From 2014 to 2019, the car dealership industry grew 5.1 percent, but the story is different in 2020 and 2021. The COVID-19 pandemic has forced used and new car dealerships alike to close for extended periods. The widespread unemployment accompanying the pandemic has reduced consumers’ per capita disposable income, placing additional strain on the car dealership industry.
Even during crises, however, hope remains. Opportunities to find low-cost funding for business growth are still out there, even as many grip for the ongoing repercussions of the novel coronavirus on the economy. In fact, shortly after the pandemic began, the government launched new small business funding initiatives targeted at small business owners -- including car dealers -- facing unexpected economic hardship due to the pandemic. Other funding options that existed long before the pandemic are available as well.
If you own an established car dealership that’s facing financial obstacles, here’s how you can obtain small business loans for car dealers.
The challenges of obtaining small business funding for car dealers
Although car dealerships face unprecedented financial challenges as the COVID-19 pandemic continues, car dealerships have long encountered obstacles toward obtaining funding. That’s because lenders see car dealers as high-risk borrowers due to their small profit margins, seasonality, high sales volatility, large ticket items, and the fact that cars rapidly depreciate in value.
Of course, belonging to a high-risk borrower category doesn’t mean that you have no options for small business funding. Read on to learn all about the small business loans available to car dealers.
Financial options for car dealers
As a car dealer, you may face a few challenges obtaining affordable small business loans, but you won’t find this task impossible. Whether you go with SBA 7(a) loans, bank term loans, or another option, you should always look for favorable approval periods, rates, and fees. Below is a list of all small business loan options for car dealers.
The SBA 7(a) loan program
If your dealership qualifies for a low-cost SBA 7(a) loan, this option may be best. SBA 7(a) loans have low rates, low monthly payments, and long payment terms, so they’re great for saving money, stabilizing your dealership, and hiring new employees as needed.
You can use your SBA 7(a) loan for the following purposes:
- Working Capital – Working capitalis the difference between your current assets and your current liabilities. Put another way; it’s all-cash your dealership has immediately available for business purposes. As such, it’s the metric most indicative of your company’s health.
You should always have enough working capital for business stability, and SBA 7(a) loans can help you obtain it. Use your loan to hire new employees, market or advertise your dealership, and buy new equipment. - Commercial Real Estate – If you want to open a second dealership, SBA 7(a) loans can help. Use them to buy owner-occupied commercial space or refinance your current commercial real estate mortgages.
- Debt Consolidation Loans – SBA 7(a) loans for debt consolidation allow you to refinance your dealership’s current high-interest or short-term business loans, daily or weekly payment loans, or merchant cash advances.
Advantages of SBA 7(a) loans for car dealers
Ask a small business lending expert what the best loan is, and they’ll often say SBA 7(a) loans. These loans are the “gold standard” due to their low rates and 10-year terms (though for commercial real estate loans, the term is 25 years). Additional SBA 7(a) loan advantages for car dealers include:
- No prepayment penalties
- Affordable monthly payments
- Wide use of funds
- Availability in all 50 states
Requirements for car dealers to apply for SBA 7(a) loans
You should expect the following requirements when applying for SBA 7(a) loans:
- Your car dealership must be at least two years old
- Your dealership must be based in the U.S.
- Your dealership must have no outstanding tax liens
- Your dealership must have no recent settlements or charge-offs
- You and your dealership must be on-schedule with all government-related loan repayments
- Your personal credit score must be above 650
- You must not have bankruptcies or foreclosures in the past three years
- You must be a U.S. citizen or lawful permanent resident
- You must be at least 21 years old
Some lenders may have other requirements, though no two lenders will use quite the same criteria for selecting borrowers. For example, while many lenders require car dealers to show their business plans, others (including SmartBiz Loans) do not.
How to apply for an SBA 7(a) loan for your car dealership
Step 1: Check whether your car dealership meets the above requirements for SBA 7(a) loans. Find additional information on the SmartBiz Loans page about SBA Loan Requirements for Existing Business to learn more.
