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Gas Station Loans

Gas stations need financing for all kinds of needs: buying fuel, upgrading equipment to stay compliant or just adding inventory. Getting funding for your gas station can be a headache. It doesn't have to be with this guide to all things gas station lending.

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A gas station/convenience store/mechanic shop combination can be a lucrative business. However, due to regulatory and environmental challenges, many traditional lenders such as banks and credit unions will not lend to businesses in this market. Gas station owners have a lot on their plates and need financing for it all: stocking up on inventory, purchasing gasoline in bulk to beat fluctuating oil prices and upgrading equipment to stay on track with safety regulations and environmental standards. In this guide, you'll learn how to find the best sources of funding for a gas station.

Main Challenges Getting a Gas Station Loan:

  • Because many gas and convenience store customers pay for their purchases in cash, it may be difficult to fully document and prove your total income. You will probably have to rely extensively on your tax returns in order to qualify.
  • Traditional banks typically will decline a loan if your business records demonstrate decreasing sales, low cash flow, or if you lack collateral or a significant amount of managerial experience.
  • Your credit score is an important aspect of qualifying for a traditional loan, so if you have faced financial business challenges, it may impact your approval.
  • Traditional bank loans will typically be for a term of 20 years and carry a balloon payment clause at the 5 year mark or the half-way point (year 10) of the loan. Having a balloon payment may mean you will have to refinance the loan before its paid off and deal with another round of associated closing costs.

If your business is new or a start-up, approval can be almost impossible to get. According to Foxbusiness.com, many banks turn away requests for a start-up loan because they require three years of business financial data to be provided.

A gas station loan can be used to finance or expand an existing business, purchase a new gas station-related business or purchase real estate for a gas station. In other cases, gas station owners may just need working capital for purchasing new equipment or buying inventory.

Despite the fact that they are high volume enterprises, gas stations and gas station/convenience store combinations often need infusions of capital. Business owners can seek working capital in the form of gas station loans, lines of credit, gas station financing, and other forms of commercial lending that can ease any cash crunch.

The majority of gas station owners, including both franchisees and independent gas station owners, secure working capital during crunch times to keep their operations running smoothly year-round.

Securing loans for gas stations can be much more difficult to complete than other types of small business loans. There are challenges specific to the nature of this business that you will have to overcome.

Your choice of lenders will be more limited than with other types of businesses. Those potential lenders who serve this type of borrower will be concerned with environmental issues that may impact the business. The very nature of this business has perceived environmental risks that are not present in many other types of commercial endeavors. Also, this type of property is usually limited to a single use, a gas station, and this impacts its perceived value when it comes to recouping funds if the business fails.

Gas station start-up funding and franchising financing can be significant investments. Any aspiring business owner who has purchased a location or has entered into a lease agreement knows that setting up a business is costly. Luckily there are many different kinds of start-up financing and service financing options available to station owners, if you know where to look.

Types of Gas Station Loans

Multi-service gas stations that are comprised of a convenience store and autobody shop partners often need funding to hire gas station attendants, store clerks and mechanics. From time to time, these enterprises encounter cash flow issues.

Because banks are generally unwilling to finance gas stations, alternative lending platforms like Biz2Credit arrange a variety of financing options that can help, including commercial loans for gas stations, lines of credit, and cash advances, which enable service businesses to operate efficiently.

  • Loans for gas stations: Looking outside the bank

    Banks are an ideal source of funding for any business. But as we have discussed previously, a bank loan for a gas station may be beyond most gas station owner's reach. The good news is that there are many alternatives for station owners to traditional bank loans. In most cases, this could mean looking at several purpose-specific loans. In this case it might be best to look to innovative gas station loans that better cover your many different business needs versus one traditional lump sum loan.

  • Alternative Lenders

    Alternative lenders or what are increasingly being called "non-bank lenders" can often provide a source for funding when banks are unwilling to lend or make a typical gas station loan. These types of alternative lenders look more at your business potential than any perceived risk involved in this type of business loan. They offer several funding options including gas station loans that can provide more flexibility and ease than banks or the SBA.

