Neither of the two primary loan options are necessarily "better" than the other. When deciding between SBA vs. Bank loans for car wash financing sources, it's important to determine which fit and accomplish your specific goals best.
The largest trade-off between SBA and Conventional Car Wash loans is that:
Seller financing is only a good idea when it successfully and contemporaneously accomplishes both the buyer and the seller's goals.
Seller financing is typically used for two primary reasons:
No. The unwillingness of a car wash owner to "take back paper", "hold a note", or to partake in and accept any form of seller financing as either majority or minority of the purchase price structure for a buyer looking to purchase their wash is not a red flag.
Car washes are operator dependent businesses. Due to such, what a car wash seller and current owner is doing in accepting any form or amount of seller financing from any purchaser is actually "backing" and putting faith in not necessarily the car wash itself, but arguably more so in the buyer and to-be new owner / operator.
Selling a car wash takes work - just like anything else worth doing. Due to the work required, car wash sellers aren't looking to forcibly take the wash back if there is a default on the seller financing that they accepted as whole or part of the purchase price structure for which they sell their wash for. A car wash seller sells their car wash to sell it - not to get some quick cash and then have to take it over again and not get the money they are due to be paid.
Between 10% and 25% cash down is required to purchase a car wash.
The exact amount of cash down needed to acquire a car wash business depends on several factors including the loan type, amount of the loan, pro-forma debt service coverage, personal financial state and creditworthiness, industry experience, and the strength of the underlying asset of the car wash and any associated property being purchased along with it.
Government or quasi-government loans for car washes do require a personal guarantee from the borrower and often place a “blanket” lien on currently unencumbered personal assets.
Non-government related loans, such as conventional bank or private lender loans require personal guarantees for car wash financing on a case-by-case basis.
Car wash lenders require a minimum DSCR of between 1.25x and 1.35x.
Although certain situations and nuances can present exceptions to this general guideline, car wash loans will almost never be made if the 1-year forward pro-forma DSCR is below 1.25x.
Twenty years is the average length or term of the average car wash loan. Car Wash loans typically vary from 10 to 25 years in length of the loan. The largest determining factor that contributes to where within this large range is achievable relies on whether or not the land / real estate is being purchased with a car wash (as opposed to buying the car wash business along with a lease, but not the land / real estate itself).
The average interest rate for car wash acquisition or purchase financing is between 4.0 - 5.5%
Most car wash lenders, whether quasi-government or completely independent, will lend for car washes based on the lower of loan-to-cost (“LTC”) and loan-to-value (“LTV”). The lower, between “Value” and “Cost” tend to be cost due to the high level of value basis that lies in cash flow and outside of physical and tangible assets in the car wash business.
For SBA and USDA car wash loans the average LTC or LTV for a car wash loan is 85% - leaving 15% to be provided as cash equity from the borrower.
For conventional and non-government lenders and car wash loans, LTC or LTC sits closer to 77.5% on average (leaving ~22.5% cash down in equity required by borrower) and tends to have a higher level of variability on a case-by-case basis than it’s alternative quasi-government backed loan alternatives.
30 to 45 days is the average amount of time it takes to get a car wash loan.
This time range holds regardless of whether the car wash loan being attained is an SBA Loan (7(a) or 504) or whether it is a conventional (aka Bank) loan.
Assuming competence and appropriate bandwidth of the lending institution to be issuing the car wash loan, the single largest determinant of how long it takes for someone to close on a car wash loan is the readiness and availability of the required information and documentation by the borrower that is required for the underwriting of the loan itself.
The process of obtaining an SBA loan for a car wash does not typically require more information than a conventional lender. The largest difference between the information requirements between these two types of loans are more around at what point in time during the process said information is required to proceed, not the level and amount of information itself.
SBA loans and lenders typically require that more information be provided earlier in the process in comparison to conventional banks and lenders that loan for car washes.
Depending on the type of loan, the amount of loan, the use of proceeds, and the borrower, several actions can be taken to speed up the loan obtainment and underwriting process. The single biggest thing a borrower can do to speed up the car wash loan process is to have all information that is asked for and is going to be required by the lender done and ready to go upfront.
There are two major milestones, outside of loan closing and the initial application for a loan, that are significant checkpoints of progress during the loan obtainment process.
A “Term Sheet” is the first milestone and is valuable in providing anticipated terms and ability to finance. Term Sheets are neither binding nor a signal of approval, but nonetheless are indeed the first major milestone a borrower will experience during the process of obtaining their car wash financing.
The second major milestone in the car wash loan obtainment process is a “Commitment Letter”. A lender Commitment Letter is the closest thing to a binding finalization and offer to finance that is present during the loan process.
Typically, regardless of whether done via SBA or Conventional financing, financing will be structured as a roughly 12-to-18 month interest only facility. During the build time, an "interest reserve" methodology will be used with an assumed percentage of total available and committed principal utilization. This utilization assumption typically sits in the range of 65% depending on the specific lender and the timeline of the car wash build at hand.
Most lenders, although some are exceptions, will allow for the interest reserve to be "bundled into" the main principal balance of the total financing at hand. This alleviates the car wash builder and borrower to have to pay true cash out during the build process to cover debt related expenses or interest.
See our full piece on new build costs for more detailed information on all the costs of building a new car wash.