Frequently
Asked
Questions
- Primarily For Newcomers to the
Car Wash Industry -
If
you would
like clarification of any of these questions or answers please call
Alan Bussey
at 817-903-876-2308 or e-mail us at AlanBussey@CarWashLoans.com.
1.
What loan terms do you offer for car washes to be constructed?
For
someone new to the industry, whether buying or
building, we can arrange a loan with about 20% all-cash down. This
is the lowest down payment available in the lending industry.
Every
car wash
financing situation is unique. It may be possible for you to put down
less cash
than 20% if you have other good marketable collateral to offer in lieu
of a
part of the 20%. This other collateral is typically real estate. But
the
typical minimum cash investment is 15%, plus other collateral to
substitute for
the 15% to 20% customary down payment portion.
The
repayment
term is a fully-amortizing term of 20 years (3/4 of the cases), up
to 25
years (1/4 of the cases). We work to get you the longest term
possible. These loans are fully-amortizing, just like most home
loans. There is no balloon (early maturity) payment and no
'demand
clause'. You can pay the loan faster than the schedule if you
wish.
The
interest
rate on a car wash loan below $1million is normally between
Prime + 2.0%
and Prime + 2.75%, variable, with Prime + 2.5% being common.
Prime
is 3.25%
today (as of
Each
loan rate
is determined on a case-by-case basis. The rate and other terms
are
unique to your situation and to your specific car wash. We design
each
loan structure to your specific circumstances. We work to make
the loan
in your favor. We work for you, not for the bank or the
finance
company.
We
have fixed
rate programs for larger loans, generally loans above $1million. Most conveyor car washes can be financed with
fixed rate loans. Even if your project is not ideal for a fixed
rate loan
we can explain to you how to "fix" a variable rate to minimize future
variable rate increases.
Fixed
rate programs
are based upon LIBOR, T-Bill, SWAP, and Federal Home Loan Bank
rates, but
the rate that you actually pay is about the same regardless of the
index.
A lower index usually just has a higher margin above that index
than a
higher index, so the rate comes out to be about the same.
If
you are
constructing a new car wash the most common interest-only
construction
period is 6 months, but we make this up to 12 months in snow belt states and in certain other instances.
Yes,
but we can often pre-qualify or pre-approve your loan over the
telephone in
about 15 minutes.
Before you call us, please remember that if you are buying or building,
and if
you are not already in the car wash
business, you'll need to make a cash down payment that is about 20%
of the
Total Project Cost.
If you have the down payment, or can fairly easily get the cash down
payment,
and if your credit history is very good, the chances are very good that
we can
finance your purchase of an existing car wash or your construction of a
new car
wash.
We prefer that you have at least a Letter
of Intent (Offer to Purchase) signed by the car wash site land seller
before
you call us. After all, if you are not in agreement with the
seller
on purchase price there is little reason for us to talk.
If you are building, already own the site land, and if you bought the
land
fairly recently your equity in the land, based upon your original
purchase
price, will count dollar-for-dollar toward your down payment. If
the land
cost is less than 20% of the Total Project Cost you will probably need
to make
up the difference with a cash down payment so that the total of the
land cost
and the cash down is 20%.
Yes.
Your
new
personal debt from the refinancing is analyzed along with any other
personal
debt that you may have. Borrowing your down payment is acceptable
as long
as you can comfortably pay the loan payments from your present personal
income
without considering any income from your new car wash.
Generally, your personal loan payments and
other personal fixed obligations need to be no more than about 40% of
your
personal gross income from sources other than from the car wash.
We
recommend
that you NOT borrow any money for your down payment that will appear on
your
credit bureau report until after you have discussed this with us.
It
might be best in some cases not to borrow any money for your down
payment, but
instead just use personal assets as additional collateral for the car
wash
loan.
NO! Do NOT
contact
your local SBA office and do NOT contact your local Certified
Development Company directly for ANY reason.
First,
particularly with regards to fixed rate "504" (five-oh-four) loans,
if you go to a local CDC and/or SBA office, they CAN get a 504 loan 2nd
lien
debenture approved even without you having a bank approval first.
But, unfortunately for you the CDC/SBA approval will be under
the
CDC's/SBA's conservative terms and conditions, which is not good for
you.
