How To Start & Finance An Auto Body Shop Business
You’re an experienced mechanic that’s been working for someone else for your entire career. You’re ready to spread your wings and fly (or drive) right to your own auto body shop. Sound like you? If you’ve been bitten by the entrepreneurial bug, then maybe it’s time to set out on your own.
Even if you’re the best at what you do, venturing out into the small business world can be scary. If you’re an employee at a collision center, you probably feel like you have some stability. Why risk a “sure thing” to start your own shop, especially if you don’t have any previous experience running your own business?
Starting your own business is risky and it takes hard work (and a lot of it). But opening your own auto collision shop can be an extremely lucrative venture. The automotive collision repair market brings in billions of dollars in revenue each year, and studies show that revenue will only continue to grow in the years ahead. Isn’t it time you got your share?
If you’re thinking about starting your own auto body shop, this guide is for you. We’ll go through all of the steps of starting your own business, from creating a business plan to finding the right lender. We’ll review potential costs, hiring employees, and other critical steps to building a successful business. If you’re ready to take the next step into entrepreneurship, read on to find out how to get started.
Table of Contents
Create A Business Plan
You’ve made up your mind: you’re ready to open your own collision or auto body center and you have an idea of how to do it. That’s good enough, right? Actually, you need to be more prepared before you even begin to move on to other steps in building your business. The best way to be prepared? Create a detailed business plan.
Let’s illustrate the importance of a business plan with an example. You’re going on a hike in the woods. There are lots of paths to choose from. Some of these paths may bring you out of the woods — your end goal — but there may be additional challenges along the way, like steep terrain. Some paths may be wrong altogether … and you’ll have to backtrack to right your course. In short, you can enter the woods without a map and risk getting lost. Or you can get a map ahead of time, plot out your course, and set out only after you’ve planned your route and know what to expect.
A business plan works in the same way. A good business plan outlines how to get from your starting point (launching your business) to your goal. Every entrepreneur has a different goal. Maybe yours is to run a successful local business that sets your family up for life. Maybe you have bigger goals — starting your own chain of auto body shops, for example. The most important thing is to set a concrete goal and create a map of how to get there.
Not only will a business plan keep you on the right track, but you must have a plan to present to investors or lenders when you’re seeking capital.
New to writing a business plan? At a minimum, here’s what you should include:
- Executive Summary: A concise summary detailing each section of your business plan
- Overview: A description of your business, including the legal structure, location, and type of business
- Market Analysis: An overview of your market and a definition of your target market
- Competitive Analysis: Strength and weaknesses of your competition
- Management Team: The members of your management team and their responsibilities within your organization
- Financial Projections: A forecast of the financial future of your business
Find A Location
As realtors say, “Location, location, location!” As you plan your own body shop, location is key, but there are a few other considerations to weigh before you put your name on that lease or mortgage.
You want to make sure that you purchase or lease the best location you can afford. Sure, that commercial property on the outskirts of town is much cheaper, but your customers have to be able to find you. Find a property that’s convenient for your customers and is located in a high-traffic area or at least off of a major road.
Another consideration is whether you’re going to buy an existing business or start from scratch. Buying an existing business comes with definite perks, including an established clientele, equipment, and even licenses and permits. However, there are a few drawbacks. This is one of the most expensive options, especially if the business is successful. You may also have to put additional costs into the business for renovations, like replacing outdated equipment.
If you start from scratch, you’ll rack up costs with the price of equipment, licenses, and building renovations.
Unsure of which to choose? Build a business plan looking at both options, calculate costs, and determine which makes the most sense financially, both in the short- and long-term.
Another option to consider is opening a franchise. With a franchise, you have less flexibility in terms of designing your brand and shop. However, you’ll have a working business model that takes a lot of the guesswork out of owning your own business.
Register Your Business
Before you open your auto body shop to the public, you need to register your business. Not only will you be seen as a legitimate business by your customers, but registering is also required when you want to hire employees, protect your assets, or seek capital from investors.
