As per the latest estimates, the global automotive repair and maintenance market is expected to grow at a compounded annual rate of 11.4% between 2021 and 2022, here are some auto repair shop loan options.
One of the biggest growth drivers for the auto repair industry is the number of car sales per year. As these numbers continue to climb, so does the need for auto repair shops.
This is exactly why many people want to set up their own auto repair shop. However, one of the biggest challenges in setting up an auto repair shop is access to capital.
Initiating an auto repair business requires a hefty cost outlay; depending on the scale of the business. But the good news?
Auto repair shop owners can realize their dream of a successful and profitable auto repair shop through different financing options. Today, we explore 6 of the best auto repair shop loans and financing facilities that you can benefit from!
What Are Auto Repair Shop Loans?
But wait…first we need to get acquainted with the basics! Understanding what auto repair business loans are and how they function, is the first step on the road to success.
Auto repair shop loans are lines of credit extended to auto repair shop owners to fulfill their expenses and expand the business. With the right loans and financing options, you can solve your financial challenges to run your auto repair business.
So whether you’re a new player in the automotive industry or an established business looking to expand, a business loan can meet your objectives.
Usually, a traditional and long-term bank loan is the most desired financing option. Unfortunately, the approval rates of large banks for small businesses are quite low. But small banks are more flexible in offering small business loans.
There are many reasons why auto repair shop financing is required including the following:
The Cost of Purchasing Equipment
When we are talking about setting up an auto repair business, you will need to purchase a lot of equipment and tools. From engine hoists, and vehicle lifts to air compressors, the list is a long one!
And the worst part? Suppliers don’t care if you are a small business – you’ll still pay the market rates which definitely are not easy on the pocket.
Plus, if you plan on staying ahead of the competition you will have to do more than just purchase essential equipment for your auto repair business.
Investing in smart technology has now become a necessity for auto repair shops, to remain competitive and profitable.
The Cost of Purchasing Auto Repair Shop Insurance
Setting up auto repair shops can expose you to many different risks. To insulate your auto repair shop from damage and losses, it’s important to purchase the necessary auto repair shop insurance.
However, considering the different types of liability and coverage that you will need to purchase, the total cost will be high. And skipping insurance is certainly not an option!
That means that you might need to get a business loan or some other form of auto repair shop financing. It will cover the cost of your insurance and eventually, help you from overcharging your customers to recover the money paid in insurance.
The Cost of Renting A Garage or Space
What’s the first thing you need for starting a mechanic business? A space! And if you want to initiate your business or repair shop at a premium location, you will certainly need a business loan or some other type of financing.
Getting a prime location with a lot of hustle and bustle and footfall is not going to come cheap. But in the long run, it’s going to prove to be an important factor in determining the profitability of your business.
Additionally, you might also want to choose a shop or garage that has ample space for your office, a repair area, and parking space for your customers. And you already know what more space means….high rent!
At the end of the day, starting or expanding a business will involve a lot of expenses and your eventual bill is going to be a long one. Getting auto repair business loans or some form of financing becomes quite important!
The 6 Types of Auto Repair Shop Loans and Financing Options
The best part about financing and auto repair shop business loans is that you have 6 different options to choose from! Each type of business loan or financing type caters to different business scales and needs.
Here are the 6 main types of auto repair business loans and financing options that you can benefit from:
Merchant Cash Advance
If you are looking for a bit of working capital to expand the scale of your shop but don’t want to take a business loan, getting a merchant cash advance can be ideal.
A merchant cash advance is a type of business financing that allows you to repay the amount through a percentage of your daily sales. This type of business line financing is most suitable for companies that have a huge amount of credit card sales.
It can be set up as daily or weekly financing, depending upon the requirements of auto repair businesses.
It is also a helpful tactic to improve the cash flow of small auto repair businesses which don’t qualify for other types of financing. It’s quick but also one of the most expensive types of financing options out there.
Equipment Financing
We already talked about how one chunk of your investment is straight away going to be spent on purchasing equipment. Equipment financing allows you to purchase specialized equipment for any of your business lines.
Using equipment financing, you can secure a loan using your purchase. This also allows you to benefit from better interest rates. You can use this option to finance any kind of equipment; from getting point of sale equipment to getting a new hoist!
Business financing for equipment also comes in handy when you plan on expanding or just updating your machinery.
Often, you can get equipment financing directly from the manufacturer or the supplier. However, it’s also plausible that you are able to secure a better deal through a bank or alternative lender.
