Auto Repair Shop Business Loans
Important Notice: For SBA Paycheck Protection Loans consider Fundera
|Loan Amounts||$5,000 to $500,000|
|APR Range||Term Loans: 7% – 30%
Startup Loans: 7.9% – 19.9%
|Repayment Terms||Term Loans: Up to 10 Years
SBA Loans: Up to 25 Years
|Time to Funding||Varies|
|Click “Check Rates” to apply to Fundera|
We love our vehicles here in the US, and with a population of 330 million, there is plenty for auto repair to do. In fact, the auto mechanic industry did $69 billion in 2019. If you’re thinking of starting an auto shop or making improvements to your current business, you’ll likely need a loan to do so. In this article, we’ll guide you through everything you need to know about small business loans for auto repair shops.
What Are The Best Auto Repair Shop Business Loan Options?
There are five different kinds of loans to consider as an auto repair business:
If you are an existing business looking to buy equipment, need working capital, inventory or real estate purchase, an SBA loan may be for you. The U.S. Small Business Development Administration works to provide these loans to small businesses at a much lower rate (5.5-13%) and often for a longer length of time (up to 25 or 30 years in some circumstances. There are various programs available and loans from $500 – $5.5 million, depending on individual circumstances.
The downside of these loans is that they take a while to get (weeks or months) and aren’t easy to get. You also can’t get an SBA loan (in most circumstances) if your business is under 2 years old.
Merchant Cash Advance
This is an option if your business does a large number of credit card transactions. Essentially, you apply for a one-time loan based on your credit card sales, and this is paid off by the provider taking an agreed percentage of every sale, typically 10%-20%. It’s fast to arrange, and collateral isn’t required. The downside of a cash advance is it is expensive, can be risky if your cash flow changes, and is often only a short-term option.
Line of Credit
This works somewhat like a credit card, wherein you agree to a maximum you can borrow, but only pay on the actual amount you owe. So, you only borrow what your business needs at any time. Most lines of credit are revolving, which means once you pay it back, it’s available to you again. This is an excellent option for businesses that need flexibility and would prefer to borrow what they need, instead of a lump sum upfront.
Term loans are the business equivalent of a personal loan. You apply for a certain amount, at an agreed interest rate (though some rates are variable), and pay it back over 2-10 years. Term loans can be a good option if you need the money for a range of areas and want to be relatively sure of how much you’ll have to pay back each month.
These are essentially the same as Term loans, the big difference being that the loan is tied to what you use the money for (e.g., your equipment). These are only going to be suitable in certain circumstances.
How Much Does It Cost To Start An Auto Repair Shop?
There’s no one-size-fits-all answer to this, unfortunately, as it’s going to vary drastically depending on where in the country you are and many other factors. However, we’ll cover some of the costs you need to consider below:
Basic Costs to Start an Auto Repair Shop
Doing a detailed financial business plan is not the most exciting part of setting up a new business, but it is necessary. Here are the basic costs you are looking at:
- Rent (or mortgage): This is the biggest unknown, and it will depend on the size and location. You need to do your research thoroughly to consider if it’s in a good location for your potential clients and if the rent is reasonable
- Diagnostic machine: $5,000-$10,000
- Lift: around $7,500 (including installation)
- Specialized tools: a good essential toolset will cost around $15,000
- Insurance: $4,000
- Wages: this needs to include you!
A ballpark figure for setting up an auto repair shop is going to be at the $50,000 mark.
Finding The Right Loan For Your New Business
- SBA Loan: The two most common types of SBA loans are the SBA 7(a) and SBA 504. The 7(a) is primarily for working capital, buying real estate, equipment or purchasing an existing business. The 504 gives you less flexibility in what you can use the money for but has a higher borrowing amount. This is not the quick option though, you have to spend a lot of time to close the deal – typically two to three months.
- Line of Credit: There are two choices here: secured or unsecured. You’ll likely have to look at a secured business line of credit, as it offers less risk to the lender. As a new business, you will struggle to qualify for an unsecured line of credit. Secured means it will be tied to your property.
- You need to shop around because different lenders offer different interest rates and often specialize in varying minimum and maximum amounts. They also differ in their requirements, annual revenue, cash flow and so on.
