By Jeff Rauth. Email Here or 248 885-8797. Commercial Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker. He has closed many car wash transactions and has been published in Auto Laundry News and other related trade journals.
Thinking of buying a car wash? Want to understand the basic loan terms and what is available in the market today? Or perhaps you already own a wash and want to get a better idea of what a refinance might look like. Either way you are at the right place!
Car wash loans can be one of the harder transactions to put together due to the single use nature of the property. Many lenders simple do not understand and or do not like this category and will not lend on it. One of the keys to your success is only working with a lender that is highly focused on the wash industry. Borrowers have essentially two options to complete their car wash loan – conventional or SBA. The pros and cons of each are discussed below.
Conventional Car Wash Loan
Conventional financing for car washes typically consists of a short fixed rate (such as 3 or 5 years) with a 20 year amortization schedule. Loans are normally termed at 5 years. Meaning at the end of the fifth year your loan comes due and or up for review. At that point, if the lender does not like how the numbers look, they may not renew the loan, so you will have to go out a find a new lender (Perhaps that is why you are reading this). If the existing lender decides to extend the loan you will probably have to re incur a lot of the typical closing costs such as appraisal, title costs, bank fees, environmental, etc.
Loan to values typically hover at approximately 75% to 65%. Most conventional sources are conservative with debt coverage ratios and like to see a minimum of 1.35 to 1.4 compared to an a 1.25 for most building types.
The advantages with conventional financing are that the fees are lower and the process to close can be easier, than on SBA loans. In addition, some borrowers psychologically like the idea of having a fixed rate, even if it is only 3 or 5 years. Also the interest rates are normally lower by appr .5% then SBA loans.
Disadvantages of Conventional Financing
First off, many conventional lenders will only consider the hard assets of the car wash meaning the real estate and equipment on their appraisal reports. They will leave out Goodwill. This can destroy your transaction if you are depending on the value to be determined “As a Going Concern”. Most appraisal company will give a break down on their reports. For example:
$700,000 Real Estate
$200,000 Good Will
$1,000,000 Total “Going Concern Value”
If you are trying to buy that wash at $1,000,000 and want to get 70% financing from a conventional bank they might only lend 70% on the $800,000, so you will have to come up with a lot more cash then you expected. In this example it would be $440,000 total down payment (30% * $800,000 + $200,000 of Goodwill). Be careful! Try to determine this with your bank before they order the report.
Even if the bank appraises it As a Going Concern you are not going to get as high of leverage with conventional loan, compared to SBA. Probably 75% loan to value max. SBA loans go up to 90%, of the Going Concern Value. Bottom line, you will have to come up with more cash and it might be a lot more with a conventional loan.
There are going to be nasty clauses in your Promissory Note to the benefit of the bank. The bank is most likely going to have a Demand Clause in the Note. This means they can legally force you out, ie to pay them off, for any reason they want. It happens! This is standard language in Promissory Notes. For example, they will typically have a cash flow covenant. Meaning if your profitability drops below their standards, they can force you to pay them off (ie refinance or sell). SBA loans are not allowed to have these clauses.
Conventional financing can be your best option for car wash owners depending on your situation and the local banks appetite for this building type. If you have great experience, cash flow and loan to value you will likely get the best terms available with a conventional loan, assuming you can find a local bank that wants to lend on washes.
SBA Loans For Car Washes
SBA 7a loans have there place for car wash financing as well. First of all, borrowers can put down as little as 10% (90% loan to value) compared to conventional financing at 25 – 35% down as discussed above. Debt coverage ratios are less conservative too, at as low as 1.20 and potentially lower. For example, you can use projected income (future income based on improvements to the wash) to make the numbers work.
Rates are normally tied to the Prime Rate, with margins at 2- 2.75%. As of this writing Prime is at 3.25% so a typical rate currently is 5.5%. Amortization schedules and the term of the loan is the same at 25 years. So you do not have to worry about your loan ballooning, ever.
Also, SBA financing can be more reliable than conventional as far as actually closing and there is a wider pool of banks and lenders willing to finance car washes, when they have the guarantee of the SBA.
Some of the major disadvantages of SBA financing include:
- The fees are higher. The SBA guarantee fee is appr 3% of the total loan amount. Most banks only charge 1%
- The rate is normally quarterly adjusting.
- Borrowers are sometimes intimidated about the closing process based on rumors they have heard. Most of this is unjustified and closing an SBA loan is just as hard as closing a conventional loan.
SBA loans have their place in the car wash industry especially for borrowers that need higher leverage, want longer amortization schedules and need more flexible underwriting (such a bad credit).
Hope this helps!
By Jeff Rauth. Email Here or 248 885-8797. Commercial Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.