Business Loans For Auto Repair Shops
Cars may be starting to look more like computers, but they still won’t stay on the road long without the help of a trusty local auto repair shop.
If you’re in the auto repair business, you know that the volume of work — as well as the types of problems you’ll encounter — can vary greatly by the day. Even the most prepared shop may run into emergencies where funds aren’t readily available. When that happens, you may need a quick loan to keep things running smoothly. Or you may just need a traditional loan for a large, planned expense.
No matter your need, navigating through the vast market of traditional and alternative lenders can be daunting. Read on and we’ll walk you through how to get business loans for auto repair shops.
|Financing Need||Best Loan Type||Recommended Lender|
|Purchasing Equipment||Equipment Financing||Lendio|
|Supplies and Inventory||Short-term Loans||PayPal LoanBuilder|
|Working Capital||Lines of Credit||OnDeck|
|Marketing and Advertising||Business Credit Card||Chase Ink Business Preferred|
|Business Startup/Expansion/Remodeling||SBA Loan||SmartBiz|
Table of Contents
Loan For Equipment Purchasing
We’re not talking parts for your customers’ vehicles. A loan of this type can help you buy the bigger stuff you’ll be keeping in-house and using regularly — things like air compressors, vehicles lifts, brake lathes, and engine hoists.
In most cases, you won’t be purchasing heavy equipment on the fly; you’ll purchase it when you’re first opening your shop, or you’ll have a general idea of when an old piece of equipment needs to be replaced. In these cases, you’re probably less concerned about speed than you are about getting a good deal that fits the needs of your shop.
If you prefer to own your equipment, you may want to look into equipment loans. These resemble traditional installment loans in many ways: they’ll accrue interest over time, you’ll make monthly payments, etc. But these loans have a built-in advantage; the equipment you’re purchasing with them can serve as collateral. Collateral is an asset the borrower puts up as security when they take on debt. Secured loans generally have better rates and terms than comparable unsecured loans.
Traditionally, equipment loans cover around 85 percent of the equipment’s costs, but some lenders may cover the entire cost. In most cases, this does not include transportation costs.
These are not loans strictly speaking, but they are a popular way to finance heavy equipment. (Read more about equipment loans vs equipment leases.) Leases fall into two broad categories.
Capital leases are essentially an alternative way to buy your equipment. In most cases, you are considered the owner of the equipment under this type of lease. You’ll make monthly payments for the length of the lease, at the end of which you’ll pay a small residual (sometimes as low as $1) to close your account.
Operating leases are closer to the traditional definition of a lease. In this case, you’ll effectively “rent” the equipment over the course of the lease, making monthly payments. At the end, however, you’ll have the option to return the equipment or buy it at fair market value. This type of lease is useful for equipment that becomes obsolete quickly.
Recommended Option: Lendio
If you’re not working with a captive lessor or your preferred bank, it’s nice to be able to hit a bunch of potential equipment financers with one easy application. Lendio is a great way to do just that. Within 72 hours of your application, you should have multiple equipment financing offers on your screen. Funds are typically dispensed within a week of accepting an offer.
Loans For Supplies & Inventory
You never want to be in a position where your auto body shop is suffering from too much business. Whether you’re facing a very high volume of customers, or an unusual number of customers all presenting with similar car problems, you may find your supplies depleted more quickly than you can collect on your invoices.
When this happens, you may want to consider a short-term loan.
Fast, streamlined, and (relatively) expensive, short-term loans are handy when you need a loan fast and want to pay it back quickly.
Short-term loans can usually get money into your hands within a day or two, which makes them a good choice for unplanned emergency financing. Rather than charge interest, short-term loans use a flat fee formula, or factor rate, to calculate the amount of money you’ll owe. For example, if you take out $10,000 at a 1.2 factor rate, you’ll need to pay back $12,000.
Short-term loans usually have terms shorter than a year, so their repayment schedule is much faster than those of medium and long-term loans. If you take out a short-term loan, you’ll be making weekly or daily payments, which, in most cases, will be automatically deducted from your business account.
Recommended Options: PayPal LoanBuilder
Because short-term loans are so fast and volatile, you’ll want some flexibility over the terms of your loan. PayPal’s LoanBuilder product is built around the idea of customization. You’ll be able to customize many elements of your loan to fit your need. Better yet, their rates are reasonable (as short-term loans go).
Loans For Working Capital
Working capital is a wonky term for the money you have on hand for daily operational expenses. If everything’s going well, you probably don’t have to give it a lot of thought. But if emergency expenses have tapped into your reserves, you may find yourself unable to pay some small, recurring expense.
Working capital loans tend to be some of the most flexible when it comes to what you can spend your money on.
Lines Of Credit
Since working capital expenses come in many different forms and amounts, it’s nice to have a flexible financial cushion to fall back on. Rather than giving you a lump sum, a business line of credit pre-approves you for a certain amount of money, called your credit limit. While your account is active, you can draw on your credit line as much or as little as you want so long as the total amount you’ve borrowed doesn’t exceed your credit limit.
In most cases, you’ll only pay interest on the amount of money you’ve borrowed, though some lenders do charge administrative and access fees. Revolving credit lines let you reuse credit after you pay off your balance, similar to a credit card. Non-revolving lines of credit don’t have this feature and tend to be extended for specific expenses where the final cost is uncertain.
