How To Finance an Auto Repair Shop

Managing cash flow can be a challenge for some auto and truck repair shops. Cash flow problems usually affect repair and body shops who work with commercial accounts or who get paid by insurance companies.

Often, corporate and insurance clients demand 30- to 60-day terms to pay an invoice. However, many repair shops can’t afford to wait for the clients to pay. They need funds to pay for employee salaries, parts, machinery, and other expenses.

Your repair shop can do a few things to improve its cash flow. In some cases, the solution can be as simple as building a small contingency reserve fund. However, if your repair shop is growing, you will most likely need some financing.

In this article, we provide five options for improving the cash flow of your company. The first two should be available to companies of any size. The last three involve using specialized financing that’s available to repair shops.

Option #1: Build a cash reserve

One simple way to avoid the cash flow problems created by slow insurance and commercial payments is to build a cash reserve. Use this reserve to pay for the repair shop’s expenses – employees, auto parts, etc. – while waiting for clients to pay. This solution amounts to self-financing and can be the most cost-effective option.

Although the solution is simple, building a cash reserve is difficult and takes time. You have to take a percentage of your monthly profits and save the funds in a reserve account. You will need to determine the size of your reserve with your CPA or bookkeeper because each situation is different. However, saving 30 to 60 days of company expenses is probably enough for most business owners.

Ultimately, a reserve may not be sufficient, especially if your business is growing. In this case, consider supplementing your cash reserves with financing.

Option #2: Offer early-payment discounts

Before getting any type of financing, consider offering an early-payment discount to your commercial and insurance clients. Early-payment discounts are relatively simple: you offer your client a discount, usually 2%, if they pay you in ten days or less. Terms can be negotiable. Obviously, you want to provide the lowest discount for the fastest possible payment.

An early-payment discount can improve your cash flow relatively quickly. However, these discounts have some drawbacks to keep in mind when structuring your plan.

The main drawback is that early payments are optional. Your client can choose to take the discount. However, because the early payment is optional, you never know if your client will pay quickly or not. The bottom line is that your cash flow should improve, but it will never be completely predictable.

Don’t offer this benefit to every client. Instead, offer it to clients who pay reliably, albeit slowly. This strategy minimizes the chance that a client will abuse the offer by taking the discount but still paying slowly.

Option #3: Finance slow-paying invoices

Another alternative to improve your cash flow is to finance your invoices using a factoring program. Factoring programs allow you to finance the payments from your commercial and insurance customers. Instead of waiting 30 to 60 days for a payment, you receive an advance on your invoices from the factoring company. This advance provides funds to pay for corporate expenses.

Factoring provides your auto and truck repair shop with immediate funds that you can use to buy parts, pay suppliers, and cover payroll. Most factoring lines are designed to adapt to your business needs. They can grow as you service a growing client base.

Option #4: Use asset based financing

Asset based financing is an alternative that can be used by larger auto repair facilities – those having more than $1,000,000 a month in revenues. An asset based financing solution allows your repair shop to finance multiple asset types. This solution helps improve your liquidity.

Usually, asset based lending programs can finance accounts receivable, inventory, machinery, and even real estate. Based on the assets that are being funded, the line can be structured like a line of credit, a term loan, or both. Although an asset based lined allows you to finance invoices, it is different from factoring.

Qualifying for an asset based financing line is more difficult than getting factoring, but it’s easier than getting a bank line of credit.

Option #5: Use a conventional line of credit

If your company has been in business for a few years and can provide reasonable financial statements, consider a conventional bank financing line. Many banks offer loans that are backed by the Small Business Administration (SBA). These loans have attractive terms and are easier to get than conventional loans.

The SBA has a number of programs that can be used for different objectives, including general purposes (i.e., working capital) and buying machinery/equipment. Note that the SBA does not offer loans directly. Instead, they work through intermediary banks and financial institutions. The SBA provides guarantees to those banks, which enables banks to provide these loans to businesses.

If you are looking for an SBA loan, consider talking to your current bank first. Many banks offer these programs, and being an existing client could help you.

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