How to Finance an Auto Repair Shop

Auto repair and body shops with commercial accounts sometimes get into cash flow problems due to slow-paying invoices. These problems can usually be solved by changing business practices or by using financing. However, getting financing for an auto repair shop can be very difficult. This article discusses five ways to improve cash flow and finance your business. We cover the following:

  • Common cash flow issues
  • Option #1: Build a cash reserve
  • Option #2: Early payment discounts
  • Option #3: Finance slow-paying invoices
  • Option #4: Asset-based financing
  • Option #5: SBA Financing

Common cash flow issues

Auto repair shops often serve retail and commercial clients. Retail clients pay immediately after the service, often by credit card. This works well for repair shops since it provides immediate cash flow. However, retail clients use auto repair shops infrequently.

On the commercial side, some auto repair shops also work with commercial fleets and insurance companies. These clients include vehicle insurance, rental, delivery, and other businesses.

a) Do you offer net-30 terms?

Commercial clients provide a great opportunity to grow your business. However, they are usually strategic negotiators who insist on low pricing and payment terms. They often negotiate to pay their invoices on net-30- to net-90-day terms.

Providing payment terms is a common way to do business. However, it can have a negative effect on your cash flow. Your company will need to stock parts, pay suppliers, cover payroll, and manage other expenses. However, supplier payments and payroll tend to be the highest and most important expenses.

Companies with a cash reserve can manage these expenses easily. They can pay their vendors, mechanics, and staff out of reserves while waiting for clients to pay. Repair shops with a small cash reserve may have problems managing these expenses. Many will likely develop cash flow problems.

The next five sections cover options you can use to improve the cash flow of your repair shop.

Option #1: Build a cash reserve

The simplest 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 – mechanics, specialists, vendors, 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 requires discipline and time. Build the reserve by taking a percentage of your monthly profits and depositing the funds in a reserve account. 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 cash reserve may not be sufficient, especially if your repair 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 simple: offer your client a discount, usually 2%, if they pay in less than ten days. Terms can be negotiable, though.

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. Because the early payment is optional, you never know if your client will pay quickly or not. Early payments are also used less during recessions, which is when you need fast payments the most.

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 invoices 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, equipment, and machinery. Based on the assets being funded, the line can be structured like a line of credit, a term loan, or both. Although an asset-based line allows you to finance invoices, it is different from factoring.

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

Option #5: Use conventional business financing

Auto repair companies with a few years of track record and reasonable financial statements can consider a conventional bank financing line. Conventional loans require an auto repair business with sufficient revenues to sustain the monthly payments. Additionally, the company must have assets that can be pledged as collateral.

Alternatively, many banks offer loans 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, it works through intermediary banks and financial institutions. The SBA provides guarantees to those banks, which enables banks to provide these loans to businesses. If you want an SBA loan, consider contacting your current bank first. Many banks offer these programs, and being an existing client could help you.

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