Step 2: Gather all the paperwork you need for your application. If needed, ask a financial expert such as your bookkeeper or accountant for assistance.
Step 3: Choose your lender. The following lender qualities matter the most:
Reputation
Choose lenders with ample instances of happy prior borrowers. Look through your lender’s reviews on Consumer Affairs, TrustPilot, and Google to determine whether your lender is trustworthy. Just make sure you’re reading reviews by actual customers.
Transparency
A good small business lender should have nothing to hide. If learning about your loan’s annual interest rate or APR takes tons of effort, choose a different lender.
Obvious loan terms
Beyond the basics of your APR and interest rate, take a close look at your loan agreement’s fine print. If what you see is inexplicably complex, you may prefer a different lender. That’s because complex fine print may hide unfavorable loan costs and payment schedules. Only choose lenders that clearly state their total loan amounts, collateral requirements, payment frequency and amounts, and (if applicable) prepayment penalties.
Fees
You should pay few fees other than interest and repayment. An agreement with several fees on top of these may be a red flag. Your agreement should also state that all fees are due before loan funding and during your loan’s lifetime.
Availability
A good lender should be regularly reachable by phone or email. Your lending company should connect you with a representative who knows your company, application, and industry like the back of their hand. If your lender doesn’t offer this level of customer service, choose a different one.
The SBA 504 loan program
The SBA 504 loan program provides small businesses such as car dealerships with low-cost expansion and modernization funding. If you’re planning to purchase commercial real estate for your dealership, SBA 504 loans could meet your needs.
SBA 504 loans are also helpful if your dealership falls within the public policy goals of your local community development corporation (CDC). In this case, your CDC could cover up to 40% of your project cost. You would then use your SBA 504 loan toward at most 50% of your costs, and you’d cover the remainder via a down payment of your own cash.
The SBA microloan program
If your dealership is a very small business (a.k.a. a microbusiness), you may qualify for loans through the SBA Microloan Program. These loans, which do not exceed $50,000, can go toward all business costs except commercial real estate purchases (for which SBA 7(a) loans work) and debt payments.
Non-SBA loans and other funding options
As a car dealer, SBA loans aren’t your only option, but be careful – your other possibilities may have shorter terms, larger payments, and higher rates. These possibilities include:
Bank term loans
If you need cash fast but don’t qualify for SBA loans, try bank term loans. You can typically use these loans toward working capital costs, new equipment purchases, and debt refinancing. Confirm the details of your lender’s prepayment penalties, possible loan amounts, rates, and repayment terms before proceeding.
Merchant cash advances
If your dealership accepts card payments, merchant cash advances (MCAs) may be feasible funding options. MCAs provide advance funding that you must repay over time through regularly scheduled payments or by paying a small percentage of all transactions toward your loan. With this repayment convenience come extremely high APRs that you may want to avoid. Read more about MCAs via the SmartBiz Loans blog What You Need to Know About an MCA.
Business lines of credit
Business lines of credit allow you to borrow money up to a preset maximum proportional to your credit. Although you’ll have less funding access than with a bank term loan, you’ll only pay interest on money that you actually use. You can borrow as much or as little money as you want until you reach your maximum, and you likely won’t have to put up collateral either. Learn more via the SmartBiz Loans blog Small Business Lines of Credit Pros and Cons.
Business lines of credit are similar to business credit cards since both are revolving lines of credit, but business lines of credit stop existing after you reach your maximum. They also lack the spending rewards that many business credit cards offer.
Why Choose SmartBiz Loans?
Need funding to rebuild your business? Don’t waste time going from bank-to-bank filling out multiple applications. SmartBiz helps you find the best financing for your unique needs whether that’s an SBA loan, Bank Term loan, or other financing. About 90% of qualified applications we refer to banks are funded and our financial professionals are on hand to answer your questions. Discover if you’re pre-qualified herewithout impacting your credit scores** and read the SmartBiz 5-star customer service reviews on TrustPilot.
