If your auto repair shop is having trouble receiving a business loan, you’re not alone. Small businesses—including auto repair shops—are still finding it difficult to receive funding, despite the recession being all but over. However, while small businesses are beginning to gain steam, many traditional lenders—banks, credit unions, etc.—are still not “all-in” when it comes to local, independent enterprises.
Alternative lending, however, is increasing its profile as businesses, both small and larger, become more aware of its benefits. Essentially, alternative lending is a faster and simpler way to receive funding. Approvals are fast and have a high approval rate, and requirements are much less strict than a bank. For example, most alternative lenders only ask for a credit score of 500 and above.
While requirements are less stringent, auto repair shops, like any small business, can still have trouble being a viable candidate for alternative lending. There are numerous reasons why a business will not be able to receive working capital, some specific to auto repair shops and some that affect all industries. A few common challenges faced by auto repair shop owners when trying to receive alternative lending. Include:
1. Not accepting credit cards: The most popular form of alternative lending, a Merchant Cash Advance, provides businesses with a sum of capital by lenders who purchase a set amount of future credit and debit card sales. But a large number of auto repair shops are cash only enterprises, automatically excluding them from receiving a Merchant Cash Advance.
Solution: Obviously, this barrier may be difficult to immediately overcome, but if you truly want to explore alternative lending you should strongly consider utilizing credit cards in the future.
2. Proper insurance: Auto repair shops have a certain set of unique risks that aren’t normally attributed with businesses like retail stores and restaurants. Instances such as property damage and liability issues are common, and while any small business is susceptible to damages, they’re not literally in the line of fire like an auto repair shop. For one, auto repair shops are often doing work involving materials like oil and gasoline, which are obviously very flammable. At an auto repair shop, the chances are higher that a fire will break out or an employee will injure themselves than at a retail store. How does that pose a risk for alternative lenders? If your business isn’t properly insured or is under-insured, it could impact how a lender views the strength of your business.
Solution: Make sure your business has top-of-the-line insurance that covers property damage, fires, floods, and liability issues relating to employees and customers.
3. Unclear records: While this certainly doesn’t apply to all auto repair shops, some remain disorganized enterprises where things like paying employees under the table go unrecorded. While requirements for alternative lending are more relaxed than a bank, one thing that’s imperative to have is accurate records about the finances of your shop. When applying, you need to be able to show bank statements and tax returns on the spot. This allows the lender to accurately gauge your company’s financial situation and suggest a reasonable payback plan.
Solution: Keep a record of EVERYTHING. Every expense, salary, even the lunches provided by the company should be recorded. If you are unable to do keep track of financials yourself, assign the job to another manager or hire an accountant.
4. Environmental issues: Body shops must be in compliance with state and federal regulations regarding proper disposal of hazardous materials. The Occupational Safety & Health Administration (OSHA), has mandates regarding waste disposal specific to auto shops, and if you aren’t following them strictly enough, it may jeopardize your chance of receiving working capital. An alternative lender will not want to work with a company that is potentially doing anything illegal or unsafe
Solution: Create a detailed report of exactly how your company disposes chemical materials and waste, including how they follow OSHA guidelines. This will help assuage any concerns from the lender about your environmental practices.
Alternative lending is an excellent way for your auto repair shop to receive working capital if you do not meet the requirements for a bank loan, or don’t want to work with a bank. However, keep everything above in mind and make sure your business is organized and serious about funding before jumping into the application process.