To register your business, you need to first determine what form of business entity to establish. There are several structures to choose from, including:
A sole proprietorship is the simplest business structure. This is best for businesses with just one owner. Sole proprietors can file their business profits and losses on their personal income tax returns. No paperwork is required to register as a sole proprietorship. However, this structure isn’t without its drawbacks. Raising money as a sole proprietorship is difficult, and you are personally responsible for the liabilities of your business.
A partnership is a good choice for companies that will be owned and operated by two or more people. There are several different partnership types to consider:
- General Partnership: Doesn’t require filing with the state and has few requirements
- Limited Partnership (LP): One partner has unlimited liability and the others have limited liability. The personal assets of the limited partners can’t be used to satisfy the debts and liabilities of the business.
- Limited Liability Partnership (LLP): Used by professional service businesses, this type of partnership offers personal asset protection for all partners.
Limited Liability Company (LLC)
An LLC has several benefits for business owners. With an LLC, a business owner will receive liability protection without paying the high tax requirements of corporations.
This is the most complex and expensive business structure. More regulations and tax requirements are put in place for corporations. This structure is best for businesses that plan to raise capital through the sale of stock.
The type of structure you select for your business varies by the number of owners that you have and the future plans for your business. In most cases, however, single owners of auto body shops lean toward LLCs, while businesses with more than one partner select the partnership business structure. Before choosing your business structure, talk to your accountant and/or lawyer to find out which makes the most sense for your business.
Once you’ve determined your business structure, you’ll need to select a name for your business. Choose a name that reflects your brand and the services you offer. You also want to choose something that’s catchy and/or easy for customers to remember.
Your business will need to be registered with city, state, and federal governments. You’ll need to sign up for an employer ID number through the Internal Revenue Service if you plan to hire employees. To learn about the specific business license and permit requirements in your area, contact your local Chamber of Commerce, Department of Revenue, or Small Business Administration office to learn more.
Calculate Your Startup Costs
Every new business has one thing in common: the need for capital. In order to start your own collision center, you need money. The big question, though, is how much do you need?
One of the first steps to starting your own business is to calculate your startup costs. In order to do that, begin by making a list of everything you need for your business.
One of the biggest expenses for your new business will be equipment and tools. While your list may look a little different, some of the most common equipment and tools in this industry include:
- Hydraulic Lifts
- Hand Tools
- Pneumatic Tools (Air Tools)
- Air Compressors
- Diagnostic Machines
- Wheel Balancers
- Paint Guns
Additional startup costs to consider include your business licenses and certifications, insurance, hiring employees, and shop rental or mortgage fees. You should expect to spend at least $50,000 to get your shop up and running. However, as you make a list of your costs and research pricing, this number could potentially rise.
Before you seek funding for your business, a good rule of thumb is to always overestimate your costs by about 30 percent. For example, if you calculate that your expenses will be $200,000, plan to seek $260,000 in funding. In other words, always plan for the unexpected.
Now that you’ve calculated your startup costs, it’s time to figure out how to pay for it all. If your bank account looks a little low, don’t worry. Most entrepreneurs don’t have the funds to cover these costs out-of-pocket. Instead, they turn to a lender to get the financing they need. Consider these loans and other funding options when you need capital to start your new body shop.
And if you can’t find the option you’re looking for here? Check out more recommendations in the post, Business Loans For Auto Repair Shops.
If you have money in a savings account, consider using these funds to pay your startup costs. There are several benefits to using your own money. You won’t be indebted to a lender, so there are no monthly or weekly payments to worry about. You also won’t have to pay interest or fees. On the downside, though, if your business fails, you risk losing your savings.
Friends & Family
If you have a friend or family member with extra money to invest, consider pitching your business to them. Present your business plan and tell them why they should invest in you.
