The Down Payment

The Down Payment

The down payment is also known as the "equity injection", "equity contribution", "capital injection", or "capital contribution".

For car washes we typically offer the lowest down payments in the lending industry.

To either build or buy a car wash virtually all lenders require a cash down payment that is more than 10%. When you hear that SBA loans require 10% down, this almost NEVER applies to car washes.

For someone new to the car wash business the normal minimum cash down payment, even with SBA-guaranteed loans, is 20% of the Total Project Cost. This 20% includes a "base" down payment of 10%, plus 5% for "special purpose" real estate, plus 5% for a "startup (new) business". Someone financing a car wash with a conventional loan (not SBA-guaranteed) can usually expect to be required to make a larger down payment, normally 25% or more. Some lenders, particularly conventional (non-SBA) lenders not familiar with the industry may require 25% or even 30% or more cash down.

The standard lending industry definition of the down payment percentage is: Down Payment divided by Total Project Cost. The Total Project Cost includes Land, Building, Equipment, and all other costs associated with getting the loan and opening the car wash for business. This includes starting cash for operations. With the hard costs that you provide to us we will estimate the Total Project Cost for you.

If you already own a car wash many lenders will consider a location that you are buying or building to be an "expansion of business". For someone who already owns a car wash or is otherwise highly experienced in the industry it is not unreasonable to expect a lower 15% down payment to buy or build another car wash. This is the base down payment of 10% plus 5% for special purpose real estate. There would be no additional 5% down payment for "startup business".

In some cases, if you are already established in the car wash industry you may be able to get a 15% down payment. If you are not already in the car wash business it is wise to assume that you will need to make a down payment of 20% of the Total Project Cost. The Total Project Cost includes constructions soft costs, working capital (cash), and loan costs, virtually all of the expenses to build or buy a car wash.

So, with us (Car Wash Loans), for people new to the car wash industry you will need to make a cash down payment of at least 20%, with 20% being most common. People who are already established in the industry may merit a down payment of 15%, or even 10% in some cases.

Even with a 20% or 15% cash down payment there may be situations where additional collateral may be required. This additional collateral may be a first lien or a strong second lien on a residence or on other commercial property owned by you. We work to minimize your cash down payment, particularly where the equity in additional collateral is substantial.

In addition to the down payment, virtually all lenders require anyone who or any entity that owns 20% or more of the business to guarantee the loan. Virtually all small business loan in the USA are personally guaranteed by somebody.

Typical sources of the down payment from personal resources:

1. Cash from personal savings and liquid investments. When the car wash investor plans for this to be the only source of the down payment the lender will check to see that this cash appears on the investor's personal financial statement. If the down payment amount does not appear on your personal financial statement we will need to identify the source of your cash down payment and the timing of your receipt of that cash.

Do not report less cash on your personal financial statement than you actually have. We will not require more cash down payment than the minimum required to do the loan. The more cash that you show the safer that your loan looks to lenders. Having excess cash after you make your down payment is a real plus, because it gives us confidence in your ability to operate through the startup period and in subsequent low cash flow periods. More cash on your personal financial statement is better than less.

2. Cash proceeds from home equity line of credit.

The interest rate on a home equity loan or on a home equity line of credit is often less than that charged on any bank or finance company car wash loan, or any other small business loan for that matter.

If you intend to borrow ANY of your down payment we recommend that you NOT borrow any money prior to speaking with us about this. Particularly do not borrow using credit cards. We just want to be sure that whatever money you borrow does not hurt your personal financial statement and your personal cash flow statement.

Normally, it is OK to borrow the down payment for your car wash as long as it can be shown that you can comfortably make the loan payments from sources other than the planned car wash.

3. Personal retirement accounts. Before liquidated some or all of your retirement accounts check with your institution, accountant, and/or personal financial planner to understand the impact of doing this.

4. Sale of personal assets. Homes, land, cars, RV's, boats, etc..

5. Prepaid Expenses. Any expenses that you make for your project prior to closing of the loan will count toward your down payment as long as they are customary for the type of project of the type, are reasonable for the scope of the project, and as long as they have been included in the Total Project Cost budget. Common items that can count toward your cash down payment are prepaid engineering and architectural fees, prepaid equipment deposits, prepaid permit application fees, etc..

A good schedule to provide to the lender will include the payee, the date, the check number, a description of the work performed. You will need to provide a copy of the front and back of the matching check, and a copy of the receipt and/or paid invoice. Beware: Do NOT use credit cards to pay for ANY project costs. The lenders often will not give you credit toward the down payment when you use credit cards for project expenses, because it is difficult to match the credit card expenditure to specific uses and it is difficult to determiner whether payments that you make on the account are attributable to the project cost rather than to non-project uses.

It is wise to open a single checking account for all project costs. Do not use your personal checking account for that purpose. Make sure that you get the type of account that returns your actual canceled checks to you because the lender will require copies of the front and back of each check and these must be matched to copies of receipts, paid invoices, etc.. Keep your project records organized to make it easy on you to provide this information to the lender.