    As a borrower it is important to consider a lender who can adapt to your present finance needs as well as your future growth. Because many banks refuse to lend to many gas station businesses, alternative lenders have looked to cater to this market segment, and so they have built specialty practices to fulfill the needs of the gas station owner.

    • Alternative lenders offer loans for gas stations and understand the nature of your business. They realize a bulk of your sales is paid with cash and work with you to get you through the simple application process.
    • They typically offer a faster application process. Interest rates may be slightly higher than a bank, but you stand a greater chance of approval.
    • Gas station loans through alternative lenders typically take less time and the application and approval process may be easier for you to successfully navigate.
    • Alternative lenders tend to look more at your business potential than your credit score or history.

Financing the Purchase of an Existing Gas Station

You may find that buying an existing gas station business is more to your liking. Purchasing an existing business has a unique set of challenges and you may have to pay a "good will" premium. However, you probably aren't sure exactly where to find the financing you'll need or even how to start. Let's start with an overview of how to find the right bank/financial institution, SBA and conventional loans, and other financing options for gas station purchases.

Getting any type of business loan is a process. Knowing what to expect before you enter into the process will increase your chances of getting your funding on-time. This means working with professionals who can guide you through the entire process, avoid delays and inform you about what you qualify for. Having this type of knowledge and assurances can potentially save you thousands or more when negotiating your purchase.

Getting prequalified and vetted by a financing specialist for gas station financing in advance is vital to your success!

Basic Documentation for a Gas Station Loan:

  • Last 3 years of complete personal tax returns.
  • A one page resume of your recent work experience (usually the last 10 years).
  • A compete Personal Financial Statement (PFS) detailing your personal income, assets, and liabilities.
  • New Articles of incorporation (if you want to finalize your deal with this type of business structure).
  • An explanation of any past bankruptcies (and discharge information) - either personal or business related.
  • A copy of your bank statements (to verify the funds for the down payment/cash injection into the deal).

Purchase Agreement

When purchasing an existing gas/service station you will need all appropriate inspection and registration documents of the UST (Underground Storage Tank) from the seller if the business you are contracting contains underground tanks. You'll also need to provide some or all of the following:

  • Financial documents

    • Balance sheet for two years, including current year and year-to-date,
    • Escrow instructions, including closing date, bank agent or escrow agent contact information,
    • Copies of all tax returns filed for the entity for 2-3 years,
    • Details of all assets included in the deal including: equipment, inventory, receivables, etc.,
    • If you are not purchasing the real estate where the gas station is situated, provide all existing lease and lease-related documents including any riders to the main lease agreement,
    • Profit and loss (P&L) statements for business for the last 3 years.
    • Copies of the purchase contract detailing the terms, all parties to the agreement, training, etc.

  • Business operation documentation

    • 3 years of contracts for all current and past fuel providers, equipment leases and vendors,
    • All current and previous vendor or franchise agreements and contracts for past 3 years (especially if you're buying a "branded" station).
    • 3 Copies of completed applications, with original signatures on each (if you choose the SBA loan option),
    • Monthly reports for station revenue
    • Contracts for any current and past fuel providers, equipment leases, etc.

  • Third-party and regulatory documents

    • Inspection and registration documents of the UST (Underground Storage Tank) from the seller if the station you are trying to buy has underground tanks.
    • An executive summary of your business plan with 2-3 years of financial projections projections (proforma) of the business you are buying.
    • The financing institution will order a third party business or market appraisal to establish the market value of the real estate (if any) and comparable sale prices for similar businesses.

    Traditional financing often takes 30 days to 6 months depending on the financing you select, the lender involved, etc. Be patient, it is almost a guarantee that you will experience delays, so work with professionals so they get resolved quickly!

Sources of Financing for Gas Station Purchases

As discussed above, banks and financial institutions can be very conservative when considering funding gas station deals - environmental concerns, the swings in gas prices over the last few years, etc. may impact the loan decision process. Many larger financial institutions simply don't have the expertise and specific knowledge of gas station operations, so they shy away from lending to that kind of business. Most gas station loans are made by local and regional banks/financial institutions that are more likely to offer the best financing for local gas stations purchases, rather than the bigger institutional types.