- Equipment Loans: You will need a good credit rating for this loan, but if you already have your property lined up and some savings of your own, this may be a good option for funding your equipment.
You Need To Consider:
- How soon you need the money
- Your credit score
- How you want to repay your loan
- If you have a solid business plan ready to present, or if you need to prepare one (there are services to help you do this)
Regardless of which type of loan you decide is best for your circumstances, you need to remember that it’s not just getting approval that’s important, it’s getting the money at a reasonable rate, too. We’ll help you compare loans so you get the best deal. (Click here to find out more.)
Why Borrow Money For Your Auto Repair Shop?
Modern auto engineering is very sophisticated, and often if you don’t have the right equipment, you can’t do the job. Old equipment wears out or becomes obsolete and needs replacing or updating. But equipment is expensive, and trying to find that money from your trading revenue may be difficult or simply impossible. A loan is a great way to get the funding you need for your new equipment.
It is essential for the success of your business that you have the right people in the right positions to give you the foundation for long-term growth. Working capital loans are often the best option to allow you to hire the best people at the right time.
A competitive marketplace is essential if you want to make money, and that’s no different when it comes to auto repair businesses. Sure, word of mouth is the best form of marketing, but you cannot rely on that if you want to grow, especially if you are a new player. A properly designed and executed marketing strategy needs time and money, money that may be sourced with a loan.
How Much Should You Borrow For An Auto Repair Business Loan?
Loans Under $100,000
You are probably looking at a minimum investment of $50,000 to set up an auto repair shop as a start-up. If you can raise more, great, but be realistic about how much you need. If you don’t need to borrow more than $100,000, then don’t. Never forget that loan providers are not giving you the money, you are borrowing it – at a cost. Don’t saddle yourself with massive monthly repayments you find hard to meet, as this may cripple your business before it has a chance.
Compare $50k – 100k Business Loans
Loans Over $100,000
If you are thinking big, be doubly careful when you do the math and prepare your business plan. Consider what you’re going to need, and why, and how that will help you beat the competition. Borrowing $50,000 to get a small auto shop off the ground is one thing, but borrowing multiple six figures will need some serious thought behind it. If you’ve got the plan in place – go for it.
See also: $250,000 Business Loans, $300,000 Business Loans, $500,000 Business Loans
What Credit Do You Need For Small Business Loans For An Auto Repair Shop?
If you want affordable loans, you’ve got to have a good credit history. There are loan options for those with less than perfect credit ratings, but generally, the better your score, the easier it is to get finance and the cheaper the repayments will be. If you’re seeking finance for your start-up, you really need to have an excellent credit rating. If your business is established, a less-than-perfect score likely will not be a barrier to finance, but it will drive up your interest and limit your options.
What Are The Terms and Rates For New Small Business Loans?
Current rates for SBA loans are:
- 7(a): 5.5% – 9.75%
- 504: 2.39% – 2.77%
Top SBA Loan Lender – SmartBiz
|Loan Amount:||$30,000 – $350,000|
|APR Range:||9.7% – 11.04%|
|Time To Fund:||Typically take several weeks to fund, but can fund as quickly as within seven days.|
|Loan Term:||Maximum loan term is 10 years.|
|How To Qualify:||675+ Personal credit score
$50,000+ Annual revenue
|Great Option For:||Borrowers with good credit
Funding real estate purchases
|Credit Check?||Soft credit check and hard pull|
|Co-Applicants Accepted?||No cosigners|
|Direct Pay-Off To Creditors?||No|
|Click “Check Rates” to apply to SmartBiz|
» MORE: SmartBiz SBA Loan Review
This varies a great deal depending upon loan type, amount, term length and credit score. As an approximation you are looking at somewhere between 8% – 12% for a standard term loan with online lenders.
Other types of loans will vary depending on what they offer, the term, and your circumstances.
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Should You Get An Equipment Loan For Your Automotive Shop?
What Is Equipment Financing?
Equipment financing is a loan you can get to help you buy equipment. This money cannot be used for other purposes, and the loan will be tied to your equipment. These loans allow you to buy or upgrade the equipment you need to do the best work or offer new services to your clients.
If you want a comprehensive view of what is available to you as an auto repair shop owner, then click here to find all the details you need to make an informed decision.