Auto Repair Shop Loans: Costs, Terms & Requirements

Auto repair shop loans can provide mechanics and shop owners with cash to offer new services, buyout another shop, or expand the current facility to increase revenue. The best auto body shop financing options are short-term loans or business lines of credit because of their minimum qualifications, low fees, and quick funding speed.

Best Auto Repair Shop Loans

How Auto Repair Shop Loans Work

Auto repair shop loans offer businesses financing to purchase equipment, fund operations, and supplement working capital for payroll and inventory. These small business loans differ in the amount of funding they offer, with amounts ranging from $100,000 to $5 million depending on the size of your business, creditworthiness, and annual revenue.

Who Needs an Auto Repair Shop Loan?

Auto repair shops need financing at all stages of development, from startup to expansions. Most loans are best for a specific purpose, whether your business is replacing aging or broken equipment, hiring additional staff, or financing parts for a particular repair.

Scenarios when business owners consider auto repair shop loans include:

• Opening a new shop
• Replacing aging or broken equipment
• Hiring additional staff to serve customers
• Paying for regular expenses like utilities or fuel
• Financing inventory of parts that aren’t used very often

The options you have to finance your auto repair shop can be broken up into specialized and nonspecialized financing. Specialized financing is for a specific purpose like purchasing equipment or buying commercial real estate. Nonspecialized financing or working capital funding can be used for most business expenses and has added flexibility.

How We Determined the Best Auto Repair Shop Loans

Auto repair shops continue to see an increase in the amount of work available because the average vehicle fleet age is now 17 years, and the average car on the road is almost 12 years old. Auto repair shops need financing to meet inventory demands and grow their businesses, which were the main considerations for this article.

The criteria we analyzed when choosing the best loans for auto repair shops include:

• Auto repair shop needs: Whether you are opening a new shop, outfitting a new location, hiring additional staff, or buying uncommon parts, there is a financing option that works best.
• Loan amounts: The amount of funding you can receive for working capital, new equipment, or commercial real estate.
• Repayment terms: The frequency with which you need to make payments on your loan and the total term to repay the loan.
• Costs: Any interest and fees lenders charge for the financing, which is important to consider if you plan on investing in new equipment.
• Speed of funding: How quickly your business can get access to funds from the time you apply to when you write the first check. We selected the fastest business loans available to ensure timely funding and short application times.
• Minimum requirements: The personal credit score, operational history, and annual revenue you need to qualify for each of the auto repair shop loans.

Auto repair shops can grow by increasing their marketing efforts, expanding their facility and service capabilities, or buying out the competition. This means that you’ll likely need more than $50,000 in financing. The best options will give you an immediate capital boost and the breathing room necessary to repay the loan as you grow your business.

Auto repair shops often find it difficult to qualify for a traditional loan because of the unpredictability of the industry, and you’ll likely need the money quickly. These reasons, combined with the maximum amount you can borrow, are why we chose the short-term loan as the best financing option.

Short-term Auto Repair Shop Loans

Short-term small business loans offer a lump sum up to $500,000 that you can get access to within one to three days. These loans can carry higher interest rates and require daily or weekly payments until you pay off the loan. You often must repay a set dollar amount regardless of how long your loan is in repayment, but there aren’t any expensive origination or hidden fees.

A short-term loan can be a good choice if you need a fixed amount of working capital to grow your business. These loans are a great fit if you need funds to spend on necessary expenses that will improve your overall sales or gross margins. For example, you can use the lump sum payment to lease out a second location due to the growth in your oil change business.

Short-term Loan Interest Rates & Fees

• Average APR: 10% to 100%, which can be as low as 9.99% for prime borrowers
• Prepayment penalty: None
• Origination fee: 0% to 5%

Short-term Loan Terms

• Loan amount: Up to $500,000
• Repayment term: Three to 36 months
• Repayment cycle: Weekly
• Time to funding: One to three days

Short-term Loan Qualifications

• Personal credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Business Line of Credit for Auto Repair Shops

A business LOC is a revolving line you can repay and use repeatedly to fund expenses like payroll. With a line of credit, you won’t have to reapply every time you need additional financing, and you’ll only be charged interest for the amount you borrow.

A business line of credit is useful for ordering unique and expensive parts that you might not have on hand. For example, while you might have brake pads and motor oil in the back room, you might not have one-off needs like a drive shaft one of your customers broke in an accident. An LOC allows you to pay for expensive parts while you complete the work and wait to get paid.