By
getting the
CDC/SBA approval first you are effectively tying the hands of ANY bank
or
finance company to get approved what would likely be a better overall
loan
structure for you. We have seen this exact scenario a number of
times. NEVER go to a CDC or SBA office and NEVER let a CDC or SBA
approve
a 2nd lien loan (effectively a complete 504 loan structure), without
first
being completely satisfied with a commitment letter from a bank or
finance
company.
Getting
a loan
structure approved by SBA/CDC first can easily cost you tens of
thousands of
dollars more cash down payment, even more than $100,000 on larger car
washes,
and can easily and unnecessarily tie up your personally owned assets as
collateral.
Second,
truthfully many of the SBA and CDC offices prefer that you work through
the
lender. They are not usually organized to work with applicants
directly.
Third,
you will
not learn any more about the SBA programs than you will from your
experienced
lender (hopefully us!) - so save your time.
Fourth,
and this happens much more often than you might think, if you contact
these
offices directly you may (probably will) inadvertently reveal
information about
your car wash project or about you that may come back to haunt you
later when
your application is formally presented. It is much better to let
the
lender make all of the contact with the SBA offices for you. In
this way
your loan application information is presented in the best light.
No.
You
will need to have the plans completed and the construction contract
fully
signed prior to loan closing.
The
lender will
submit your architect prepared plans and specifications to a
third-party
construction management company to confirm that the project can be
completed
with the amount of money that you have budgeted for construction.
Second,
the construction contract must be completed and signed so that all of
the loan closing documentation, liens, title
policies, etc. are
prepared using final numbers. It is difficult and costly for you
to have
the loan documentation changed. By having the correct
construction cost
identified and the documents prepared correctly just once prior to loan
closing
could save you a considerable amount of money. As long as the
cost of the
architecture and engineering work has been included in the Total
Project Cost,
these costs can be counted toward your cash down payment
dollar-for-dollar or
those costs can be "refunded" to you from the loan proceeds at
closing.
Probably not. For newcomers, even if
you have an
excellent credit history and excellent income from a job or other
businesses
the banks and finance companies generally want a 20% minimum cash down
payment.
While ours do not, many banks and finance companies want a 30%
minimum cash
down payment.
So, the 20% cash down payment that we offer is already the lowest in
the
lending industry.
If you have less than 20% cash down payment, but you DO have other real
estate
collateral to offer, we should be able to get the loan approved.
In other
words, if you have about 15% cash down and you can offer marketable
real estate
as additional collateral (in addition to the subject car wash) we
should be
able to get the loan approved. Normally the additional collateral
needs
to be a first lien or a strong second lien - usually on a single or
multi-family
residence. The market value equity in the additional real estate
collateral usually needs to be 1.5x (150% of) the cash down payment
being
substituted.
If you have
substantial other real estate
collateral to offer, a very few lenders might allow you to put down
only 10% in
cash, but in almost all cases the minimum is 15% even with substantial
additional collateral.
Yes, to a limited extent it is possible to use equity in your house and
other
properties as a down payment without actually pulling the equity out of
the
house and other properties.
Typically
the 'banker's' formula for calculating the equity in additional
collateral is
((80% times the Market Value) minus Prior Liens). A lender is
stretching when
it allows even a 2nd lien to substitute for down payment, so don't
expect a
lender to accept a 3rd lien, no matter the value of that 3rd lien.
The 2nd lien position(s) in additional collateral would have to be such
a large
percentage of the value of the
additional collateral that there is no
question that the lender could foreclose on the additional collateral,
pay off
the additional collateral 1st lien, and still have plenty of value to
pay off
any deficit from foreclosure of the subject car wash 1st lien. That can
be a
tall order.
The best thing MAY be to get a 2nd lien on your home or refinance so
that you
have enough cash to make a down payment of at least 10% on the wash. Follow the formula above to make sure that
you have at least another 5%, 10%, or more to offer from the 1st or 2nd
lien on
the additional collateral.
Note: The number one criteria
for the lender making the loan is the projected Debt Service
Coverage
Ratio (DSCR). The car wash and additional collateral 'Appraised Value'
is only
a secondary consideration. The DSCR is the historical annual NOI
(EBITDA)
divided by the annual car wash loan payments. This ratio needs to be AT
LEAST 1.2x. The higher the loan amount on
the car wash, the higher
the loan payments, and therefore the lower the DSCR. The trick is to
get the
loan payments low enough so that the EBITDA (after annual owner
withdrawals) is
AT LEAST 1.2x the annual loan payments. In
a very small percentage of cases the CASH
down payment will need to be at least 20% or more of the Total Project
Cost
(the Purchase Price plus the Closing Costs) in order to calculate a
satisfactory DSCR.