OnDeck offers quick and easy access to lines of credit. Depending on your revenue and other qualifications, you can get a credit limit between $6K and $100K with no draw fee. Just be aware that these are short-term credit lines lasting only about 6 months, but considering the approval process only takes a few days, you don’t need to plan too far ahead. The major downside is the $20/mo administrative fee, but OnDeck will waive that if you withdraw at least $5,000 within the first five days of opening your account.
Loans For Marketing & Advertising
Word of mouth may be the ideal form of advertising, but sometimes you need to reach outside of your normal sphere of influence to draw in new customers. Or maybe you’re a new business that needs to establish a customer base.
Designing and running an effective advertising campaign is outside of the purview of this article, but most of the good ones require spending some money.
Business Credit Cards
Surprised? Business credit cards are often suggested as a way to smooth out your business’s cash flow, but they also have some other features that make them ideal for certain types of expenses. Namely, rewards programs that allow you to get a return on specific expenses — expenses like advertising.
Just be sure to pay off your balance within your business credit card’s grace period, or the cost in interest will exceed your rewards savings.
Recommended Option: Chase Ink Business Preferred
Chase’s Ink Business Preferred credit card is at the top of most business credit card lists, and for a good reason. It offers one of the most lucrative rewards programs out there. Advertising expenses spent on social media sites and search engines earn triple points (as do travel, shipping, and telecom expenses). Those points can be redeemed on travel, on Amazon, as gift cards, statement credit, or cash back.
The card has an annual fee of $95 and an APR between 17.99% and 22.99%.
Chase Ink Business Preferred
18.24% - 23.24%, Variable
Loans For Business Startups, Remodeling, Or Expansion
Like equipment purchases, business remodeling and expansion (or starting your business up in the first place) falls under the category of “large, planned expenses.” One of the bigger and more daunting business expenses occurs when you’ve outgrown your space.
If you need additional bays, or even a larger overflow lot, you’ll want a loan that can offer you a large sum of money at a low interest rate. Your best bet is probably an SBA loan.
The Small Business Administration (SBA) is a government agency tasked with advising and assisting small businesses. The SBA doesn’t usually directly lend to businesses. Instead, it guarantees a portion of an SBA-approved lender’s loan. This guarantee allows you to access better rates and terms than your credit rating or business size might otherwise allow.
|SBA 7(a) Loans||SBA 504 Loans|
The 7(a) offers the most flexibility in terms of what it can be used for. This can include anything from equipment to non-investment real estate, leasehold improvements, business acquisition, or start-up costs. Depending on your needs, however, you may want to look into the SBA 504 loan, which has a higher maximum borrowing amount. These loans can be used to purchase land and buildings, buy long-term equipment, or make improvements to your lot.
Be prepared to play the long game with an SBA loan, though. They take far longer to close than the other financial products we’ve discussed.
Recommended Option: SmartBiz
You have a lot of choices when it comes to SBA-approved lenders, which likely includes your preferred local bank or credit union. You don’t need our advice for that, right?
But if you need help navigating the complexity of the SBA application process and don’t have a lender specifically in mind, you may want to give SmartBiz a look. SmartBiz can’t do a full end-run around the massive amounts of paperwork required to get an SBA loan, but what they can do is keep the process as organized and streamlined as possible on your behalf. Most importantly, they’ll match you with a lender that fits your needs.
What To Consider When Choosing A Lender
If you didn’t see a lender you liked above, you can always hunt for one on your own. Though it can be a time-intensive task, there are some ways to strategically narrow your search.
Why Do I Need A Loan?
Lenders serve a variety of needs, but not every lender can serve yours. Even if you don’t like the lenders we recommended, the type of financial products discussed above can be a guide for finding a lender.
A slow, traditional lender may not be able to help you get emergency funds, while a fast, expensive alternative lender may be a poor choice for financing an expensive renovation.
Am I Qualified?
One of the easiest ways to rule out a lender is to figure out if they’ll rule you out.
Most lenders have minimum qualifications for borrowers. The most common ones are:
- Time In business: Lenders want to know you’ll be around long enough to pay them back.
- Credit Rating: Some lenders use credit rating as a line in the sand, while others use it mainly to help determine rates.
- Revenue: Lenders want to make sure you can pay off your debt. Sometimes this number is an absolute minimum (like $100,000/yr); other times it’s relative to the amount of money you want to borrow ($1.50 for every $1).
Additional factors may include the number of other loans you currently have, the industry or state you’re in, and whether you’ve had any recent bankruptcies.
Do The Terms & Rates Meet My Needs?
While it might seem that lenders have the upper hand, remember that you are ultimately the one who gets to decide whether or not the transaction happens.
If a lender charges usurious rates, if they pile on unnecessary fees, or if they demand repayment on a schedule you can’t accommodate, you’ll probably want to keep looking.
Try to get a sense of whether your prospective lender will be a flexible partner or a predatory animal looking to cash-in on any small mistake you make. Do they offer early payment incentives? Incentives for repeat business? Is customer service available and helpful?
When it comes to keeping your auto repair shop’s engines purring, you have a ton of potential financial solutions at your disposal. With a little patience, you can find a deal that fits your needs.