traditional bank loan.

Terms

• Nearly all SBA 7(a) loans are structured on a 25-year amortization schedule. By comparison, most banks require a shorter repayment period on car wash loans (such as 20 years) to reduce lender risk. A five-year reduction in the amortization schedule can mean a monthly payment increase of 15 percent to 20 percent to the borrower (at the same rate and same loan amount). For many small-business owners, cash flow is more important than paying down debt, especially during the early stages of growth.

• With an SBA 7(a) loan, there is no balloon payment whereas traditional bank loans often have a 5- or 7-year balloon payment. At the end of a 5- or 7-year balloon payment loan, the borrower must: 1. pay off the entire balance of the loan, 2. apply and be approved for a new loan with the same lender, or 3. go back into the marketplace to shop for a new lender. In the last two scenarios, the borrower is likely to incur new closing costs.

• Most SBA 7(a) lenders tie their interest rates to Wall Street Prime Rate. Per SBA rules, the maximum margin that lenders can charge on 7(a) loans is 2.75 percent. As of June 25, 2014, the Wall Street Prime Rate is 3.25 percent, so the maximum interest rate a lender could charge as of that date is 6 percent. Being able to finance up to 90 percent at a rate of 6 percent or less is one of the reasons an SBA 7(a) loan is ideal for financing a car wash.

• The pre-payment penalty during year one is 5 percent, year two is 3 percent, and year three is 1 percent. After year three, there is no pre-payment penalty.

CONS OF THE SBA 7(a) LOAN PROGRAM

As with any financing program, there are certain drawbacks that borrowers should be aware of and consider before making a financing decision.

• All partners with 20 percent or more ownership in the business must be underwritten. This includes providing three years of personal tax returns and three years of business tax returns on any other business where the partner(s) own 20 percent or more. SBA 7(a) loans involving partners are commonplace, but the underwriting process can become daunting if, for example, your business has five partners and each partner has 20 percent or more ownership interest in other businesses. With a traditional bank loan, you may be able to avoid this requirement.

• SBA loan programs are intended for small business owners actively involved in running their business. This means that passive investors may have a difficult time getting an SBA loan approved. This can be an issue for owners that live far from the subject property.

• Borrowers that have defaulted on government loans or student loans are ineligible.

• The SBA Guarantee Fee is more expensive than a typical bank origination fee. The SBA Guarantee Fee is approximately 3 percent of the total loan amount versus a typical 1 percent origination fee charged by banks. Because the fees are higher, many borrowers opt to add the guarantee fee to the loan amount.

THE RIGHT TIME

Despite these drawbacks, now is the best time to seek car wash financing since 2007. SBA lenders have the highest level of leverage and some of the most flexible underwriting standards in the business. Banks are looking for more transactions and are competing. If your car wash financing was sidelined during the great recession, now is the time to make your move.

Jeff Rauth is a vice president of business development at Celtic Bank. Celtic Bank is a nationwide SBA lender and was named the 6th largest SBA lender in the nation for FY 2013. You can contact Jeff at jrauth@celticbank.com.