Generally
you need a credit score above 650. We can work with delinquent accounts
from
the distant past. It is important that you continue to make all of your
payments on time because that will quickly increase your score.
If
one
partner has a weak credit score this can be offset by strong credit
scores from other
partners.
In many
cases, yes. Of course, the more
distant in time the better. We will NOT likely be able to
finance
you for a car wash if your bankruptcy has been within the last three
years
If
you have a
past bankruptcy please tell us about this
in our first
telephone conversation. We will discuss with you your specific
case and
the impact that this might have on your car wash loan
application. We
have successfully worked through these situations on previous car wash
loans.
We
receive a number of car wash business plans. Some
are very good, others not so good. A good
business plan does not have to be
overly detailed or overly lengthy. The best ones are fairly specific
and do not
make statements of glowing generality.
(Never use the word ‘dynamic’ in your business plan. To a lender this word is equivalent to
‘risky’.)
The most important parts of your business plan are:
1. Site
Selection, 2. Advertising and Promotion, 3. Competitor Analysis, and 4.
Management and Operations.
A
projected balance sheet is not necessary in your business plan since
our loan
analysis software automatically creates that from the total project
cost and
down payment (or equity injection) information.
More important than the balance sheet is a thorough listing of your
project
costs. Don't forget engineering, architecture, legal costs for rezoning
and
replatting, off-site utility construction, site preparation, appraisal,
environmental study, and permitting.
If your car wash will include an in-bay automatic or a conveyor,
or if you plan to have fleet accounts the business plan needs to have
clear
marketing plan. Discuss specific advertising programs and the cost of
those
programs. If fleets, discuss (name) specific fleets and include letters
to/from
those fleet representatives that indicate their willingness to do
business with
you and the estimate of the number of vehicles they will wash at your
business.
A
business plan should include as exhibits copies of the land purchase
contract,
construction quote, and the equipment quote. These are often left out
of
business plans. Without an actual written quote it is difficult to say
just
what these costs will be. We recommend that you have the site plan,
floor plan,
and elevation done to get a good construction estimate. Of course, you
won't be
able to get a final construction estimate or quote until the contractor
sees
the final complete set of drawings and specifications.
The
business plan needs to have clear advertising and promotion plan.
Discuss
specific advertising programs and the cost of those programs. If
fleets,
discuss (name) specific fleets and include letters to/from those fleet
representatives that indicate their willingness to do business with you
and the
estimate of the number of vehicles they will wash at your business.
Many
lenders will not even consider financing a car wash for investors who
do not
have previous significant experience in the car wash industry. Attach documents that show that you have or
are scheduled for training. You may also
have a Consulting Agreement where the consultant will spend time with
you
before opening and after opening. On-the-job
training needs to be evidenced by letters from owners of car washes
where you
have had this work experience. Any
training at the factory needs to be evidenced by a Certificates of
Completion.
12. I
need to prepare cash flow projections
for the new car wash that I am planning to build. What
are some things that I need to do?
Your
revenue projections should be the direct result of numerical
calculations based
upon the demographic information and/or traffic count information. Show
your
calculations. Include a demographic report (Claritas) and traffic count
maps in
your business plan.
EVERY revenue and EVERY expense item should
be
supported by an attached assumption listing. List each expense and how
you
estimated that expense. Get written quotes for insurance, pit cleaning,
dumpster service, accounting and tax return preparation, alarm/security
service. You may be able to get a written estimate of your property
taxes from
the appraisal district, or at least a schedule of the tax rates so that
you can
calculate the property taxes. Attach
these written estimates and quotes to your projections as exhibits.
A sensitivity analysis on your projections might be important to you or
partners, but we think that a break-even analysis is the best.
Do
not include your projections in the body of your business plan. The reason that you want to keep them
separate is because you will likely need to reprint one or the other
independently, so you can save yourself much time by not having to edit
and
reprint the business plan simply because you have made a change in your
projections.
Many
inadequate projections include only a single-year annual revenue
projection and
annual expenses, which does not accurately describe the first year or
two of
business. The best projections are on a monthly basis and show a
gradual
increase in revenue over time.
