Owning a car wash can be extremely lucrative. With the multi-billion dollar industry expected to grow steadily for the foreseeable future, this means there are plenty of opportunities for new investors to get involved.
The first step to becoming a car wash owner involves securing funding. In a lot of cases, this means applying for a Small Business Administration (SBA) loan to cover the costs involved.
Keep reading to see how an SBA loan can help investors get involved in the industry by owning their own car wash
SBA vs Other Funding
There are multiple options prospective owners have to finance a car wash. Going through these choices can often be intimidating, especially if they are new to the concepts and institutions involved.
For those looking to buy a car wash, there are typically three sources of funding available:
- Independent funding: those with the means can use their own cash to fund a car wash operation. This is the best option given that owners will not take on any liabilities. However, considering car washes can cost upwards of $100,000 and more this is not always possible.
- Bank loans/financing: those with a proven background in business might be able to secure a bank loan to partially fund the purchase. Most banks will only offer 65-70% of the funding, however, with stringent requirements to be approved.
- SBA Loan: SBA loans are business loans backed by the Small Business Administration. The SBA is an independent government agency that aims to support economic growth through investment in prospective businesses. The SBA does not issue the loans themselves but guarantees as much as 85% of the loan through approved lenders such as banks.
Types of SBA Loan For Car Wash Business
There are three types of SBA loans that those interested in a car wash business should consider.
7(a) loans
A 7(a) SBA loan is a general business loan that new investors can apply for. Applicants can secure up to $5 million.
The 7(a) loan is ideal for those looking to purchase an existing car wash business. Applying for a 7(a) loan is faster and allows investing in working capital to buy stock, supplies, and inventory or plug holes in cash flow.
These loans involve a variable interest rate which can mean during times of inflation payments could increase.
Loans for working capital need to be paid back over 10 years and 25 years for investment in real estate.
Down payments vary between lenders and collateral is required for loans over $25,000. You must also have invested your own money into the business and applied for finance through other financial resources.
504 loans
A 504 SBA loan can also secure up to $5 million in funding for a car wash but requires meeting job retention, creation, and public policy goals outlined by the SBA. The application is slower than applying for a 7(a) loan and is considered more involved.
This type of loan is more suitable for building a car wash up from scratch or expanding on an existing venture. Applicants must have a net worth of less than $15 million and an average income that does not exceed $5 million.
504 loans can be used to lease, improve, and purchase real estate, property, and equipment.
Loans can be paid back over 10, 20, or 25-year periods and are offered at a fixed interest rate linked to U.S. Treasury bonds.
Investors are required to submit a 10% downpayment or more depending on the loan use. In the case of a 504 loan, the car wash business itself will act as collateral.
Green 504 Loans
As 504 loans are secured against a single project, car wash owners may be able to secure a second SBA loan that meets the Green Loan Program requirements. Green loans are offered at a much more favorable rate than commercial loans or even a standard 7(a) or 504 SBA loan.
Because car washes use considerably less water than DIY car washing, a Green 504 loan can be secured for projects that use 10% less energy than existing solutions.
This includes buildings and other facility improvements such as water management changes, more efficient machinery, renewable energy installations such as solar panels, and more property rebuilds to improve energy efficiency.
Benefits of an SBA loan to fund a car wash
- Low-interest rates
- Up to $5 million in funding
- Smaller downpayments
- Generous repayment terms
- Less stringent than bank loans
Car washes can take time to recoup initial expenditure and need adequate capital for daily operation. An SBA loan allows for this and other purposes such as facility improvements that car wash investors would need.
They are also much more attractive for investors than a bank loan as they require smaller down payments. A 504 loan is also offered at a fixed rate and both types of SBA loans are spread over-generous repayment periods. This means less concern if a car wash takes a few years to make a significant income.
Applying for an SBA Loan
Applying for an SBA loan of any type will require a personal financial statement. This can be presented in the form of a document or a spreadsheet that details the total assets and liabilities of the relevant party.
You can find a list of SBA lenders on the official website. Prospective car wash owners should always apply to several lenders to receive the best offer possible. Be wary that real lenders will apply for retainers from the SBA directly.
If the applicant already owns an existing business, they will also need to provide three years of existing tax returns to the lender, as well as financial documents such as forecasts, credit history, and outstanding debt.
Applicants will want to ensure their credit core is in good standing too. A score of 700 or higher is recommended. Applicants will also need to submit an accompanying resume that details their experience, business background, and interest in the car wash industry.
There should also be provided business licenses relevant to the state of operation necessary for running a car wash.
Lastly, a sound business plan is also needed including market research, competitor analysis, financial projections, and expected use of the SBA loan.
Conclusion
SBA loans are a safe way for investors to secure funding for improvements, construction, and more. They are government-backed and typically easier to secure than bank loans. For car washes, Green 504 SBA loans offer the possibility of securing even more funding through sustainable investments.