You might have to conduct in-depth research to find lenders that offer the best rates.
Invoice Factoring
If you are looking for a transparent option, then invoice factoring is a good choice for you. How does this work, you ask?
It’s actually quite simple. Under this financing option, you simply sell your open discounted invoices and when your customers make the payment, the amount goes to the lender.
So if you are looking for some extra cash to upgrade your auto repair business and gave open invoices, you can use invoice factoring.
This is again a great way to source working capital for your business, especially if you are operating on a small scale and struggling with small business loans. But there are three different invoice factoring types and you need to be mindful of what you choose.
The types of invoice factoring include:
Whole Turnover
In this, you can sell your invoices to a factoring company over a period of time.
Selective Invoice Factoring
As the name suggests, you can select and choose the invoices you want to sell over a period of time.
Spot Factoring
Do you want to sell individual invoices in a one-off agreement? Spot factoring is the way to go!
With a little bit of research and digging, you can compare providers of small business loans that offer invoice factoring. Choose the one that best meets your requirements!
SBA Loans
The Small Business Administration has mandated guidelines for banks to follow when offering loans. Banks follow these guidelines while giving out guaranteed loans.
In SBA loans, guarantees from the federal government also help in easing out some of the qualification standards. Usually, SBA loans are deemed to be more beneficial for you if you plan on purchasing real estate for your business.
However, an SBA loan program might assess and qualify a small business owner who is unable to meet the rigid criteria of the loan. One of the metrics that they will look up if you have been running your auto repair shop for a few years is your personal credit score.
Ideally, your personal credit score should be above 680 for you to secure this financing option.
Business Line of Credit
When it comes to business loan options, a line of credit is also worth exploring. This line of credit is similar to a credit card and offers a revolving line of credit.
Similar to how a credit card works, this allows you to make purchases against an approved amount. You can also use a business line of credit to improve your cash flow as you make purchases for your auto repair business.
Sometimes, you can also benefit from promotions under this financing option. If you are looking to make a hefty purchase on a promotion, you might just save yourself from paying interest!
Usually, businesses use this to improve their cash flow or to pay for expenses such as:
- Hiring new employees
- Purchasing new inventory and parts ordering
- To fund expansion or an ongoing construction project
- Cover any cash flow gaps as you wait for clients to clear their invoices
- To fund employee salaries and wages during an off-season
- Paying for unexpected expenses or losses
When it comes to lines of credit, you will also get to choose from a secured or unsecured line of credit. The difference between the two?
The secured line requires collateral while the latter does not. However, an unsecured line might still require small business owners to submit personal guarantees.
General Purpose Business Loans
If you are a small business owner looking for the best business loan options that don’t restrict you in terms of use, you should look up general-purpose business loans.
You can secure general-purpose business loans from both online and in-store providers. These types of loans for auto repair expenses afford you freedom in terms of how you choose to spend it.
These loans, however, come with a fixed repayment term of up to ten years.
How to Compare Different Financing Alternatives For Auto Repair Shops
Even if you are operating in the same industry, your needs will greatly vary in terms of loans for auto repair businesses.
Here are a few things you need to think about as you evaluate the different financing alternatives at your disposal to choose the one that really works for you:
The Amount You Need
This one is really obvious. First, you need to calculate your expenses and finalize the amount of loan that you require. Not all alternatives will be able to meet your needs in terms of the amount you require.
Borrowing more than you need might have you paying unnecessary interest rates, so you should only borrow the amount that you need.
Loan Repayment Term
It’s important for you to budget your financials and arrive at the estimated time period for repaying your loan. Usually, short-term loans have a lower interest rate but are not suitable for businesses that have restricted cash flow in the short term.
When calculating the approximate time for loan repayment, you should also keep a buffer for unexpected circumstances. This will help you from exceeding your repayment deadline.
The Interest Rates
This is usually the first thing business owners think about when they apply for loans. Interest rates, represent the cost of the capital that you are going to borrow for your business.
You should always aim for a lower interest rate, to have a lower cost overall. However, you should always keep an eye out for APR – which are the hidden costs of acquiring a loan. Also, make sure you thoroughly go through other payment terms.
Wrapping it Up
Luckily, there are many different financing alternatives that are available to business owners nowadays. In this post, we have discussed the six different types of financing alternatives that auto repair business owners can benefit from, depending upon their requirements.
Choosing the right auto repair loan options is important, here at Car Title Loans California, we will help you to use the equity that you have in your vehicle.