Investing In NEW Coin-Op Carwashes
The "How To's" Of Obtaining A Loan

reprinted from Fall/96

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To obtain a bank loan the borrower has to convince the banker of the value of the project. The loan proposal submitted to the bank will need to contain a feasibility analysis and other documents. The borrower's task is to present evidence of projected gross revenues, the NOI, and demonstrated ability of the project to service the debt on the proposed loan. The bank officer will be expecting to discuss the project in those terms.

The other documents the borrower needs to include in the loan proposal are a Net Worth Statement showing assets and liabilities of the borrower; evidence of income over several years (usually tax returns); and, if it's an existing wash rather than a proposed new project, then the bank will expect to see the financial statements of the most recent 2 or 3 years of the opera tion. Beyond these "hard, cold facts", getting the desired loan is a human interaction. How the banker feels about the borrower can influence whether the loan proposal is cast in a favorable light or simply searched for excuses to be turned down.

If at all possible, I prefer to speak with the person who has the authority to approve the loan. Frequently I've found myself deal ing with a subordinate whose job it is to pass on the facts to some higher officer or committee. It seems much is often lost as the proposal gets passed up the line. It's difficult to demonstrate things like enthusiasm and confidence on paper. Selecting the proper bank can be half the battle. Ask other carwash owners what banks have been receptive to carwash loans. It's quite clear that any bank which had a previous carwash loan go belly up would be hesitant to entertain more carwash proposals.

The level of receptiveness to carwash proposals can vary widely from bank to bank and thus a borrower desir ing a carwash loan is well served to do some homework and select a bank which is not still smarting from a defunct carwash loan. Some of the terms and conditions are quite negotiable. On a recent loan I found the bank surprisingly willing to accept a condition which significantly reduced the risk of the rates going against me...

"Fixed Payment" I knew I would not be granted a fixed rate loan. I didn't even ask. But I did ask for a "fixed payment" loan. The rate may go up or go down as dictated by the indicators, but the payment would remain the same. To entice the bank into accepting this condition I of fered to make higher monthly payments than the amortization schedule and the current rate demanded. At the time, the monthly payment would have been $3,300; could go no lower than $2,600, but had no "ceiling". I countered with a fixed payment of $3,600 and committed to make those fixed payments even if the rate dropped.

The bank agreed to accept that level of payment ... no matter how high the adjustable rate rose. In the worst case scenario (where the rate on the loan increased a great deal) the only consequence for me is that I'd not have the loan paid off in the agreed upon term. That is, I'd still owe the bank some money at the end of the 10 years. To me, that was a round about way of getting the possibility of a longer term loan even though at the end of the 10 years I might need cash or a new loan to pay off any remaining balance. I reasoned I'd have ample time to plan for that eventuality if I saw rates starting to escalate during the first 5 to 7 years of the loan. If rates declined, I'd pay off the loan at an accelerated rate thanks to the fixed payment. My willingness to make higher than required payments prompted the bank to agree to the fixed pay ment.

I'd willingly do that to be absolutely protected from the possibility of the debt service being in excess of NOI. Cap It! There's another way to minimize the risks inherent in adjustable rate loans. This condition is also negotiable because it offers some protection to the borrower as well as the bank. It's done by putting a "cap" on the loan rate a limit to the amount by which the rate on a loan can change in a given period of time. A typical cap might state that the rate on the loan can neither increase nor decrease by more than 2 points in any given calendar year.

There's another way to cap loan rates. This sort of cap limits the total amount of possible change in the rate over the entire term of the loan. Such a cap might state: during the 10 year term of the loan, the rate shall neither increase nor decrease by more than 5 points. Thus a borrower getting a 10% loan today would be assured he'd never have to pay a rate in excess of 15% ... or less than 5%. To me this second type of cap is the more desirable. I'll accept such caps even when the chances seem extremely remote that the cap will ever be needed. An 8 point cap on a 10 year loan is acceptable to me. And the higher the overall cap, the more willing the bank is going to be to accept it.

There's far more pro tection to the borrower than to the bank. Current rates could possibly go up by 8 points, but they'll never drop 8 points because that would put current loans between 2 and 3%. No way. Caps should always be asked for, but will not always be granted. Actually, of the four major loans I have, only one has caps. I'm often turned down, but I always ask. I'll accept overall caps of 8 points ... 5, of course, is better.

Sources That May Make Borrowing A Bit Easier The SBA (Small Business Administration) can be a real help. This federal government agency can make loans, guarantee bank loans, and is generally charged with the responsibility of aiding small busi ness. If the SBA is used the up front costs are likely to be slightly higher, there's apt to be more paper work, plus the borrower needs a certain tolerance for having the government involved in his financial affairs. But there are genuine advantages: lower down payments and longer terms are the principal ones. Some banks are even designated as "preferred SBA lenders".

That's means the bank can not only facilitate the paper work, but may even have in-house ability to approve SBA packages. If turned down for conventional loans the SBA is certainly a resource worth considering. Owner financing is a realistic possibility for carwash deals. It's almost always worth exploring. I imagine that a great many carwash deals involve at least some owner financing. Most sellers of carwashes re alize that bank financing is not always easy to get. Some may be willing to carry a second mortgage for part of the down payment, or to make up the difference between what a bank will loan and the total amount needed to make the sale. If an owner carries all the loan, he's far less likely to require appraisals, environmental studies, and numerous other up front costs. Those savings can be substantial. I've bought and sold washes by way of seller financing.

I especially like the flexibility it offers ... especially compared to the rigid policies of many banks. For example I financed the sale of one of my washes more creatively than your typical bank terms. It involved a fixed payment loan plus a I was paid a small percentage of the wash's gross revenues for the first 2 years. The arrangement appealed to me because I be lieved the new, gung ho owner would improve the busi ness and I'd get a small share of the increase. In another situation, my partner and I were trying to buy a property. It was priced at about $10,000 more than anyone would pay. We prepared our carefully reasoned arguments designed to persuade the owner to lower the price. We had evidence of comparable sales to show the property was really worth less than the asking price.

All the logic failed in the face of the owner's reaction "There's one price ... my price ... it's firm. I don't dicker. Take it or leave it!" Yes, the price was carved-in-stone firm ... but the terms flexible. The owner did not have to have all cash. In fact, due to his tax situation he preferred not to. Moreover, his notion of good interest rates was anything over what his bank was paying him on his Certificates of Deposit. We ended up paying the inflated asking price because the terms and conditions of the transaction were so attractive: No money down. A 10 year term with interest only paid for the first 5 years. And at a rate that was only one point over what banks were paying on his CD's! In the end, it was a much better deal than borrowing from the bank and getting the owner to lower his price by $10K.

Deals that good may not be typical. But the point to be made is that when it comes time to get fi nancing you should not feel yourself a captive customer of the big banks' lending policies. There are a lot of ways to cut a win/win deal. Don't be afraid to be creative in your pursuit to financing with the SBA, the owner of an existing wash, or even a buttoned down banker. A novel approach can be the best approach. Speaking of things "novel" a reader quipped that he had "read shorter novels" than Part One on this subject (Spring '96 issue). This installment was not much more brief, still I doubt that Tom Clancy or Norman Mailer are too worried by the "competition". Anyway, the following succinct summary is dedicated to that erudite reader ...

...Pt. 2 Pg. 5

Pt. 2 Pg. 7...

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