From the VP: Financing Growth – Six Crucial Methods
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From the VP: Financing Growth – Six Crucial Methods

Six crucial methods of financing available in what many are calling an utterly new and different collision industry from which we’ve ever known.

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Lou Berman is vice president of sales for Collision Care Auto Body Centers. He also consults (out of market) nationwide. He can be reached at [email protected]

Today’s collision repair climate has changed more in the last 10 years than ever before.

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When there first became a need for a collision repair shop, anyone with a knack for fixing cars and providing good service could be successful. But those were much simpler times, of course. These days, it’s either go bigger, go small, or go home.

The medium-sized businesses that serve so many are going to have to make hard decisions in the very near future.  Some are going to hang in there, while others are going to get out. For those who are going to stay and want to participate in the fast-paced and ever-changing environment of today’s modern day collision repair industry, mastering the elements (which we are about to discuss) will be crucial to survival.

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Six Ways to Finance

Not only do you have to be a master of internal processes and procedures today, but also a finance expert. And if you’re not very good at that, you better have someone close to you who is.

Below are six crucial methods of financing that are available in what many are calling a new and utterly new and different industry from which we’ve ever known.

Cash Flow. For companies looking to expand, one simple rule applies: Clean up your own backyard. In other words, you need to configure the most lean, organized and efficient facility which can maximize your profit before you even think about opening another shop. This sounds logical, but when a bank wants to look at your P&L and your business plan to determine your risk factor before lending you money, your cash flow – not the cars, boats and houses – is going to end up being a direct example of your business acumen. How much does your company earn? Cash flow maximizes borrowing potential, but the management of this is crucial. Mastery of your P&L is vital to your ability to borrow. Banks want to see positive cash flow.  One of the biggest misconceptions is predicated by the popular show, “Shark Tank.” In this show, you typically see characters like “Mr. Wonderful” evaluate a company’s worth based on sales and cost of product. But there’s so much more that goes into a true company evaluation, such as soft costs that affect the bottom line. Mastery of your P&L can be the difference between you getting a loan and wishing you did. Cash flow is crucial to financing your future.

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Traditional Financing. Some examples of this include purchasing businesses, real estate, separation of the two, non-purchasing agreements, business-only, etc. Traditional financing is probably one of the more common methods of financing growth, but be careful. People don’t realize the soft cost expenditures such as legal fees, appraisal fees, architectural fees, surveys and title insurance (not typically financed). You also have to factor in a depreciation schedule for the business needs to meet the loan terms. These are common mistakes – And things you’ll realize after you’ve visited your accountant many times.  Of course, your personal credit history needs to be stellar, as well as your business credit history with agencies like Dun & Bradstreet. Years ago, it was always said that cash is king, but ask anyone in business and you’ll find that the main objective is to make money without using your own or using as little as possible of your own. Also, to obtain the best interest rate.

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Seller Assist. For example, let’s say the purchase price is $1,000,0000, and you borrow $500,000 from the bank. The seller takes $500,000 back which they’ll finance over the next 10 years. Seller financing is flexible…sometimes better than the bank because there is a faster depreciation schedule and less interest. Most owners will take more paper back. Seller-assisted financing comprises 50 to 60 percent of the deals. The other great thing about seller-assisted deals is that you can customize them outside of the realm of traditional financing. If two people agree on terms, that can be a much better arrangement for both – depending on the terms – than any type of traditional financing that’s in the market. The free enterprise system is a wonderful thing in situations like this in that it promotes growth, expansion and leverage. You see many older business owners leaving the business to long-time employees, affording those individuals the American dream with the convenience of two-party agreements and without the hassle of credit reports, P&Ls, business plans, etc. For some of the newcomers to self employment, this kind of start is the only way.

