Bridging the Gap: Using a Car Business Line of Credit for Unexpected Cash Flow Needs

Why Auto Repair Shops Face Cash Flow Problems

The automobile repair business faces pressures that impact cash flow. Many operate on thin margins to begin with. Expenses can increase significantly while revenue stays the same.

Some of the factors that add to these challenges include:

• Higher costs for parts and supplies
• Supply chain disruptions and shortages
• Rising labor and payroll costs
• Seasonal declines in service volume
• A delay in customer payments

Some repair jobs can cost thousands of dollars in parts before you're reimbursed by a customer. But it's vital to have what you need on hand to meet customer needs and expectations.

Many small business owners rely on car business loans and other financing solutions, such as a line of credit or revenue-based financing, to meet their business's short-term needs.

How a Business Line of Credit Works for Auto Repair Shops

Business lines of credit are a flexible form of financing that work much like a credit card (they are not car business loans). However, you'll usually have a higher credit limit and lower interest rates than with credit cards.

With a business line of credit, a lender approves a borrower at a maximum credit limit that they can draw from. But you only pay interest on the part of the limit you use. When part of a credit limit is repaid, it becomes available again.

Use Cases for Auto Repair Shops

Auto repair business owners often use a line of credit for:

• Bulk inventory part purchases
• Diagnostic equipment
• Payroll support during slow months
• Short-term working capital or cash flow gaps
• Emergency equipment repairs

When a Line of Credit May Make Sense

Lines of credit may be an ideal solution when your shop's expenses are more unpredictable or when you need a more flexible financing solution.

A line of credit makes sense when:

• You need fast or immediate access to funds.
• You expect fluctuating cash flow.
• You want to avoid larger, long-term fixed payments.
• Funds are needed for short-term expenses.

Some auto repair shop owners combine lines of credit with other types of car business loans to meet both short-term needs and long-term business goals.

Interest Rates and Lines of Credit

When evaluating your loan options, it's always a good idea to look at the total financing costs. As with a credit card, interest on a line of credit can be fixed-rate or variable. This will vary by lender.

Some lenders offer competitive APRs that adjust based on how you use the line of credit. Many lenders also charge higher interest rates for borrowers with lower credit scores. On the other hand, a higher credit score often means you'll have lower interest rates.

But the interest rate isn't the only factor that determines the cost of financing. Other considerations include:

• Repayment terms
• Fees and draw costs
• Access speed, or how fast you can draw from the limit

Another thing to think about is that if you plan to use the credit line frequently, a lower interest rate will mean lower costs over the long term.

Line of Credit vs Credit Cards

Some business owners rely on credit cards for short-term expenses. While convenient, credit cards often carry higher APRs and lower limits.

A line of credit typically offers:

• Lower interest rates
• Higher loan amount limits
• Better cash flow management

For auto repair shops, this difference can significantly reduce financing costs.

Loans Used by Car Businesses

A small business loan is another financing option for auto repair shops. These types of loans include:

• Equipment loans: This type of loan can only be used toward business equipment. Most business owners have an easier time qualifying for equipment loans due to the equipment serving as collateral for the loan. Equipment financing usually comes with competitive rates.

• SBA loans: Small Business Administration, or SBA loans, usually have the best repayment terms, but qualifying can be tough. The application process can also be overwhelming, and funding can take a while. But if you can get approved, SBA loans usually have low rates.

SBA loans can be used for refinancing existing debt, renovations, purchasing commercial real estate, equipment or inventory, working capital needs, and acquiring another business.

• Term loans: A term loan provides you with loan funds upfront, and the loan is repaid in equal, monthly payments over the loan term. Term loans can be used toward purchasing inventory, a business expansion, or upgrading equipment.

With multiple types of business financing options, you may wonder which is best for you. The answer depends on the lender's requirements, your business's specific needs, how fast you need the money, and your creditworthiness.

While this article focuses primarily on funding needs for auto repair shops, car business loans can meet other business purposes, such as:

• Commercial auto loans and fleet financing

• Car dealership loans

• Transportation business loans

• Towing company loans

Car business loans will also pay for a single business vehicle for just about any type of business, as long as the vehicle is used for commercial needs.

How Lenders Evaluate Loan Car Business Loan Applicants

Eligibility standards range from lender to lender. Many lenders will look at both personal and business credit and other financial factors before approving a car business loan.

Banks, credit unions, and the SBA typically have stricter loan requirements than online or alternative lenders.

Still, many lenders will take the following into account:

• Your business's time in operation
• Annual revenue
• Personal credit history and score
• Bank statements and other financial documents
• Downpayment and collateral

Some online lenders look more at the overall picture of a borrower. Instead of relying on credit alone, some lenders will look at the following when reviewing your loan application:

• Supplier and vendor payment histories
• Transaction history
• Cash flow
• Real-time data instead of outdated credit reports
• Online reputation

These types of data help lenders perform a more accurate credit analysis, often leading to more applications getting approved.

However, it's important to understand that your credit record impacts how much interest you're charged. The better your credit, the lower the interest rate you'll likely have on your car business loan.

If your credit is less than ideal, it's sometimes best to consider a smaller loan option, such as a line-of-credit or revenue-based financing, to build your creditworthiness and strive towards better loans down the road.

Final Thoughts

A business line of credit or a car business loan can help your auto repair shop meet expenses and stay operational in an unpredictable market.

Business lines of credit offer convenience and flexibility when you need it the most, while car business loans can help you tackle larger business expenses.

When used with business auto loans, a business line of credit can help you grow your car business with greater confidence while staying competitive by delivering the superior customer service your customers expect.

It's essential to choose the right lender for your needs and compare interest rates, repayment terms, and funding speed before committing. The right financing partner can guide you throughout the loan process to help you get the capital you need.

With the proper financing tools in place, your auto repair shop can stay positioned for long-term success..