Buying a Gas Station Franchise: Where to Find the Best Financing
Gas station franchises are attractive businesses for many small business entrepreneurs: Gas is a high demand product, which means a steady stream of customers. And, while gas doesn’t have a high margin, gas station convenience stores, car washes, and other additions provide a chance to increase profitability from non-gas sales.
If you’ve already decided that buying a gas station franchise is your next opportunity, you need to be aware of the costs required to purchase a gas station or convenience store. In addition, franchisees often have to fit rigid requirements to even qualify. From upfront capital and credit conditions to franchise fees, many aspects of gas station franchises are different from other small businesses. Those differences often make it more challenging to obtain gas station loans.
Buying a Gas station franchise requires business experience and excellent credit
Like loan officers and banks, franchisers want to see that you can make a business succeed, and that you can make a profit.
If you are already a small business owner or a private gas station owner, past business wins will work in your favor. The franchisers want to see that you can successfully manage a business, since gas stations require hands-on daily management to succeed. If don’t have experience selling gas or owning a convenience store, you can show other kinds of valuable experience, such as managing a store or other kind of franchise, or running another small business. Your franchiser is making a bet that you will make money for the parent company, and that they will earn back the investment the parent brand made in your business.
Another qualification for gas station franchise ownership is your personal and professional credit. A franchiser is looking for your history with money. Do you pay on time? Do you have any bankruptcies or charge offs? What kinds of debt do you carry? Even if the franchisor isn’t loaning you money, they want evidence that you can meet your financial obligations. Their name will be front and center on your business, and they need franchise stores to live up to the brand image.
Gas station franchises also have cash requirements
Gasoline station franchise brands require their applicants to have lots of cash or liquid assets. These cash requirements range from $20,000 to get started with a 7-Eleven gas station convenience store franchise, to well over $1,000,000 for gasoline station brands like ARCO AM/PM. These investments are required to pay for anything from opening inventory to permits and franchise fees.
The range in cash requirements across gas station franchise businesses is based on what type of franchise you want. Upfront fees can be as low as $20,000 to lease an existing location.
However, if you have to purchase real estate to build a gas station from the ground up, initial costs could top $1,000,000. Adding a convenience store or a car wash to your franchise requires an additional cash investment for inventory and/or materials.
Franchise fees are also an important upfront investment in a service station convenience store business. Franchise fees pay for the support that gas station franchises get from the corporate brand, including advertising and marketing, training, and other administrative functions. Franchise business owners get a lot of support, but that support cuts into the bottom line profits of your gas station convenience store. It is important to figure these annual fees into your potential gas station business budget.
Financing options for gas station franchises
The good news is that many service station franchisers have financing options that will help offset the cash requirements to own and operate a franchise. ARCO AM/PM offers loans and incentives for purchasing land, rebranding an existing gas station under the franchise, and offsetting startup costs for veterans. These enticements make it easier for different groups to enter a franchise.
Another way to buy a franchise is to get a franchise loan. Most lenders and banks that service other small business loans will be able to provide a loan. However, a financial institution will look at a number of things in order to qualify you for a loan. Of course, you need to have good personal credit. But a franchise lender will also look at the strength of the franchise brand and the location of the franchise before giving a loan. Well-known branded franchises attract more customers to a gas station, and the location is key to a steady stream of customers.
Before getting a franchise loan, you must also document the condition of your new business. Lenders want to see your franchise agreement and other contracts, including leases and rental agreements. You will also have to provide any permits (i.e. a license to sell beer or lottery tickets) and environmental reports on your gas tanks. They may also want detailed information about any real estate and equipment included in your franchise agreement. These loans for gas stations are often harder to get than regular commercial loans, as lenders are concerned with the effects of environmental regulations and gas prices on gas station profits.
You can also use an SBA loan to finance your franchise gas station dreams. SBA Loan 504 allows for the purchase of real estate, buildings, and long-term equipment for your new or existing gas station franchise. These loans are easier to get than a traditional loan, as they require a lower down payment and are backed by the Small Business Administration. SBA loans also involve funding from non-profit sources, so they have lower interest. With these favorable conditions, an SBA loan is great for a business with lower cash flow for repayments.
Alternative sources for gas station financing
Seller financing is great option for making your business purchase if other funding sources fall through. Seller financing is when the current owner of a business agrees to a mortgage on the business. With a percentage down in cash, a seller may allow you to pay for your new store in installments. For a franchise business, that kind of support would be called internal financing, and you would make payments on the cost of the franchise to your parent company, along with regular franchise fees. This is not a standard practice for gas station franchises, so you must check to see if it is available.
Finally, gas station entrepreneurs often self-finance the cost of their businesses. Because of the difficulties involved in getting loans, franchisees often use 401(k) accounts, personal savings, and contributions from friends and family for their purchase. Paying cash for your business might wipe out your bank account, but not having a loan will reduce your operating expenses and increase your profitability.
The COVID-19 pandemic is causing disruption for business owners in gas stations industry.
Read more: A Brief Guide To Gas Station Loans