Anyone that does any research will find out that a SBA loan for a car wash is the best option for many people. In reality, maybe ten lenders do 75% of the SBA loans for car washes. The reasons for this should be obvious. Because there is a significant amount of equipment involved in a car wash it tends to lend itself to doing SBA loans as banks that focus on conventional loans only will focus on collateral. If you are an individual that already owns quite a few car washes, it is more realistic that you will obtain conventional financing. If you are putting down a large down payment, it is also much more likely that you will obtain conventional financing. Keep in mind, if you obtain conventional financing, your amortization period will frequently be shorter, which will translate into a larger payment. Plus, you will normally have a 5,7 or 10 year note which will balloon usually. SBA loans are usually fully amortized which means you won’t be required to refinance them at any point.
COLLATERAL
Because SBA financing can go up to 90% financing, a significant portion of these high loan-to-value (LTV) loans would be considered undercollateralized. The land, building and improvements will usually be discounted by 20% (sometimes 25% by some lenders), some equipment can be discounted by 50%, and good will has zero collateral value. The main reason that banks prefer to do car wash loans SBA is because of the loan guarantee. The government will guarantee an SBA loan up to 80% of the loan. That is why the SBA guarantee fee is normally larger than normal origination for a conventional loan. That million dollar appraisal you have on your car wash might be viewed as $600,000 by a lender.
Car wash loans do not have a high default rate like other types of asset classes. However, self-service and automatics are more of a cash business than tunnel washes are and can be more difficult to underwrite.
CASH FLOW
Like any other commercial loan, verifiable cash flow is the most important thing in obtaining SBA loan for a car wash. If the seller only owns one car wash, there will not be that many financials to look at. The SBA requires a 1.1 to one debt service coverage. What that means is, for every dollar of liability and expense, there needs to be $1.1 of revenue. The individual lender can require something higher in their underwriting requirements. You want to make sure you get full financials anyway so that you do not overpay for the property. It will be a realtor or business brokers responsibility to get as much as they can for the property, but the only way you can truly verify is by looking at verifiable financials.
EXPERIENCE
Some may disagree with me, but I find that running a car wash business does not require as much direct industry experience as running a gas station, restaurant, hotel or other special purpose facilities. With these other special purpose facilities the SBA leans much more heavily on experience as they have a higher default rate and one of the two common denominators for defaults are 1) not enough equity or not enough non-borrowed equity into the deal and 2) not enough direct industry experience.
In many parts of the country, a lot of the full service car washes are being built. If you’re looking to buy or build one, it would probably be a wise investment to have a car wash feasibility study done to make sure there is still plenty of traffic and there won’t be too much competition. It will also give the lender a higher level of confidence.
I saw during Covid that a lot of car washes were far less effected than businesses like restaurants and hotels. I saw a small reduction in car wash subscriptions but many owners still thrived. People still want a clean car. Now water shortages and excessive rains is another story.
There are certain restrictions that SBA loans have that a conventional loan might not have. First of all, you either have to be a citizen, or have permanent resident alien status. If you have been arrested, this must be disclosed as well as if you have a felony conviction, this must be disclosed. If you have defaulted on any type of government backed loan, such as a VA loan, a student loan, SBA loan or any other government backed loan, it must be disclosed. Unless the rules have changed, any type of default on an SBA loan in the past, will immediately disqualify you for an SBA loan. If you have declared bankruptcy, or had a foreclosure, a short sale, repossessions, or other things similar it must be disclosed. It does not mean that you will be declined, but it must be disclosed. There are some SBA lenders out there that will not approve a loan if the borrower has ever had a bankruptcy. This is not an SBA regulation, though, it might just be the bank policy.
CREDIT
Speaking of potential credit issues, know where you stand credit wise, it’s highly advisable that you pull your own credit so that appears as a soft pole, and does not affect your credit score. The lender will most likely pull your credit upfront as well as pulling your credit at the time of closing, to make sure that you have not taken on any additional debt or had anything derogatory show up on your credit report. There are many fine companies that do credit repair for dated or inaccurate information, so start the process as soon as you can.
The process will generally go faster if you are dealing with a preferred lender, or a lender with PLP status. These particular lenders have authority to approve loans without having to submit directly to the SBA. This can cut weeks out of the process and in reality, there probably aren’t many, if any lenders, that do car wash loans that are not PLP lenders. If these non-PLP lenders have done car wash loans, they most likely not do a lot of them.
There is no question, but more forms are required to fill out for an SBA loan. There are two uniform forms that are identical, regardless of who the SBA lender is. The personal financial statement and the personal history form or form 1919 are identical, regardless, of who the lender is. If they are a bank, or a non-bank lender, you will be required to fill these forms out.
It is advisable that you do some sort of a business plan. In particular, what will make someone come to your car wash instead of another car wash? If it all possible, avoid using software generated business plans, unless you can customize it enough to where it looks original. I usually can tell in a short period of time, If it’s something that they created or it is a fill in the blank template.