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Mezzanine Financing. This type of financing represents interest only, for an agreed amount of time, typically five to 10 years, which can enable you to get profitable so you can get to traditional financing later on. There is higher risk, however, in that you pay no principal but only interest for the term of the loan. A lien can and will be placed on your current assets. A Here’s a scenario of mezzanine financing that could turn very lucrative if executed properly: Let’s say you have the potential business and associated property you would like to acquire. Let’s also assume that you have the accounts and the business sourcing capability to make the business fly. This form of financing would provide you with an opportunity to pay interest only for the term of the loan, which could buy you some time to get things organized a little bit better and create a more traditional way to refinance at a later time, but not allow you to miss the opportunity. In business, timing is everything, and that timing can make the difference. For example, in the early ’90s, it was way easier to obtain a DRP than it is today. The pie has been divided so many different ways. Startups now face so much more competition, but if you were established during that time, and it was through a mezzanine deal, you would likely be successful now and transitioned to a traditional financing plan. But the mezzanine got you off the ground.

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Private Equity. This is a common method we’re seeing now with very large consolidators who are well-funded and looking to create – over the long-term – a public stock that would create an enormous opportunity for profit for those who got in on the deal early (even before the IPO is issued). This typically isn’t a viable method for mid- to  even large- sized individual operations. These endeavors take an exorbitant amount of time, as does any big business venture. However, we’re seeing many collision repair shops selling the business only, retaining the real estate, and then reinvesting the proceeds in other areas they might be interested in. In many cases, this is a win-win for the consolidator and the shop owner, especially if the owner is older.

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State, Federal and Local Financing. This would include low interest financing, tax abatements, etc. Urban redevelopment is something every major city is going through right now. If you explore your own backyard, you’ll find an extraordinary amount of opportunity to negotiate vault deals with real estate, financing, tax abatements and incentives. Typically, the fiduciary responsibility for doing business in  urban markets is much greater than in outlying suburban areas. But the greater the risk, the greater the reward. You’ll see more of this type of creative opportunity in these markets than in outlying areas. It’s simply a numbers game.

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Crunching the Numbers

Admittedly, the modern-day collision repair era has us crunching numbers more and more every day. Every penny counts as profits continue to dwindle. On a semi-related topic, we had to allocate funding for certification by Ford to repair the new all-aluminum F-150, the best-selling vehicle ever. The equipment needed to perform repairs, keep the warranty intact and ensure that you have the opportunity to service this vehicle can cost in excess of $50,000 per store. If you don’t crunch your numbers and operate off of your P&L religiously, a necessary expenditure like this that arises can have a heavy impact on your bottom line. And that’s what matters to the bank.

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Customer Financing

Synchrony Financial has been helping motorists get back on the road for more than three decades by making sure they have options to pay for needed repairs and services. High insurance deductibles can mean consumers are sometimes left to pay for costly repairs on their own.

Consumers are savvy, researching their purchases and looking for financing options. Our third-party research¹ shows that the availability of financing is a key consideration when making major purchases exceeding $500. In the automotive sector, 76 percent of respondents in our most recent Major Purchase Consumer Study² said they “always” seek promotional financing.  And more than half (56 percent) said they will go elsewhere if promotional financing is not available.

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More than 18,000 automotive merchants are enrolled in Synchrony Financial’s CareCareONE consumer financing program. They know that, in addition to providing access to credit for their customers, CarCareONE is also shown to drive repeat business. Research confirms that consumers who have a merchant’s store card shop up to 30 percent more frequently and spend up to 50 percent more than consumers who don’t have the card.³

With CarCareONE credit card promotional financing, cardholders are able to get the repairs they need now, and spread their payments out over time* – whether it’s an unexpected repair or routine maintenance. It also allows them to keep their general purpose credit cards available for unforeseen emergencies, or daily expenses.

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Synchrony Financial understands your business, and is working to keep your customers’ cars and trucks on the
road longer.

¹,²,³ Based on Synchrony Financial’s third annual 2014 Major Purchase Consumer Study, conducted by a third party, reflects the experience of consumers making purchases valued at $500+ in one of 12 categories, including Automotive.

*Subject to credit approval. Minimum monthly payments are required for promotional financing. Credit is extended by Synchrony Bank.

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