How Can I Get an Auto Repair Shop Loan with Bad Credit?

A small automotive repair shop can provide a good living for a skilled mechanic, but getting started is more than just designing a business card and hanging your tools on a garage wall. Cars are getting more complex, and you need increasingly sophisticated testing, calibration, and repair machines that can cost a packet to purchase and maintain.

At some stage, most shops will need an auto repair shop loan to buy specialized equipment, do renovations, or increase their inventory during busy times.

Generally, traditional funding options are impossible for people with bad credit. They are doomed to a poisonous cycle of getting extremely costly loans from less-than-reputable sources and facing impossible repayment terms. 

The best way to get an auto repair shop loan with bad credit is if you can find an investor or loan company that will look past your poor credit score, and who can recognize the business potential of your auto repair shop.

Let’s take a look at traditional versus non-traditional funding options for auto repair shops.

Traditional vs Non-Traditional Funding options

Bank loans can be hard to get, especially if you are the sole employee or if your credit score has been damaged. Running a small business has been especially hard these past few years. The COVID landscape has brought devastating economic consequences for people who don’t have the backing of a big corporation.

If you have been in business for a few years and have a good credit score, you have plenty of traditional financing options. But only a few small business owners have escaped from the past two years with their credit scores intact, and most have no savings or collateral left at all. With bad credit, they have no hope of qualifying for one of the traditional funding options.

Types of loans available

If you can show a steady, strong cash flow and can illustrate that your revenue is recovering, traditional financing options may still be available.

• Business line of credit: Up to $250k. The premium and interest are calculated on the amount you have withdrawn, not on the entire potential loan amount. You must have a track record of 6 months in business, a personal FICO of 620, and the business must show a minimum annual gross revenue of around $300K.
• Term Loan: Up to $200k. Repayment is a fixed amount over 2 – 5 years. You must have a track record of 2 years in business, a personal FICO of 640, and the business must be profitable.
• Grants for Auto Repair Shops and other Small businesses: Grants for small businesses, including auto repair shops, do not need to be repaid, but you must follow specific guidelines for spending and the administration of the funds. It takes a lot of research and a great deal of effort to write a successful small business grant application. The amounts generally vary between $1000 to $5000 and could take months to secure.
• Small Business Administration (SBA) Working Capital Loan: Up to $250k because it’s a government-backed loan that is partially guaranteed by the SBA. It is harder to qualify for an SBA loan than for other options. Repayment is a fixed amount over 2 – 5 years. You must have a track record of 2 years in business, a personal FICO of 650, and the business must be profitable
• Merchant Cash Advance: Up to $250k, but interest rates and repayment terms can be crippling, and could even lead to bankruptcy. Repayment is calculated over a short period at an exceedingly high interest rate. You must have a track record of 6 months in business, a personal FICO of 500; and annual revenue of $180K or more.
• Equipment leasing and financing: Equipment financing can pay for up to 100% of the cost of the equipment purchase because the equipment serves as collateral for the loan.

This section will take a closer look at some of these different options available to auto shop owners with bad credit.

Business Line of Credit

A business line of credit is a great option because it gives you the ability to control how much you need to borrow. When you get this loan, you will get a lump sum of money. However, unlike with other loans, you only pay interest and fees on the money that you borrow from this lump sum rather than the entire loan. You can continue to borrow and pay it back, just as you would with a credit card. This is perfect for small amounts of money that you need here and there, or in case there’s an emergency where you need to access a decent amount of money.

Term Loans

Term loans are another good option, but it can be hard to get from a traditional lender if you have bad credit. The good news is that there are alternative loan companies that will offer you term loans if you have bad credit, though you will end up paying higher interest rates and fees. Still, this can be a great option to consider for the basic needs of your auto repair shop.

SBA Loans/Grants

Turning to the Small Business Administration for loans is a great option if you qualify. Since these loans are backed by the government, you can get better rates and terms than if you went with a traditional lender. It is a time-consuming process to get these types of loans and grants, and you will need to make sure that you have all of the necessary paperwork to get this done. Even with all of the information that you need for this, there’s no guarantee that you will get the funding that you are looking for.

Merchant Cash Advance

As an auto repair shop, you likely take in a lot of money through credit cards. This means that you could be an excellent candidate for a merchant cash advance. What this type of loan means is that you get money upfront, then pay it back using your credit card sales. The lender will receive a certain portion of your daily card sales, until you have successfully paid the loan back according to the terms of your loan.

The fees associated with this option isn’t necessarily the most appealing to people, but it’s definitely a good option if you need quick cash but are unable to get another type of loan for the smaller amount that you are looking for.

Equipment Financing/Equipment Leasing

A final excellent option to consider is either equipment financing or equipment leasing. Both of these options help you get the equipment you need to replace current equipment or to grow your business. There are pros and cons to each of the different options that are important to consider.

The first one to look at is equipment financing. With equipment financing, you are able to buy the equipment that you need and can eventually own the equipment after you have completely paid it off. This means you can use it as an asset after you complete the terms of your financing. Plus, the terms are relatively favorable since the equipment you are financing can be used as collateral for the loan if you fail to make your payments.

Equipment leasing is a little bit different. When you lease equipment, you never actually own the equipment unless you choose to purchase it after you have completed your terms of the lease. Or, you can choose to just get new equipment in its place under a new lease. While this means that you can continue to have the latest and greatest equipment, this will mean that you never actually own the equipment. This means that you can never claim the equipment as an asset of your company. Like with equipment financing, the equipment itself is used as collateral in case you default on your payments.

What Are The Other Financing Options For Auto Repair Shops?

What you need is auto repair shop alternative funding. That’s someone who will look past the poor credit score, and who can recognize the business potential of your auto repair shop. You need someone to look past the surface to spot the opportunities for generating enough cash to repay the financed amount. That’s what an auto repair shop alternative business loan can offer you!

A Business Loan from Small Business Funding (SBF)

An auto repair shop small business financing is a loan from a company that is optimally placed to assist small businesses and could be the solution to all your problems. Your application will receive the consideration it deserves, based on the merits of your hard work, and not just get turned down because of a bad credit score.

You will need to provide basic documentation, but the application process is significantly faster and easier than the application process for traditional bank loans, and the interest rate and repayment terms are tailormade and far kinder to a small business owner than other financing options.

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