Geography typically does not make a difference unless a lender is prohibited or unlicensed to do business in a certain state. This is becoming a thing of the past however, as non-bank lenders do not have the same regulations as many banks.

With more choices than ever, finding the right fit for your particular needs is especially important. Different types of lenders will offer different kinds of loans or financial products, so it's important to be aware of the most common types so you can be prepared when you work with these companies.

SMALL BUSINESS ADMINISTRATION (SBA) FINANCING

The SBA offers specialized loan programs set up for gas station loans. These loan programs can be flexible and they allow for a relatively high level of financing when it comes to your collateral. A 90% loan to value (90 percent of the value of your property) is possible versus 70% or less with traditional bank sources.

Be aware! There a few drawbacks to an SBA loan. One down-side to an SBA loan is that if are on a short time-frame, you may find an SBA loan prohibitive. An SBA loan can take up to 90 days or more to put into place and because they are a government backed program. This means they require you to provide extensive documentation. This will take time for you to gather and will take time to review. Your credit, resume, business plan and past industry experience may be considered in the SBA decision process for the loan.

SBA loan financing may provide the best rates and repayment terms (10 to 25 years depending if there is real estate included with the deal) as they are partially guaranteed by the US Government, thereby reducing the risk to the bank or other lending institution.

Conventional Loans

The conventional loan process can be less cumbersome and faster than seeking government backing, but they are typically harder to get, even with excellent credit. For gas station owners, because of the industry concerns that were mentioned earlier, it becomes even more difficult. You may need up to 30%+ down; the business to be purchased needs to be VERY healthy financially and you'll have to put up sizable collateral, most likely your house and/or real estate investments. Even if you meet these requirements you still may not get the loan.

  • Do You Need an Advisor?

    A business purchase financing professional will also be able to help guide you through the extensive paperwork and requirements of the SBA or traditional loan application process if you choose to go that route.

    These professionals can also help you with some of the following forms of financing to help you bridge any gaps in funding that you may have to get your deal done.

Types of Financing

If you are interested in buying a gas station it is highly advisable that you hire a business financing professional to help you sort through the funding options that can help you close the deal. But to get you started, here are some additional ways of getting enough money together to go through with your new gas station purchase.

  • Using Your Retirement Funds

    You can use part of your retirement savings to close the funding gap for buying a gas station. The best part is that you won't incur taxes or penalties that come from early withdrawals. Plus, the funds are generally available in as little as 4 weeks.

  • Seller Financing

    The vast majority of business for sale deals involve some type of seller financing. Seller financing is when the seller provides a loan to the business buyer. As the buyer you'll provide a down payment (approximately 15% to 25%) to the seller, and then make installment payments over a specified time, at an agreed-upon interest rate, until the loan is fully repaid.

  • Friends and Family

    Many gas station deals are funded by friends and or family members of the aspiring business owner. Purchasing a gas station business (especially if it involves its own piece of real estate) can be a profitable investment. Very often your friends and family will be interested in learning about the opportunity, but ensure you share with them a clear picture of all the risks as well as the potential rewards. When it comes time to sign on the dotted line, you need to make sure that any investors or partners stay below a 20% equity in the business or they will have to become co-signers on any loan. Deal structure, contract language, and lender presentation is paramount in these situations.

  • Alternative Financing

    Getting financing for your gas station business doesn't have to draw down all your personal assets, or take up a lot of time waiting for the bank to call. If you work with an alternative financing specialist you could have funding in as little as a few days. However, with these financing arrangements you'll want to be sure you read the lending agreement carefully so that you know exactly what the funding company is expecting of you as a business owner.

    Regardless, today many gas station owners are choosing to work with alternative financing companies because of the convenience and speed that they offer. The whole process is usually handled online or over the phone, making it as easy for a business owner to complete as ordering a pizza.