A Complete Guide to Auto Repair Shop Loans and Financing

A Complete Guide to Auto Repair Shop Loans and Financing

A Complete Guide to Auto Repair Shop Loans and Financing

The financial demands on an auto repair business are never ending. Small business owners who operate these businesses need steady cash flow to pay employees, purchase supplies and equipment, and ensure their shops run smoothly.

Just as your customers may be caught with unexpected, large repair costs that leave them scrambling to get a personal loan, you as a business owner may find yourself in situations where your cash flow just won’t cover your business expenses. 

That’s when you may need to consider auto repair shop financing.

How Business Loans Can Help an Auto Repair Shop

Working capital is essential for auto repair shop owners, but there may be times when you’ve laid out more expenses than you have coming in. Maybe you place large orders for tires for your shop, and won’t see that investment returned until you sell those tires, which could take months. Or maybe a customer is having trouble coming up with the money to pay for vehicle repairs, and they dispute the bill they charged to their credit card.

That’s where having easy access to business funding can ease the burden.

Another way small business loans can aid body shops is by helping them build their credit. Often, businesses don’t have solid business credit, though the owners might have good personal credit. Taking out a loan for the business and paying it on time each month can help your business credit scores, which down the line, may help you qualify for even better financing when your business needs it.

That’s especially important for businesses in the motor vehicle repair space, which may be considered risky by some lenders.

Auto Repair Shop Costs That a Business Loan Can Pay For

Business financing can help cover a variety of costs related to the auto repair industry. Let’s start with equipment. You likely need equipment like lifts and tire changers, and those don’t come cheap, especially if you’re buying new equipment. An auto repair shop loan, including an equipment loan, could cover these expenses. Some loans will even cover used equipment.

Then you have all the tools and supplies you need to do car repairs like tires, oil, and coolant. If you place large orders for these and don’t always have the cash on hand, trade credit or a credit card could be helpful in covering these expenses.

Financing can also help you expand your auto repair facility or acquire a new location. 

Basically anything your auto repair shop needs to run is something that a business loan could cover.

Understand Your Financing Options

We’ll go into specific types of financing in a moment, but generally, business financing falls into two broad buckets:

Short-term financing is used when you need to finance something for a year or less. This type of financing often includes lines of credit that give you access to funding as needed. 

Long-term financing is used for bigger projects like a new piece of expensive equipment or financing the acquisition and buildout of a new facility. These loans usually come in the form of installment loans with fixed monthly payments. 

The key here is to match the type of financing with your business needs. (You’ve probably seen mismatches in financing with your customers who may have a vehicle that’s out of warranty and they still owe much more than the car is worth.)

Once you’ve thought through how long you need to borrow money, you can start to look at specific financing options.

If you’ve got excellent credit, at least two years in business and six figures in revenue, working capital loans from banks or credit unions may be an option. But many business owners have trouble getting loans from traditional financial institutions and will need to cast a wider net, or may even need to look at alternative financing.

Business Loan Options for Auto Repair Shops

Here are the most popular types of financing options for businesses in the vehicle repair space:

Line of Credit

A business line of credit is often the first type of financing a business owner will want to get. If you qualify, you will be approved for a line of credit for a certain amount, and you’ll be able to borrow as much as you need up to the credit limit. 

Once you repay what you borrow, you can borrow again and again. Most established auto repair shop owners should have access to a line of credit for cash flow fluctuations.

Term Loans

If you know how much you need to borrow and how fast you will pay it back, a term loan may be a good option. It gives you a lump sum of money with a fixed repayment period that may be as short as a few months, or up to ten years or more. 

Term loans may be available from banks, credit unions, or even online lenders.

Equipment Financing

With equipment loans or leases, the equipment you’re getting serves as your collateral, which means you can often get good rates on these loans.

SBA Loans

Another option if you have great credit is a loan guaranteed by the Small Business Administration, such as its 7(a) loan program. (There are other types of SBA loans we’ll mention shortly.) 

SBA loans offer low interest rates, steady payments, and you can generally use these loans to purchase equipment and real estate, and for working capital. Keep in mind that a personal credit check will be required and you will often need good or excellent credit.

Alternative Financing Options

If you’re having trouble getting approved for the financing options listed above, you may want to look at alternative financing. Here are a couple of options:

Trade Credit

If you place regular orders from suppliers on a regular basis, you may be able to take advantage of trade credit where you have 30-90 days to pay your invoice. This type of financing can help with cash flow and if vendors report to business credit, will help you build business credit. Here’s a list of easy net-30 vendors that can help you get started.

Business Cash Advance

While not a loan, a business or merchant cash advance solves your cash crunch in the short-term. You are advanced an amount that based on past revenues (such as debit and credit card sales), and then you pay that amount back from your daily transactions, plus any fees such as an origination fee. Funding can take place as soon as the next business day. If you have bad credit, this may be worth considering, though realize the cost can be high.

Financing for Expansion

If you are ready to open another location, or perhaps move from your home garage to a standalone shop, you may need more money than a business line of credit or credit card offers. Instead you’ll want to look for larger, long-term loans.

Commercial Real Estate Loans

A bank or credit union may be able to finance your commercial loan. A down payment is often required, and while payments are often calculated over thirty years, there may be a 10—20 year repayment period with a balloon payment required.

SBA 504 Loans

The SBA 504 loan program offers loans to help cover the cost of real estate or fixed assets. Also called CDC 504 loans, they feature fixed payments, low interest rates, a low down payment (usually 10%), and attractive terms to business owners with solid credit scores who qualify.

Financing with Business Credit Cards

Just like a line of credit, business credit cards can be helpful for cash flow. Even if you pay the balance in full, you get use of the issuer’s money for a month or more. They can be helpful for short-term loans as well, though. Some cards offer 0% intro APRs which can allow you to borrow interest-free for up to a year or more. 

Also most rely on the cardholder’s personal credit history (not business credit) when evaluating application, and will look at income from all sources, not just the business, so they can be helpful for startups.

Remember that most credit cards charge high interest rates if you carry a balance, and that cuts into your profits. If you pay your balance in full each month, you won’t incur these charges.

How to Qualify for Auto Repair Shop Loans

Every lender has its own eligibility requirements that vary by type of financing and are tied to borrower qualifications.

Even though these are business loans, the borrower’s credit scores will likely be considered for most types of financing. Some lenders put more emphasis on your credit than others, and with them, the higher your scores, the higher the credit limit and the better the interest rates you may be approved for.

Other criteria that are very likely to be considered are your auto repair shop’s annual revenue and how long you’ve been in business. You should have a business bank account as it will be required for proof of revenues.

If your business is new, you will find it harder to find startup loans but there are options out there.

How to Apply for Auto Repair Shop Loans

Once you’ve determined that you qualify for a loan, it’s time to start the application process. If you apply through a bank, you may be required to apply in person, but with online lenders, you can usually fill out a quick online application and get a decision in minutes.

As part of the approval process, you will be asked information about both your business and yourself, including:

  • Business location
  • How long you’ve been in business
  • Annual revenue
  • Loan amount you are requesting
  • Personal contact information
  • Social Security number
  • Business bank account details

Once approved, you will be presented with your loan options, including how much you can borrow, at what rate, and repayment terms. Sign the loan agreement, and your funds will be deposited into your bank account.

Nav’s Verdict: Auto Repair Shop Loans

Business owners need to ensure that they always have cash for unexpected expenses, and for auto shop business owners, a loan, line of credit, or credit cards could be that saving grace.

This article was originally written on April 28, 2021 and updated on March 23, 2023.

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