6. Equity in the site land that you have owned for more than about two years.

In this instance we can usually use the market value of the site, rather than your purchase price to establish the equity contribution using the site land.

7. Equity in the site land that you have recently purchased. If the site land is recently purchased it is customary to use the original purchase price to determine the equity contribution of the site land. However, there are situations where an investor might be able to use today's market value even though the site land has been purchased only recently.

a. A car wash investor buys two or more adjoining pieces of property where each one alone is unusable for a car wash (each are unusable as originally purchased). The car wash investor has these two (or more) adjoining lots legally replatted into one, making the new single lot more valuable and now suitable for the new car wash (or other purposes).

b. A car wash investor buys a relatively large piece of property and simply legally replats (separates) a smaller piece of the entire property for the new car wash. In this instance the remaining property (the property not used for the car wash) is sold, held for resale, or used for some other project.

If the car wash site that is smaller than the entire owned land is on or near a lighted corner, or fronts onto a road where the remaining property does not, we might be able to show that the car wash site is more valuable on a per square footage basis than the overall land on a per square footage basis. Discuss this with us early.

If it seems that the property for the car wash is a LESS valuable part of the original entire tract many lenders will not give you credit on the car wash site at the entire (larger) tract average price per square foot. They may insist upon using today's market value - "lower of cost or market" - for the car wash site..

The market value of the site is determined at the time of the appraisal for the overall project. An appraisal prior to the formal loan presentation is not necessary. Do NOT have an appraisal of the site done prior to approval of your car wash loan. The site land appraisal will be done as a normal part of the car wash appraisal after your entire car wash loan has been formally approved.

8. Employee deferred compensation. Some people who plan to buy a car wash from an employer receive a purchase price discount (cash gift) from their employer under a previously agreed WRITTEN employee benefit arrangement. This benefit may be one where the person receiving the gift is a longtime employee of a car wash business that he or she is buying. The agreement needs to be in writing and dated at the beginning of the plan, or at least dated some years prior to the purchase taking place.

There needs to be a schedule or formula set out in the agreement. Normally the purchase price of the business is discounted by a certain percentage for each year of service. The market value of the car wash is determined by the seller and the buyer, and then the discount is applied. The lender's appraisal will determine whether the car wash is bought/sold at a fair market price.

Consult with your attorney and your CPA before setting up such an agreement.

9. Cash received from a 10-31 (like kind) exchange. If you have a 10-31 exchange please discuss this with us early to make sure that you meet your exchange deadlines.

Personal Guarantees (Personal Endorsements)

Virtually all lenders will require anyone who owns 20% or more of the business personally guarantee the loan. If a minority partner or an investor wants to invest in your business but not guarantee the loan (particularly a SBA loan) you should keep that investor's ownership percentage at 19% or less.

Some lenders will even require those that own less than 20% to personally guarantee some portion of the loan. This portion may be 200% (two times) or 150% of their prorate share (for example: 15% ownership guarantees 30%). But it would be unusual for a lender to require a personal guarantee of someone who owns less than 20%. Not needing to guarantee any part of the loan is important to many minority (silent) partners.

Ways to Reduce the Cash Down Payment Made by You Personally:

As stated above, 20% is a common down payment, particularly for new car wash owners. These are some ways to reduce the out-of-pocket down payment made by you personally:

Method 1: You may be able to reduce the 20% down payment by substituting part of the down payment with additional real estate collateral. Additional collateral often used to reduce the down payment can be another car wash, a duplex, rent house, or other marketable real estate . Usually the lender will want a 1st lien or a strong 2nd lien in property that substitutes for a portion of the 20%. Still, for a new car wash to be constructed just about all lenders will want you to put down at least 10% in cash. Some lenders may want those who are buying an existing car wash to also put down at least 10% in cash.

We HAVE financed 100% of car wash purchases (including all soft costs) when the additional real estate collateral, perhaps a second car wash, has good marketable value. An example might be a car wash owner who has no debt on a car wash and who wants to buy a second car wash with 100% financing. The lender would take a first lien in the car wash to be purchased and a 1st lien on the applicant's existing car wash. In these cases a loan-to-value percentage may be 50%, perhaps as high as 75% or 80%. Usually both car washes will need to be appraised.

If you plan to offer additional collateral in lieu of a portion, or even all, of the down payment the lender will consider the first lien collateral value to be a portion of the market value. This portion is usually 80% or 75% of a residential property value or commercial property value, and 50% of a raw land value. To use the market value instead of the cost you will normally need to have owned the property for at least about two years. Otherwise the cost amount is used, instead of the market value. The general rule is: "Cost or Market, whichever is lower."

