Operating auto repair shops is no walk in the park; there is a lot that goes into keeping them in order. In fact, auto repair shop owners need to wear many hats and ensure that finances, marketing, services, and operations are running smoothly.
But the first thing you need to think about before opening or expanding your auto repair business is how you will finance it. The investment required for an auto repair shop is hefty, so make sure you know your options. A great way to cover the expenses and investment is through a business loan.
In this guide, we are going to walk you through auto repair shop loans and other financing options you can turn to.
Why Do You Need Financing For Your Auto Repair Shop?
Automotive businesses and auto repair shops, can have high start-up costs. To keep your business running well, you must purchase costly equipment such as shop lifts and air compressors, as well as inventory and meet regular licensing and regulatory needs.
At the same time, your cash flow may be irregular – whether you’re in a sluggish season, or you’re waiting for a customer or insurance agency to pay an invoice, cash can be limited.
Some of the most prevalent reasons auto repair shop owners seek finance are as follows:
- Maintain Consistent Cash Flow
- Obtain Inventory
- Salaries, taxes, and fees
- Expansion
- Boost the workforce
- Purchase or repair machinery
Additionally, if you are looking to expand your operations or venture into a new market, you will need considerable financing.
Here are a few ideas on how you can utilize financing like auto repair shop loans:
Setting up auto repair shops:
Starting a new auto repair business takes funds, and it may be challenging to finance the entire operation with equity alone. The expression “don’t put all your eggs in one basket,” popularized by billionaire investor Warren Buffet, applies here too.
Upgrading present equipment:
Using old and obsolete equipment is not only inconvenient, but it can also be dangerous if not properly maintained. Investing in new equipment will not only help you run more efficiently, but it will also keep you up to date on emerging technologies, such as Digital Vehicle Inspections (DVI) and Advanced Driver Assistance Systems (ADAS).
Expansion of present operations:
Owning a profitable auto repair shop is an incredible accomplishment—why not take it a step further? Having a second shop in a separate area has more benefits than just potential money; it can also be a very successful marketing tactic for your auto repair business.
Different Financing Options For Your Auto Repair Business
If you’re operating in the auto repair industry, you need to stay ahead of the game and choose competitive financing options. So what are the options that you have as an auto repair business owner?
Following are some viable financing options that you can choose from:
1. Credit line (LOC)
Obtaining a line of credit from your bank would provide you with access to a set amount of dollars that you could use at any time. These funds, sometimes known as revolving funds, provide a variety of advantages to individuals who use them, including the following:
Flexible funds: Unlike a traditional loan, which provides a flat sum of money to the borrower, a line of credit allows you to withdraw different amounts at different periods depending on your needs. This flexibility ensures that you never withdraw more than you need while still having a safety net to fall back on if you ever need more dollars.
If you have an open line of credit, every sum put back into the LOC will refill the overall cash accessible to you. Knowing that you will never have to worry about your finances running out encourages you to pay on time and allows you to focus exclusively on how to manage your business to the best of your ability.
Accessibility: In general, acquiring a business line of credit will be much easier than most other types of finance, especially if you have an excellent credit history.
If your money management is acceptable, using a LOC will allow you to keep a pretty consistent cash flow without having your bank statements dip into the red.
2. A Bank Loan
A standard bank loan is something that everyone, especially business owners, is familiar with. In fact, auto repair business loans are quite a popular financing mechanism.
A loan will typically consist of three components:
Principal: The principal amount is the real loan amount that you take from the bank and will repay over a defined period of time. Typically, this loan comes with strict terms stating that it can only be used for one purpose, such as business.
Loan interest rate: Each loan has an interest rate that must be paid at regular periods. This can change over time according to a variety of factors such as prior credit history, business plans, and a variety of other considerations. Make sure your loan has a reasonable interest rate—you don’t want to end yourself in too much debt!