There are two ways to go about this. You can stick with traditional debt financing. This means that you would take a loan from your friend, family member, or colleague and pay it back over a set period of time, along with interest and fees.
You may also consider equity financing. Instead of taking out a loan, you’d receive capital in exchange for ownership in your business. The investor would get their money back over time through a share of your profits. While the risk falls on the investor and you wouldn’t have to begin paying back money immediately, you would have to share your profits and lose some control over your business.
Unsure of which option is right for you? Learn more about debt financing vs. equity financing.
Personal Loans For Business
One of the biggest challenges a new business owner faces is meeting the requirements for a business loan. Many lenders – especially the ones with the lowest rates and best terms – want to work with established businesses with high revenues and solid business and personal credit histories. If you haven’t even opened your doors to a single customer, meeting these requirements is impossible.
However, if you have a high personal credit score, you can take out a personal loan to use for your startup costs. Time in business, annual revenue, and business credit history aren’t required to qualify for personal loans. Instead, you use your personal credit score and your own income to qualify.
If you choose this option, it’s important to make sure that your lender doesn’t have any restrictions prohibiting you from using funds to pay startup costs or other business expenses. Most personal loans don’t have restrictions and can be used to purchase equipment, hire employees, pay operating costs, or use as working capital.
Recommended Option: Lending Club Personal Loans
Lending Club is a peer-to-peer lender that provides personal loans up to $40,000 to qualified borrowers. Repayment terms are 3 years or 5 years with APRs starting at 6.95% for the most creditworthy applicants. APRs for less creditworthy borrowers go up to 35.89%.
To qualify for a Lending Club personal loan, you must meet these minimum requirements:
- Be at least 18 years old
- Be a U.S. citizen, permanent resident, or live in the U.S. on a long-term visa
- Have a verifiable bank account
- Have a personal credit score of at least 600
In some cases, Lending Club may recommend adding a co-borrower to increase your chances for approval. If you meet all requirements, you can get funded in as little as 7 days.
As you grow a more established business, you can later take advantage of Lending Club’s business loans. Lending Club offers up to $300,000 in business funding with terms of up to 5 years and fixed monthly payments.
Lines Of Credit
A line of credit is a form of financing you should consider if you want instant access to cash without having to wait for lender approvals. Once you’ve been approved for a line of credit, you can make draws as needed to inject cash into your business.
Here’s how it works. You apply for a line of credit with a lender. The lender looks at a number of factors, such as your personal credit score or business performance, when determining whether to approve your application. These factors will also be considered when setting your credit limit.
Once you’ve been approved, you can initiate as many draws as you’d like from your line of credit up to and including the credit limit. Funds are typically transferred to your bank account immediately, and you can access the money in 1 to 3 business days with most lenders.
As you repay the borrowed funds plus fees and interest charged by the lender, the funds replenish and become available to use again.
Lines of credit are useful for unexpected expenses, emergencies, or to fill revenue gaps. Having a line of credit allows you to access money when you need it without having to go through the application and approval process over and over again.
Recommended Option: Fundbox
Fundbox offers lines of credit up to $100,000 for qualified businesses. The lender charges a one-time fee for each draw that starts at just 4.66% of the draw amount. Terms of 12 weeks or 24 weeks are available, and automatic payments are drawn from your bank account each week. You can save by paying your loan off early, as Fundbox will waive all remaining fees.
There are two ways to qualify for a Fundbox line of credit. The first is by linking your business bank account or submitting bank statements. These will be used by the lender to evaluate the performance of your business. If you have unpaid accounts receivables, you can use these to qualify. All you have to do is link your supported accounting software.
Minimum requirements to receive a Fundbox line of credit are:
- Business checking account
- U.S.-based business
- At least $50,000 in annual revenue
- At least 3 months of transactions in a business bank account OR at least 2 months of activity in accounting software
Once you’ve filled out Fundbox’s quick application and have linked your accounts or submitted documentation, you can be approved in just minutes. Then, you can instantly put your line of credit to work for your business.