Sometimes we can arrange a loan where a second lien is acceptable as additional collateral. In this instance the formula for calculating the value that can substitute for down payment is: ((Market Value times 80%) minus First Lien Loan Amount). For example, if a rent house has a market value of $150,000 and there is a first lien balance of $70,000, the collateral value will be (($150,000 times 80%, or $120,000) minus $70,000), or $50,000. That $50,000 could substitute for a portion of the cash down payment.

Method 2: When installing an in-bay automatic a way to lower your cash down payment is to have an investor buy the in-bay automatic equipment. Charge rent to the investor (in-bay automatic owner) and split the revenue with that owner. In your agreement you could include an option to buy the machine after a period of time. If you plan to have an investor buy and own the automatic please discuss this with us early.

Method 3: Lease the equipment rather than financing the equipment in the loan. This can reduce your cash out-of-pocket. However, most lenders on the land and building will object to this, preferring to financing the entire project. Compared to a single overall loan for the entire project, equipment leases tend to reduce the car wash cash flow during the critical startup period. Car wash equipment leases can be difficult to get for the first-time car wash owner.

Method 4: You may be able to get investors to invest cash into your car wash project. Their cash investment can help you with the down payment or make the entire down payment. Many people who want to get into the business, but who have little cash for the down payment, have gone to investor open meetings, called private investors, called investment banking firms, called CPA's, bankers, attorneys, insurance agents, etc.. without finding investors. We have never seen an investor in a car wash that was not already a close friend or a close family member. We HAVE seen a number of car washes with close family members, close friends, and existing business associates as investors. Your most likely investors are the people closest to you.

With most loan types, an investor who owns less than 20% of the car wash may not need to guarantee any of the loan which reduces your investor's financial risk. A lender could require those who own less than 20% to guarantee some multiple of their ownership percentage, say 15% x 1.5 = 22.5%. With most loan types, anyone who owns 20% or more of the business MUST guarantee 100% of the loan.

Method 5: Borrow money from relatives or friends where you intend to repay the money according to a repayment schedule and using a formal written Note. Discuss this with us early.

Method 6: Receive a cash gift. Some people who plan to buy or build a car wash receive a cash gift from a relative. This may be a part of the gift giver's estate planning. The Congress/IRS places a limit upon the amount of gift that a person can receive without the gift being taxed.

If a parent or other person wants to give a larger amount to you than the maximum gift amount as set by Congress and you wish to avoid the taxes, you can do an additional subordinated loan payable to the gift giver. Consult with your CPA to determine the restrictions concerning gifts.

The lender's only criteria is that the person giving the gift must attest in writing that there is no expectation of repayment from the person receiving the gift.

Method 7: If you are BUYING a car wash and will be financing your purchase with a bank or finance company, you might be able to make as low as a 10% cash down payment if the car wash seller will take a 2nd (second) lien subordinated note for 15%, or so, of the purchase price. In these cases the bank or finance company makes the loan for about 75% of the total project cost.

Method 8: If you are buying you might be able to put down 10% (or less) and get the car wash seller to carry a 90% first lien note. You could refinance the "seller note" later with a bank or finance company once you have built equity in the car wash.

Method 9: If you plan to lease a car wash or car washes for a period of time before buying them you can often arrange within the lease document a discount of the eventual purchase price. In these cases the purchase price is usually set at the outset according to a schedule and the discount is also set at the outset according to a calendar schedule.

One way for the discount to be determined at the eventual time of purchase is by assuming that the lease payments are equivalent to a loan amortization payment. The discount is the same as the principal reduction that would have happened over the same time. In one such schedule the discount is accumulated and only becomes active after a set period, such as accumulating for the first year before the discount becomes effective for that first year, then accumulates again for the second year until the second year discount becomes effective, etc.

100% Financing     (If you are seeking 100% financing please read this section carefully.)

We have arranged 100% financing to buy or build new car washes and are willing to do so now. This normally involves a lien on a property in addition to the subject car wash.

A person who is buying or building a new car wash AND who already owns one or more car washes CAN use the equity in the existing car wash(es) in lieu of the down payment for the new car wash. Of course, there would have to be sufficient equity in the car washes already owned.

The same can be done if you are building your FIRST car wash and would like to use your equity in a home or commercial building instead if a cash down payment.

Some lenders require a minimum of 10% down on new purchases regardless of whether a car wash investor already has sufficient equity in car washes already owned. But, we can usually arrange your loan with a lender that will not require at least 10% down, if you are giving sufficient additional collateral in another property.

We cannot do 100% financing when you have no significant collateral to offer in addition to the subject car wash.

Self-Contracting or Self-Construction

Virtually no lender will allow labor that is personally performed by the car wash investor ("sweat equity") to be counted toward the Total Project Cost, nor toward the down payment. If you build the car wash yourself any supplies that you purchase for the project CAN be counted towards the Total Project Cost. Labor performed by others can also be counted toward the Total Project Cost.

If you intend to construct all of the car wash yourself or if you intend to act as the General Contractor please discuss this with us early.   We may be able to help you to get the lender to accept self-contracting.

We want to finance your car wash!