Loan repayment terms: Loan repayment conditions, such as a 12-week or 24-week repayment period, must be followed. Talk to your bank to find out what favorable terms are available for your company, and then choose what works best for you.
A bank loan is a popular way to finance any type of business, and if you have previous business expertise, you can achieve very low interest rates.
- Small Business Administration Loans (SBA Loans)
Some banks may impose stringent standards and regulations for granting a loan or LOC, which not everyone can meet. In this case, the SBA loan guarantee program will sometimes allow a borrower who otherwise would not be eligible for a small company loan to qualify.
Although the SBA does not lend, small business loans are made available through partner banks, credit unions, and a few specifically regulated non-bank lenders. SBA loans can be quite helpful for candidates.
- Short Term Business Loan
Many online lenders provide small company loans for short periods of time, especially to auto repair shops. With durations ranging from three months to three years, this sort of financing allows a repair shop to borrow cash and repay it fast. This frequently results in a lower overall dollar cost than a longer-term loan.
A short term business loan from an online lender is a great business financing option and can be obtained significantly faster than a standard bank loan. Typically, the borrower can apply for short term, small business loans in minutes and receive funds within days. Many car repair firms will employ a short-term business loan to pay for shop improvements, inventory purchases, and marketing or advertising efforts.
Many shop owners agree that this is a great auto repair shop financing strategy and one of the best business loan options.
- Equipment Financing
Another option for funding the acquisition of business equipment is equipment financing (besides just using a loan or line of credit). Business equipment can be any tangible object employed in business operations. This can include a shop lift, tire changer, or alignment machines for vehicle repair shop operators. An auto repair shop can use equipment finance to buy new shop equipment without tying up their present money.
- Working Capital Advance
A Working Capital Advance usually has a higher fee and a shorter term, which makes it a viable alternative if you have a low personal credit score or have been in business for a short time, and require financing rapidly. This form of advance can provide financing in as little as three days.
Requirements: 6 months in operation; a minimum personal FICO score of 500; and an annual gross income of around $180,000.
You may be accepted for up to $500,000.
- Merchant Cash Advance
Merchant cash advance, like auto repair shop loans, is another viable financing option.
A merchant cash advance is actually a type of unsecured business loan that can help an auto repair shop with its cash flow in the short term by providing an instant cash advance. There are no APRs or hidden expenses, only an agreement that normally lasts 6 months to a year and is repaid as a fixed percentage of future consumer credit card transactions made using card terminals.
Because repayments are proportional to sales, if debit and credit card payments decline, the repayments also reduce—this makes cash flow management at auto repair businesses easier to manage.
- Alternative Lender Loans
According to entrepreneur.com, around two-thirds of all small business owners are looking for alternative lenders to help them with their finance needs. When quick, adaptable outcomes are required, business or auto repair shop owners pursue this route. Alternative lenders provide a wide range of customized lending solutions to auto repair business owners who face rejection throughout the bank and SBA application procedure. Seriously, securing auto repair business loans can be a tough nut to crack.
Small company loans and lines of credit come with customizable alternatives.
Pros:
Alternative lenders provide a straightforward one-page application process. Documentation is usually simple (a few bank statements), and it can all be done online.
Your credit score will not prevent you from getting a loan. When examining your application, these authorities will consider the health of your company and its overall potential.
One of the advantages for you and your company is speed. You receive replies and the funds you require more quickly than with other sorts of financing solutions.
Cons:
Because there is less emphasis on an applicant’s credit, the lender is taking on more risk, so the interest rate may be slightly higher than with another business financing option like a bank or the SBA.
Many situations can arise in which quick auto repair shop financing is needed. Whether the demand stems from routine expenses, an emergency, or a golden chance, business owners require dependable funding solutions.
Ending Thoughts
Obtaining the necessary cash flow for your auto repair business may appear to be a difficult undertaking, but there are a number of options available to you. Finding the correct program to suit your company plan is critical for success, whether you need money now or over time.
