5 Best Ways to Finance Your Auto Dealership Startup
Starting an auto dealership is an exciting challenge – but often a costly one.
The estimated average investment is about $100,000, which means you need to have a sound financial plan when launching your startup.
Naturally, you won’t need such an amount from the first day. Still, the costs for setting up your retail location, obtaining your dealer license and auto dealer bond and keeping a good level of inventory are considerable. Unless you have your own capital, it’s wise to look for external financing early on – and have your back safe.
Luckily, there are a variety of auto dealer financing options these days. Let’s take a look at the most preferred options, so that you can make an easier choice which one works for your business.
Floorplan financing
Many dealerships start with small personal finances and then look for additional financing for their inventory. That’s why so-called floorplanning is a popular way for dealers to get affordable short-term loans. They are used to purchase vehicles that are then sold as quickly as possible in order to avoid high interest costs. Floorplan financing is a great way for dealers to keep a good level of inventory without withdrawing major loans.
When you’re checking floorplanning options, look for experienced providers and don’t forget to check the values and flexibility of their credit lines. If you are based in Georgia, Florida, South Carolina or North Carolina, Dealers Finance can be a great resource for your inventory financing needs.
Real estate financing
Another common cost that dealers often cover by obtaining external financing is for their real estate needs. Not everybody likes the idea of spending between $8,000 and $20,000 for the monthly rental lease of a retail location. That’s why many car dealers buy their own showroom and office space, especially when selling cars is a passion they want to pursue diligently.
Purchasing property, naturally, is not a cheap endeavor. Dealership retail spaces can easily cost around $2 million. While many would like to own their retail locations, a starting business can rarely afford to pay this. That’s why dealers turn to loans and mortgages to finance the purchase of real estate. Commercial banking solutions often include loans for buying property, so there are a variety of such financing opportunities on the market.
Small business programs
Another option for financing comes from government small business programs, like the ones organized by the Small Business Administration (SBA). Back in 2009-2010, there was a heated public discussion over whether auto dealerships should qualify for small business programs. The reason was that dealerships were earning about $40 million per year, while the SBA defines a small business as a business that earns no more than $29 million. Eventually, the SBA offered the Dealer Floor Plan Financing Pilot Program (DFP), which ran in 2010.
Make sure to check SBA’s website regularly so that you don’t miss out when these dealer-specific programs are announced. The SBA also offers Permanent Loan Programs targeted at all small businesses. Depending on the profile of your business, you might be eligible for some of them as well.
Loans
Getting external funding does not have to be tied to a specific business cost such as inventory or real estate. Starting auto dealers can also turn to general loans for their budding business.
In this case, you can turn to commercial banking solutions such as Wells Fargo, BBVA Compass and AmeriCredit, as they offer dealership financing. With such providers, you can also get financing for floorplanning, real estate or equipment, or you can simply look for a working capital loan for your business.
Don’t forget that you need a good auto dealer business plan to get approval. You are also very likely to be asked for collateral, an additional form of security such as property or other personal assets.
Peer-to-peer lending
Obtaining proper financing for your dealership is a challenge in itself. But securing a small business startup loan can be even tougher with bad credit or without having assets that you can use as collateral.
In such circumstances, more and more small businesses are turning to peer-to-peer lending. Loans are usually smaller – in the range of $25,000. On websites such as Prosper.com, you can post a listing with your desired loan. Then potential investors can check out your profile and decide whether to give you financing. While peer-to-peer lending is not an ultimate solution for your dealership’s financial needs, it can be a great interim solution for more difficult cases.
If you have experience with financing your dealership startup, please share your insight in the Comments section. It’d be much appreciated by fellow dealers!
