In 2018, the Auto Care Association reported that the $392 billion auto care industry experienced several upward trends. Some projections, published in the Auto Care Association’s “Auto Care Factbook 2019,” estimate the industry to reach $433 billion by 2021, given surges in consumer confidence and spending levels.
This research begs a couple of questions: are you capitalizing on a growing market, and are you considering an expansion?
Growing your business can be done in many ways. Here are a few common situations where financing can be advantageous:
- Lease versus own: Most shop owners must eventually confront the issue of whether to purchase or lease their buildings. For new owners who are uncertain of future space needs and who want to ensure maximum cash flow as they grow their businesses, leasing may be a wise option. But for new or seasoned owners with a strong financial profile, a clear picture of future growth and the ability to take advantage of the tax benefits of ownership, a commercial real estate purchase can provide a solid foundation for growth. Remember, your monthly mortgage payment will often be less than your monthly rent payment.
- Relocation: Frequently, the location you chose for your business is no longer working. It may not provide the space you need, or it might not be in the place you desire. A new location can also allow for growing your client base. For example, an ideal location will be visible from sidewalks and roadways to generate more brand awareness and easy access for new customers.
- Second location: If your first location is successful, expanding to a second location under the same brand can be a good option. With an established business plan, strong customer base and successful employees, the upfront risk is often lower than breaking into the market. However, keep in mind, opening a new location is no simple feat (as you undoubtedly know from opening your first location). You’ll need to ensure your first location is a well-oiled machine — pun intended — allowing you to focus your efforts on your new shop.
- New construction: Conventional and SBA lenders have favorable terms available for financing automotive care construction projects. To determine how much debt the business can reasonably support, the lender will evaluate whether the cash flow of the business is sufficient to cover the monthly payments of the construction project. In addition to cash flow, lenders may examine:
- Revenue trends
- If revenues are maxed out due to limited space
- If upgrades are needed to keep up with the competition
- What new services you will be able to offer
- Personal credit
- Acquisition: Purchasing an existing location is another way to grow, and this approach may have less risk than opening a second location. Be sure to weigh transition risks carefully. For the business you are considering buying, how is the business performing? What is the customer base, and are they loyal? How will your cash flow be affected?
- Conversions: Converting an independent shop into a franchised brand location is also an option. Typically, these can be remodeled in a short amount of time. Often, an existing building has an easier time getting through the zoning process. Moreover, a community tends to be more lenient with conversions because the building already exists, and there is less construction required. Converting can also bring down the overall costs of a facility structure because HVAC systems or other equipment may already exist on the site. All of these factors can influence the success of your business.
Preparing For Financing
After identifying the next growth opportunity for your business, it’s time to prepare and start talking to banks. A bank’s decision to lend money to a borrower is not rocket science. It’s a decision made on a few founding principles, so to better understand how they decide who is approved and who isn’t, let’s look through the lens of the lender. There are five categories to evaluate the risk of a loan: character, capital, conditions, collateral and cash flow.
Character: Can we trust you?
Your traits define your character, and a bank wants to know what kind of trust they can place in you. The lender needs to be confident that a borrower’s background, education, industry knowledge and experience align to operate the business successfully. In essence, the bank wants to know if they can trust you to run the business successfully and pay back the loan.
Many factors influence loan approvals, and personal finances and credit can have a significant impact on your ability to borrow money for business purposes. A lender will examine personal credit reports and PFS of borrowers and guarantors associated with the loan.
Your credit report is your track record of prior debt repayment. Your credit report compiles your debt story in one place and tells a reader how successful you are at paying that debt back. Balances, credit limits and payment history are reported from your credit cards, student loans, mortgages, car loans or other lines of credit. Payment history is one of the most significant factors in your credit score. It is wise to check your reports before talking to a lender and be prepared to explain if there are delinquencies.
Capital: How do you handle money?
When asking to borrow money from a lender, it is only natural that they will ask what personal investment, or capital, you plan to make or have already made in the business. Contributing personal assets demonstrates you are willing to take a personal risk and you are betting on the business to succeed.
In addition, the lender will assess your personal financial position by looking at your PFS. This is simply a summary of your assets, things of value you own, liabilities, debts or obligations. By calculating assets minus liabilities, the lender calculates your net worth. Depending on the lender and the type of loan, a positive net worth may not be a requirement to qualify for the loan. In addition, your PFS is an indicator of your financial responsibility. The types of assets and liabilities you accumulate show long- and short-term spending behaviors.
So, consider the picture your PFS may paint. A positive picture is one where your PFS aligns with your past and current job positions and reflects a history of responsibility when it comes to managing your money.
Conditions: What do you need to succeed?
Lenders examine conditions for both the current state of the business and expected industry trajectory. This gives a lender perspective on what the loan will be used for, what will be taking place, the status of the business and the status of the profession and marketplace economy. Lenders like to see positive trends and strong business plans with a thoughtful plan for growth and continuity.
For example, common reasons for automotive care expansion financing include: construction, renovations, acquisitions, equipment purchases, working capital and refinancing. A lender would look at these factors to ensure the money being borrowed is appropriate and that market conditions are strong enough for the business to make enough money to cover costs and pay back the loan.
Collateral: What if you don’t pay it back?
A lender is not only interested in what happens if everything goes well, but they also have to consider the worst-case scenario — a defaulted loan.
Collateral helps solve this problem by acting as a secondary source of repayment. A lender will consider the value of the business assets as well as personal assets of the guarantors as potential collateral.
Collateral also acts as a psychological motivator, as people tend to get more resourceful when they have something to lose. Collateral is an important consideration, but its significance varies depending on the type of loan. A lender will be able to explain the types of collateral needed for your loan.
Cash flow: How will you pay it back?
Ultimately to approve the loan, the lender wants to get comfortable with how your auto care business will be able to repay the loan successfully. In business financing, there is a different paradigm in evaluating repayment ability than in consumer financing.
With business loans, repayment ability comes from the business’s cash flow. This is the amount of cash available after ordinary business expenses have been paid. The business should have sufficient income to support its business expenses and debts comfortably, including principals’ salaries that support personal expenses and debts. Cash flow management is an imperative skill for any small business owner.
Current market conditions and available financing options are creating an ideal time to pursue an expansion in the automotive care industry. Remember, these five components — character, capital, conditions, collateral and cash flow — are the pillars of typical credit analysis. These five areas help the lender evaluate the auto care business owner and the business to understand better the risk of making the loan and the likelihood that the loan will be successfully repaid. Hopefully, you now have a better understanding of what is needed and how to prepare for the expansion loan application process.