Business Line of Credit Interest Rates & Fees

• Expected APR: 10% to 75%; can be as low as 13.99% for prime borrowers
• Prepayment penalty: None

Business Line of Credit Terms

• Loan amount: Up to $100,000
• Repayment term: Up to 12 months
• Repayment cycle: Weekly or monthly
• Time to funding: One to three days

Small Business Line of Credit Qualifications

• Personal credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Business Credit Cards for Auto Repair Shops

Small business credit cards can help with small financing needs and should be a part of every business’s financial plan. These cards are fairly easy to qualify for, and most businesses can receive a credit line up to $30,000. Plus, many business credit cards carry rewards that can help you earn cash back or points on purchases.

Business credit cards are used as auto shop financing to buy known and inexpensive inventory parts or fluids you regularly keep in stock or to buy retail items you’re trying to sell to your customers. Credit cards are great for ongoing expenses like office supplies, garage insurance, and utilities because you can often earn rewards for these routine purchases.

Business Credit Card Interest Rates & Fees

• Interest rate: 15% to 29%
• Introductory offers: Some credit cards offer 0% financing for up to 18 months
• Annual fee: Up to $350

Business Credit Card Terms

• Loan amounts: Up to $100,000 but typically less than $30,000 for most businesses
• Repayment terms: 30 days interest-free
• Time to funding: Up to two weeks, which is the time to receive your card
• Initial rewards: Introductory APR of 0% for up to 18 months, and a cash bonus or points bonus if you spend a certain amount within the first two to six months
• Ongoing rewards: Cashback or rewards points

Business Credit Card Qualifications

• Credit score: At least 680 for best offers

Equipment Financing for Auto Body Shops

Equipment financing comes in the form of an equipment loan or lease, which can be used to purchase large pieces of equipment. Typically, the lender uses the equipment you’re purchasing as collateral for the loan. These equipment loans carry low-interest rates and have repayment terms of two to seven years.

Equipment financing is great for auto repair shops needing to purchase new equipment like a hydraulic unit or replace old equipment like a car lift. Equipment loans won’t be able to help your shop with most of your financing needs because funds can only be used to buy equipment and not for growth capital.

Equipment Financing Interest Rates & Fees

• Interest rates: 6% to 9%
• Fees: Varies by lender, but there is typically an origination fee

Equipment Financing Terms

• Financing amount: $10,000 to $500,000; up to 95% of equipment costs
• Repayment term: Two to seven years, based on the expected useful life of the equipment
• Payment frequency: Monthly
• Funding speed: Two to five business days

Equipment Financing Qualifications

• Credit score: At least 600
• Collateral: Equipment being financed
• Down payment: At least 5%
• Other requirements: No bankruptcies, foreclosures, or repossessions on your credit report

SBA Loans for Auto Body Shop Financing

SBA loans are partially guaranteed by the SBA and offer the lowest rates and longest repayment terms of any auto repair shop funding options. However, these loans take a long time to get funded and require a lot of documentation. With an SBA loan, you can borrow up to $5 million and make payments on the loan for up to 10 years.

These loans carry added fees, so they’re typically not a good fit for short-term borrowing. For auto repair shops, SBA loans will probably only be the right choice if you are buying an auto repair shop or building a new facility for your shop. For example, if you’re expanding to a second location, an SBA loan offers enough to cover all the expenses.

SBA Loan Interest Rates & Fees

• Interest rate: 7% to 11%
• Prepayment penalty: None
• Origination fee: 0.5% to 3.5%
• Loan packaging fee: $2,000 to $4,000
• SBA guarantee fee: 2% to 3.5%

SBA Loan Terms

• Loan amount: Up to $5 million
• Repayment terms: Up to 10 years; 25 years for real estate
• Repayment cycle: Monthly
• Time to funding: At least 30 to 90 days

SBA Loan Qualifications

• Minimum credit score: 680
• Collateral: Typically required
• Down payment: At least 10% to 20%
• Time in business: No restrictions

Merchant Cash Advances for Auto Repair Shops

Getting an MCA for your auto repair business is typically a last resort method of financing. This is because of the high overall costs compared to other financing options. However, it has lower personal credit score requirements than other financing options making it accessible to business owners unable to get funding elsewhere.

Merchant Cash Advance Costs

• Expected average APR: 50% to 120%
• Factor rate: 1.1 to 1.5 times the loan amount
• Holdback percentage: 8% to 30%
• Prepayment penalty: None

Merchant Cash Advance Terms

• Loan amount: Up to $500,000
• Repayment term: Up to 18 months
• Repayment cycle: Daily, between 8% and 30% of daily credit and debit sales
• Time to funding: Two to five days

Merchant Cash Advance Qualifications

• Personal credit score: No minimum requirement to at least 500
• Credit card receivables history: At least two years
• Annual credit card sales: At least $50,000

How to Choose an Auto Repair Shop Loan

There are many considerations when selecting auto repair shop financing, and doing your research is an important first step before applying. As a business owner, you should also consider how you plan on using the funding, what minimum qualifications you can meet, and how quickly you need the money. Every financing option is different, and selecting the right one will set your business up for success.