Business Credit Cards
Another option for fast funding is a business credit card. Once you’ve been approved for a business credit card, you can use it any time. You can use your card as often as you wish provided you stay within your set credit limit.
Business credit cards can be used anywhere credit cards are accepted. You can make purchases online or in-person. You can also use your card for recurring payments, such as utility bills, which is even smarter when you use a rewards card that gives cash back or other perks.
Like lines of credit, business credit cards are revolving forms of credit. This means that as you pay down your principal balance and interest, funds will become available to use again. Once you’re approved for a business credit card, your card is ready to use immediately whenever you need it. This makes it a great payment option for emergency expenses, purchasing supplies or inventory, or for paying recurring expenses.
Recommended Option: Chase Ink Preferred
Chase Ink Business Preferred Annual Fee: $95 Purchase APR: 18.24% - 23.24%, Variable
Chase Ink Business Preferred
18.24% - 23.24%, Variable
If you have excellent credit, consider applying for the Chase Ink Preferred card. With this rewards card, you can receive 3 points for every dollar spent on combined purchases in travel, shipping, cable, internet, phone services, and advertising. Even though earning three points on these purchases is capped at $150,000 per year, you can still earn one point per dollar spent with no limitations on all purchases.
If you’re approved for the Chase Ink Preferred card and spend $5,000 within 3 months of opening your account, you’ll receive an additional 80,000 bonus points. Points can be redeemed for rewards including vacation packages, gift cards, Amazon purchases, and cash back.
This credit card comes with a variable APR of 18.24% to 23.24%. A $95 annual membership fee is required.
To qualify for Chase Ink Business Preferred, you must have good to excellent personal credit.
Rollovers As Business Startups (ROBS)
Withdrawing retirement funds may be tempting, but who wants to pay penalties and taxes for early withdrawal? Luckily, there’s a way that you can leverage these funds to put capital into your new business. This method is known as rollovers as business startups, or ROBS.
How does ROBS work? The first step is to create a C-corporation. Then, a new retirement plan is created for the C-corp. Next, the funds from your existing retirement plan are rolled over into the new plan. These funds are used to purchase stock in the new C-corp, giving you access to the capital you need to get your business running.
Sound too complicated for you? Then consider working with a ROBS provider. A ROBS provider will get everything set up for you legally and ensure you maintain compliance. In exchange, you’ll pay a one-time setup fee and a monthly maintenance fee with most ROBS providers.
When you use this type of financing to fuel your business, you don’t have to worry about repaying a lender. After all, you’re using your own funds. However, be aware that if your business is unsuccessful, you risk losing your retirement funds.
Recommended Option: Guidant Financial
Guidant Financial is a ROBS provider that can help you leverage your retirement funds. All you need is a qualifying retirement or pension account. Qualifying accounts include:
- Traditional IRA
Qualifying accounts must have a minimum of $50,000. You must also be an employee of the business.
By working with Guidant Financial, you can receive funds in as little as 3 weeks. The setup fee is $4,995. You must also pay a Plan Administration fee of $139 per month.
Unsure if a ROBS plan is right for you? Don’t worry — Guidant Financial offers other business financing options including:
If you’re looking for a way to pay your vendors that frees up some of your cash flow, purchase financing might be the solution you’re looking for. With purchase financing, your vendor gets paid immediately for your purchases – think tools, fluids, and other critical shop supplies. In the meantime, you’ll get additional time to pay. Instead of paying off the full balance of your purchase up front, you’ll be able to split it into more affordable regular payments.
Purchase financing gives you more control over your cash flow, freeing up funds and allowing you to pay back on a schedule that works best for your business. Of course, like with other financing, you do have to pay interest and fees for this service.
Recommended Option: Behalf
Behalf offers purchase financing of $300 up to $50,000. You’ll receive up to 6 months to repay the lender and can choose between weekly or monthly payments.
