Auto Repair Shop Loans

Michelle Adams

Running a garage is indeed profitable. Almost everyone that owns a vehicle will require professional services of a mechanic at some point. In winters, when the weather’s rough, auto mechanics are in high demand.

If there are only a handful of auto repair shops in an area, they can be booked at the same time during the peak season. For minor repairs, people prefer to do it themselves. However, bigger issues always need the attention of a stellar and dedicated auto mechanic.

The US auto repair industry is worth $86 billion, and is mostly made up of repair and maintenance services for cars, trucks, vans and other motor vehicles. Major auto repair and maintenance services include mechanical repair, auto collision repair, car detailing and washing, and oil and lube change. About 70 percent of all auto repair shops are family owned businesses.

Some of the other types of auto repair shops include:

  • Auto body and collision repair shops
  • Automotive exhaust repair shops
  • Auto paint shop
  • Diesel engine repair shops
  • General automotive repair shops
  • Tire repair shops
  • Transmission repair shops
  • Wheel alignment shops

The margins are high in auto repair, however, it isn’t easy to run one. Both starting and maintaining an auto repair shop is hard work, and is capital intensive.

Funding is required for the location, the shop, specialized equipment, payroll, and general inventory. When you have enough funding, it is easier to buy better equipment to provide more effective services and attract repeat customers.

But the cost of running an auto repair shop can often become higher than the revenue during initial period. Whether you need money to start an auto repair shop or grow an existing business, auto repair loans provide easy funding for all.

Funding may be required for buying new machinery, moving to a new location, or carrying out renovations, and there are various auto repair loans today that help both new and established businesses.

Auto Repair Loan

Types of auto repair loans

There are various funding options for auto repair shops, depending on what you need the loan for, how much, and if you qualify for it.

Needless to say, qualifying for a loan is sometimes the hardest part. Thus instead of sticking to only one type of loan, you should seek various options, because one of them is sure to work for you. Most businesses deal with automotive parts and supply vendors with very limited credit options with poor terms, and it often makes getting funding hard.

But what you must do is get a business loan specific to auto repair shops. This not only provides the funding you need, but is also tailored to auto repair shops.

The following are the different types of loans you can get for auto repair shops:

Bank loans

This is the conventional, and the most common type of loan, for businesses, issued by a bank. Bank loans are a tad difficult to get if you are setting up a new business, but are available for already existing businesses.

However, the biggest downside of bank loans is that they are very hard to qualify for. Most small businesses like auto repair shops are either too new to have sufficient credit history, or are not established enough to bring in enough revenue to meet a bank’s eligibility requirements.

Commercial bank loans are the most secure form of funding because you are sure to not be cheated. But the strict loan guidelines make small auto repair businesses ineligible.

On the other hand, since banks have such strict eligibility requirements, those who qualify for a bank loan have to pay a lower interest rate than any other type of loan.

In fact, if your credit history and yearly revenue are impressive, it is even possible to convince the bank to lower the interest rate. If you have sufficient credit history and an established business with satisfactory revenue, a bank loan could be easily available to you.

Pros of bank loan

  • Safe and secure funding
  • Lower interest rate than other types of loans

Cons of bank loans

  • Loan repayments can hurt business revenue
  • Set payments may be hard with sale fluctuations
  • Long application process and processing time
  • Requires collateral
  • At least three years in business

SBA loans

The United States Small Business Administration is an organization that helps small businesses grow and succeed. Since its inception in 1953, the SBA has provided billions of dollars in loans and other forms of financial assistance to small businesses.

The SBA is not a lending institution, but it partners with trusted lenders to help borrowers with funding. The SBA acts as a guarantor to lenders for the funds lent to small businesses. When you apply for an SBA loan for your auto repair business, you are actually applying through an authorized SBA lender.

If you are a veteran, the SBA has special assistance for your business. If you need a loan for your auto repair shop in a rural area, you can apply through the United States Department of Agriculture (USDA).

There are many benefits of SBA loan for to qualifying businesses.  Some of the benefits include lower down payments and longer repayment terms than, making it easier for businesses to pay off the loan.

The SBA loan is a suitable option for auto repair shops that want to grow their business while also preserving capital at the same time. The rates of interest are low also because the SBA guarantees part of the loan in case of defaults.

Pros of SBA loans

  • Low interest rate, depending upon your credit history
  • Easier to qualify because SBA guarantees the loan

Cons of SBA loans

  • Long and in-depth approval process
  • Credit score, payment history, and even business skills and experience are
  • looked into
  • Detailed business plan
  • Funding takes at least 90 days

Business line of credit

Short term loans are considered the best for auto repair shops, and a business line of credit is one of them. If you need funding on a recurring basis, then a business line of credit could be a good fit for you.

