No matter what city or state you live in, people are always going to be in the market to buy a car, or get their current ride tuned up. As more consumers see the value of buying used cars, there’s seldom been a better time to open up your own car dealership. And as people try to maximize the life and longevity of their current cars, now is a prime time to open up a repair shop to keep everyone’s rides running smoothly.
Opening a car dealership or auto repair shop isn’t cheap, however. Both businesses are capital-intensive, as you need to either buy car stock or tons of equipment to repair vehicles (or both, if you’re planning on offering both services under one roof). You might also need to find help paying for the real estate required to open up your business, or to cover expenses in between customer payments.
Thankfully, there are small business loans for car dealers, as well as small business loans for auto repair shop setup that can help you (and your cars) get rolling.
If you’re looking for small business loans for car dealers, you’ve got plenty of options whether you’ve been in business for a while or are just starting out. This is helpful, particularly if you’re a new business and may not have a history of profitability or income to rely on as part of your application. Getting a loan for a car dealership or auto repair shop boils down to finding the right one for your needs. The right loan usually corresponds with your existing financial scenario, or the goals you have in mind for how you’ll use the money.
Regardless of the kind of loan you pick, your lenders are going to want some baseline figures about you and your business. This includes your personal credit score, your business credit score (if you have one), and your business’s cash flow. These details help lenders get a better picture of your history of borrowing money, paying off debts, and whether or not you’re likely to pay off any future loan on time. Lenders realize that a car dealership or auto repair shop take time to get off the ground, but that they both drive steady revenue—after all, people are always in need of a vehicle, and anyone who owns a car has to get the occasional tune up at the very least. In other words, you might be cash-poor to start, but your wares are fairly expensive, which means you should be able to generate revenue in short order.
There are tons of options out there for car dealer and auto repair shop loans, so we’ll cover the basics and give you the best options for the most common needs you might face. Our list is far from exhaustive, but can help steer you in the right direction for most cases.
Few small business financing options can beat an SBA loan. They’re considered the top of the pile for business financing, and for good reason. These loans are guaranteed by the U.S. Small Business Administration for up to 85% of their value, which means that the SBA makes a promise to pay up to that amount of your loan’s total in the event that you can no longer make payments yourself. This lowers your risk to lenders, which means you’re able to access better loan terms that are usually reserved for low-risk applicants.
Another reason SBA loans are so coveted is the range of funding amounts they offer, their flexible repayment terms, and—of course—low interest rates. You can get up to $5.5 million with an SBA loan, and can repay your loan for up to 25 years. Plus, you’ll get some of the lowest interest rates around, sometimes half of what you’d get through a conventional business term loan outside of the SBA program.
The SBA loan program offers more than just conventional term loans, too. Small business owners can also apply for an SBA 7(a) loan, which provides a ton of flexibility with how you spend the sum of your loan. Most business owners use SBA 7(a) loans to refinance old debt, serve as working capital, or make other purchases as necessary when getting their business operational.
Since SBA loans are so popular with borrowers, you’re going to need some pretty strong credentials in order to qualify. For starters, you’ll need a great credit history with a score of 680 or higher in most cases. You should also brace yourself for a long turnaround time: SBA loans take about the same amount to review as other term loans, but require much more paperwork, which can make the SBA loan timeline process longer than you’d experience elsewhere. Be prepared to open up your financial records and draft up a business plan, too. The bottom line on SBA loans is the more information you can provide, the better.
Not every small business owner might get their SBA loan application approved, of course. That’s where regular business term loans can be a great fallback option, since they offer similar sums of money for long repayment periods and competitive interest rates. Term loans are basically what you think of when considering borrowing from a bank: a lender provides you with a set amount of money to be repaid over a period of time at a determined interest rate. So long as your credit history is good, and your lender approves your application, you’re free to use the funds as you wish (so long as your lender hasn’t put restrictions on how you use the money, of course!).
Term loans can be tricky to get for entrepreneurs as well, though. Banks reserve these loans for the most qualified applicants with the lowest amount of borrowing risk. This means that you’ll have to have great credit, a proven history of making money through your business, and will need to demonstrate that your company has been in operation for a decent amount of time. All of these factors help assure borrowers that you’re able to pay back your debts, and that your company has made money over time (thus demonstrating you can make enough money to pay off the loan).
If you qualify for a term loan, you’ll be able to enjoy lower interest rates than you’d get through other financing means, such as medium- or short-term loans that usually charge daily interest and require fast repayment. Most term loan providers will work with you to set up a repayment schedule that works for you as part of the application process.
Buying the equipment you need to sell and service cars isn’t cheap. Tools and machinery can get pricey, particularly when you’re just starting out. If you need help paying for all of the startup costs that purchasing equipment entails, consider getting an equipment financing loan.
Equipment financing is a great option when you need money to pay for specific pieces of machinery. This kind of loan allows you to get a quote from a vendor and use it when approaching a would-be lender for cash. Once you’re approved, the lender will give you the money you need to buy the equipment in question.
There is a ton of upside to an equipment financing loan. First, you don’t have to put up collateral in order to get one. The value of the equipment you buy serves this role. If you can’t keep up with payments, the borrower can seize and sell what you’ve bought in order to recoup their money. This helps you free up money that you’d otherwise have to set aside as collateral, which goes a long way toward improving your cash flow. The approval timeline for equipment loans is quicker than term loans as well, since there’s less risk to the borrower in the event that you can’t pay up. So if you need to make a quick purchase or replace faulty machinery, an equipment financing loan can help make that happen fast.
Opening up a car dealership or auto repair shop means paying for items from time to time, and those expenditures may not always line up with your business’s finances. That’s where a business line of credit can help. A business line of credit gives you periodic access to cash that you can tap into multiple times during the duration of the loan. Your lender will work with you to create a maximum amount of money you can borrow, an interest rate on the money you’ve pulled from the account, and a set period of time in which the line of credit is open. This can help make big purchases more affordable, and cuts down on the amount of times you need to apply for individual loans.
Think of a business line of credit as being a hybrid of a business credit card and a loan. Instead of putting charges on a credit card, you can tap into the money your lender allows you to borrow. You’ll pay off interest on the money you’ve borrowed for as long as the debt is outstanding, and can take out as much money as your line of credit allows during the term in which it is open. Unlike conventional loans, you only have to pay interest on the money you’ve drawn from the account, as opposed to paying interest on the total amount your borrower is willing to give you.
Running a car dealership or an auto repair shop can be a capital-intensive business. You’re often buying merchandise, cars, and car parts before you get paid by clients and customers. This can put a significant crunch on your cash flow, since you’ll have to fork over significant amounts of money before getting paid for your services.
If this sounds familiar to you, you can opt for invoice financing to help steady your cash flow. Invoice financing allows you to get up to 85% of the value of your outstanding invoices as a cash advance. Once these invoices are paid, your lender will give you the remaining 15% of the balance, minus fees. Of course, it’s always better to hold onto your invoices and not pursue financing if you can help it, but if you need access to cash to tide you over until your customers pay their bills, invoice financing is an option worthy of consideration.
Owning a car dealership or auto repair shop can be rewarding work with a ton of opportunity to make money. You’re working in an industry with plenty of demand, as people always need a way to get around. Starting a new dealership or shop may come with a decent amount of investment required, however, which means that it’s helpful to know what your financing options are in order to help bridge any financial gaps you might encounter. With the right loans, you can get down to business selling and servicing cars in no time.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.