Monthly fees for the service start at 1% and are based on creditworthiness. There are no additional fees for using Behalf’s financing.
There are no time in business or revenue requirements to qualify. However, Behalf performs a hard pull on your credit, considers business credit history, and looks at other business performance factors to determine if you are eligible for financing.
Choose Business Software
To keep operations flowing smoothly, you need to pick the right business software for your repair shop. Business software helps you more efficiently run your business, from keeping up with customers to tracking your finances for tax purposes.
Accounting software allows you to perform various accounting functions so that you can track and record all financial transactions. With accounting software, you can track accounts receivable and accounts payable. Most modern accounting software also offers additional tools including bill payment, payroll, and invoicing. You can purchase accounting software or pay a fee to subscribe to an online service.
Accounting software not only allows you to keep track of your finances at any time, but it also can be used to run financial reports that may be required to receive financing. These reports will also serve you well when it comes time to do your taxes.
No experience in accounting? Don’t worry — we have you covered. Check out our free eBook “The Beginner’s Guide to Accounting” that breaks complicated accounting concepts into ones that are easy to understand.
Auto Repair Invoice Software
Accounting software often has a feature that allows you to create and send invoices. However, you might want to invest in specialty software for auto body repair shops.
Auto repair invoice software includes a variety of tools that can be used to track service requests, create invoices and estimates, track leads, and manage inventory and orders.
Payment Processing Software
No longer do we live in a cash-only world. Now, customers almost always make their purchases using debit cards, credit cards, and even smartphones.
In order to be able to accept these forms of payment, you’re going to need a payment processing service. The payment processor serves as the communicator between your customer’s bank and your own bank, allowing you to process credit, debit, and other forms of payment.
For your auto collision business, you might want to consider getting a point-of-sale system. With POS software, you’ll be able to process credit cards, scan barcodes, print receipts, track inventory, run reports, and perform other functions. For a fee, your business can receive the software and hardware needed to best serve your customers.
Your website should be a reflection of your brand, so make sure to choose templates, photos, and colors that best represent your shop. Your domain name should also represent your brand, so make sure it’s easy to remember and avoid numbers, symbols, or very long URLs.
Your website shouldn’t be overly complicated, and it should be easy to navigate. You don’t have to load down your site with lots of information. Start off by including key info such as hours of operation, services performed, and contact information. Also make sure to highlight any features that make your shop stand out, such as certifications, free estimates, or rental car/shuttle services offered to your customers. In the future, you can add additional features such as a signup option for email newsletters or online scheduling.
This is all just the tip of the iceberg. Learn more about creating and maintaining an online web presence for your business.
Advertise Your Business
Your website and social media profiles are a great way to start advertising your business, but in order to grow and scale, you can’t stop there. You need to plan a marketing and advertising campaign to get the word out about your business.
Consider paying for social media ads or pay-per-click ads on search engines, or sign up with Yelp For Business. These options can be affordable for new businesses and are easy to set up.
You can also look beyond the internet to advertise your business. Consider placing flyers or door hangers in the area around your business to bring in new customers. Before you take this route, though, make sure to understand the local laws in your area regarding the posting of flyers on public and private property.
As your business grows and becomes more successful, you can explore options including radio and TV advertisements and mailers. However, these ads are typically quite expensive, so hold off on these options until your business is bringing in steady revenue.
One of the most important things to remember here is that word-of-mouth advertising is one of the best forms of advertising. If you perform a great service, your customers will tell others about your business. Keep customer satisfaction high to increase those referrals and draw in more revenue for your body shop.
While you may be itching to get your auto body shop off the ground immediately, a business isn’t born overnight. Take the time to plan out your business, and you’ll increase your chances for success. The hard work doesn’t stop after your grand opening, either. You’ll need to continue working hard to bring in customers, increase your revenue, and become a successful entrepreneur.