It is like a credit card with a fixed amount of funds for you to use whenever you want. With a business line of credit, you don’t have to apply for a loan again and again. Once you get the credit, you can use it as and when the need arises as long as you don’t exceed the maximum amount.

With a line of credit, you are charged interest only on the amount you borrow. For instance, if you need money to buy expensive auto parts that you don’t currently have, you could take a short term loan like a line of credit for the funding.

A line of credit gives you control over the money you want to spend. You also get more flexibility with a line of credit because you can use the money as and when the need arises, rather than take a lump sum amount. However, you might be charged a fee if you do not use the money within the stipulated time frame.

Pros of line of credit

  • Flexible funding, instead of a lump sum
  • More control over when and how much to spend
  • Helps businesses build positive credit history

Cons of line of credit

  • Requires up-front fees to obtain the line
  • High interests
  • Can be a burden to the incoming cash flow of the business

Merchant cash advance

A merchant cash advance is a one-time lump sum loan that is good for short term funding purposes. It isn’t actually a loan, rather a cash advance that is made against future credit card sales receivables or other incoming revenue.

If you accept credit card payments or have regular streams of revenue, you can obtain an advance against the funds flowing through your merchant account. As an auto repair shop owner, you repay the merchant cash advance using a percentage of your daily sales. This is a good funding option when you regular business, but need to add working capital.

Merchant cash advance is considered an unsecured and unconventional loan. The most important criterion to be eligible for a merchant cash advance is to have steady and suitable business on a regular basis.

If your business only gets a few seasonal customers and not much income the rest of the year, it can be hard to get a merchant cash advance. The lender will need proof that you have enough revenue coming in to be able to pay off the advance. Although it is easier to qualify for than traditional loans, merchant cash advances are known to have a significantly higher rate of interest.

Once an agreement is made with the lender, each a part of your daily revenue is held back to pay the lender. This is called a holdback.

Pros of merchant cash advance

  • No credit check required
  • No need of collateral
  • Automated merchant payments
  • A steady flow of funding

Cons of merchant cash advance

  • Payments commonly have to be made in cash
  • You might have to switch your credit card processor

Equipment financing

If you need a loan for purchasing any equipment PR machinery for your business, then you could look into equipment financing. This is a kind of loan where the item that you are purchasing is kept as collateral. An auto repair shop has a need for various kinds of specialized equipment.

As mentioned earlier in the post, the better equipment you have, the more efficient service you will be able to provide. Equipment financing works in a number of ways: you can lease the equipment, buy the equipment, or do a sale-and-leaseback where you sell existing equipment to a lender for a loan upfront and then lease the equipment back.

Equipment financing is good for those businesses that need equipment, need working capital to purchase equipment, and new businesses and startups.

Pros of equipment financing

  • Low APR
  • Predictable monthly payments
  • Equipment is collateral
  • Helps build positive credit

Cons of equipment financing

  • Can require high down payment
  • Requires strong credit
  • Equipment can become outdated at the end of the term
Auto Repair Loan

How to prepare for auto repair loan

Before you go for a loan, you must learn about the steps involved in applying for a loan. Although different lenders have different requirements based on the type of financing, there are a few basic documents that you have to submit regardless of the lender or the type of loan. These include:

Proof of income and revenue: When applying for a business loan, the most important document is your proof of income and revenue. This is because the lender needs proof that you are able to repay the loan.

Documents related to business revenue and personal income can prove your ability to repay the loan. These documents include bank statements, tax documents and credit card statements.  If your repair shop mainly accepts payments in cash, make sure to keep the receipts.

Your budget: The loan amount must be within your budget, and lenders want proof that you have planned ahead. Although many lenders are happy with just a simple budget about what you plan to do with the loan money and how you will repay it, some SBA loans might require a full business plan rather than just a budget.

Current assets: If you choose a secured loan, you have to provide documentation of your current assets. Assets include commercial property, equipment and machinery, cash in hand, stocks, bonds, etc.

Personal documents: Lenders also need to verify if you are a legitimate person. For this, you need to furnish govern issued identity documents like driver’s license, social security number, passport, etc.

Regardless of the type of auto repair loan you choose, there are a number of procedures you need to follow.

Interest rates, terms, and the application process differ from one lender to another. Whether you choose a traditional loan or an alternative lender, it is always wise to do your homework in advance so that you are well aware of the procedures and terms of the loan.