How the Funds Will Be Used

There are many types of financing available, but the most common include those for equipment, working capital, and large projects. Equipment financing is best for equipment, short-term loans can address working capital, and large projects are best left to SBA loans. Consider it like selecting the right tool for the job. Every financing need has a specific lending product that’s best.

What the Minimum Qualifications Are

Regardless of the financing you need, there are minimum qualifications you will need to meet. Smaller auto shops are served best by short-term funding, and larger shops may need an SBA loan. If your personal credit score is preventing you from qualifying for certain options, then a merchant cash advance may be the only alternative. Applying for a loan that you can qualify for saves you time and gets you funded faster.

How Quickly Are the Funds Needed

If a lift breaks down or the roof is leaking, you don’t have weeks to get access to financing. If you are planning on buying out a competitor in your area or expanding to a new location, you have months to shop around for the lowest rates. Make sure that the loan you apply for is available quickly enough to avoid making a bad problem worse.

Common Mistakes When Applying for an Auto Repair Shop Loan

The lending process with most online lenders has been simplified; however, as the loan amounts get larger and the terms get longer, you may find it getting complicated. You can reduce the time it takes to get a loan and improve the experience overall by avoiding asking for the wrong amount of funding, reviewing your loan offer, and responding to any follow-up questions your lender may have.

Requesting the Wrong Amount

Whenever you apply for a loan, you will need to request a funding amount. This is the case, regardless of the type of loan you get. Rather than requesting the maximum that you think your business can qualify for, it’s worth selecting an amount that your business can afford based on earnings. By supporting this decision with the expected return from your investment, you’ll convince the lender you are a responsible borrower.

Not Reading the Loan Terms

Loans are simple on the surface but can be complicated in the details. Understanding what the lender requires from you, including timely payments, adequate insurance coverage, and any other specifics, will reduce the headache of learning it later on. It will also give you the opportunity to discuss these details with the lender before a potential violation of the terms has occurred.

Being Unresponsive to Follow-up Questions

Many online lenders can get your application processed with the paperwork you submit the first time. However, SBA loans and other traditional lenders often have follow-up questions about funding amounts, tax returns, and other details needed to qualify you. By being responsive, you can ensure that the process keeps moving and that your business gets the funding it needs.

Keys to Getting Approved for an Auto Repair Shop Loan

Many auto repair shops don’t have predictable income because so many of their services rely on vehicles breaking down or needing parts replaced. Even predictable services like oil changes can be difficult to forecast because of the amount of competition. It’s important to know how to put your best foot forward in your loan application to maximize your chances of getting approved.

The three keys to getting an auto repair shop business loan are show growth in sales and margin, improve your personal credit, and improve your margins.

1. Show Growth in Sales & Margin

Lenders will want to see you’re growing your business. Being able to show six months or more of continual sales growth is a great way to show a lender that your business plan is growing and that you could use the capital to grow faster. Auto repair shops should focus on improving sales in the service areas of your business that make more money like diagnosing and repairing engine problems.

You can use new or more effective marketing efforts to increase your overall sales, or you can look at upselling your current clients when they come in for products or services from which you don’t make much money.

2. Improve Your Personal Credit

The higher your personal credit, the higher your likelihood of getting approved for a business loan. Getting your personal credit score to meet the minimum qualifications of the loan you’re applying for is the first step. To get the financing amount you want, chances are high that you must surpass the minimum requirements.

You can improve your personal credit score by doing these three things:

1. Verify the accuracy of the information on your credit report.
2. Make all of your credit payments on time.
3. Spend much less than your maximum approved credit.

Having bad credit isn’t a deal-breaker with alternative financing like short-term business loans. However, if your credit score needs some repair, there are great credit repair companies that can work with you to increase your personal credit score.

3. Improve Your Margins

Many shops struggle because their gross profit isn’t high enough. This can be because of ineffective operations or inaccurate diagnosis of vehicles. Parts only generate a 20% to 25% margin while services that involve labor can rake up margins as high as 65%. You need to maximize your gross profit before you apply for a loan.

Poorly operated shops can see profit margins dip below 10% for the entire business. It’s difficult for any auto repair business to stay afloat if you can’t improve how much you’re making to more industry-standard levels. Showing the strength of your business’s margin will help the lender feel comfortable with your loan.

Bottom Line

Getting approved for an auto repair shop loan can be difficult if your profit margins are low for your industry, or if you have seen no significant recent sales growth. The right loan for you will depend on how you plan on spending the money. Short-term loans are the best option for the largest number of auto repair shops because of their loan amounts, minimum qualification requirements, and quick funding capabilities.