We like to see two full years of monthly projections with a gradually
increasing revenue and with
monthly seasonality factors.
Be sure to include property tax expense and a realistic cash
withdrawal
and/or salary for yourself.
We can usually
finance your
purchase of the land with a ‘bridge’ loan.
In this instance the car wash construction and permanent loans
must be
approved first. While you are working to
complete your construction plans, getting all of your construction and
equipment contracts completed, and getting your permits approved you
can close
into your bridge loan to get ownership of the land.
The down payment
for the
bridge loan is usually the down payment that you will need for the
entire
project, which coincidentally is approximately equivalent to 50% cash
down for
the land. For raw land speculators the
down payment for land is usually 50% anyway, so the banks generally go
along
with buying the land for car wash early if necessary.
In some
cases, yes. This
is handled on a case-by-case basis.
But,
please be aware that almost no lender will allow you to function as
your own
contractor if you do not have experience constructing a car wash. There
are
some unique aspects to building a car wash, and there are some lien
issues and
insurance issues with general contracting. We
have had some contractors who have at least
gotten a "straw" contractor to handle the paperwork for a nominal
amount, typically $10,000.
If
you are a licensed general contractor and have experience with
construction projects
similar to your car wash then you should be able to act as your own
general
contractor. You will need to go through
the bank's customary contractor approval, which is based upon the AIA
Form
A305, Contractor Qualification, form.
Remember that no
bank or finance company will allow a ‘self contractor’ to show a profit
on the
bid or the schedule of values.
These
days the
lenders really want you and your contractor to use the standardized
construction contract form and other important forms provided by the
American
Institute of Architecture (AIA).
Construction
contractors are very familiar with AIA documents - these documents are
commonly
used in the commercial construction industry. Often your
architect or
contractor already has these forms or the lender will provide them to
the
contractor. The forms are copyrighted but can be easily purchased
at a
low cost through the AIA chapter in your area in your state.
Importantly,
the contract between you and the contractor must be a "fixed price"
contract, not a "cost plus" contract. Lenders usually require
that the contract be on the "Standard Form of Agreement Between
Owner and Contractor - Stipulated Sum" (AIA Document A101).
As
is customary
in the construction industry, the contractor and the sub-contractors
will be
subject to a 10% retainage that is withheld until ALL work is
completed. The
retainage is paid according to state law, but the retainage is normally
paid
within 30 days of the receipt of the Certificate of Occupancy.
Normally
the
contractor will need to complete the "Contractor's Qualification
Statement" (AIA Document A305). This provides information to the
lender and to the 3rd-party construction management firm about the
technical
and financial qualifications of the contractor to perform the work.
You should tell your contractor that the lender will require
references and
financial information about the contractor as is called for in this
document
(A305).
Like
the main car wash construction loan there is a cash down payment
for the 7a loan. That also must be injected at the closing/beginning of
the
construction loan.
To get
your
pre-approval
done we will need personal financial statements on all of the partners;
the
first page of the last two years of personal tax returns on the
partners; the
rough project cost itemization; the street address of the proposed car
wash;
and a copy of the mutually signed Letter of Intent (Offer to Purchase),
the
Sale/Purchase Contract, or the land purchase Closing Statement.
Unlike a
credit
card
pre-approval or pre-qualification, a car wash loan pre-approval from me
is for
REAL. I can discuss your specific
business proposal with several lenders.
I will then structure your loan to your best advantage. This includes setting the down payment and
other equity; determining additional collateral, if any; determining
the best
interest rate index and margin to suit your needs; determining the best
prepayment penalty schedule; setting the repayment term; and
determining the
construction loan terms. I work to make
your car wash loan the best that it can be for YOU, not necessarily for
the
bank.
In just
about
every case
the loans that we arrange and get formally approved are identical to
the ones
that we got pre-approved at the very beginning of the process.
23.
What
is the timeline for formal loan approval?
Closing
is most
commonly
governed by the time that it takes you to get your construction permit
approval. You do not need to actually
purchase your permits before the loan closing because the lender can
fund your
purchase of those with the first loan proceeds.
The
second most
common impact
on the timing of the loan approval is the time that it takes to get the
appraisal completed, which is normally three to four weeks.
The third
most
common
impact is the time that it takes to get your contracts completed.
© Copyright by Alan L.
Bussey, 1999 through 2009
All Rights Reserved Updated