Growth is as essential to business survival as good people and loyal customers. Getting good growth takes planning, marketing, the right people…and the right equipment. While determining which machine will generate the best productivity improvement or additional sales can be difficult, finding the best way to pay for it is at least as important to the bottom line.
Lease or Buy?
Is leasing or buying the best way to finance equipment for expansion? While there is no universal answer to that question, it’s important to avoid jumping into a deal without considering what each strategy can bring to your business. Ownership gives you clear title to the asset when it’s paid, and depreciation is available to your accountant at rates that are likely to be faster than the degradation of the productivity advantage of the new equipment over the years. The primary disadvantage of straight-up borrowing for new equipment is that the additional leverage can crimp your bottom line, especially if accelerated depreciation leaves the asset with a much lower value on the books than the residual amount still owing. The temptation to beat the taxman is always there, but depreciation needs to be tactical to prevent nasty surprises when you need the next round of financing.
Leasing takes care of many of these problems by leaving your line of credit alone; the leasing company owns the equipment, with payments often structured to provide a nominal (often one-dollar) buyout at the end of the lease period. And the tax deductibility of lease payments will be well understood by your accountant. Leases are great for preserving cash flow, but leasing companies, like banks, aren’t in the automotive service business, so your ability to negotiate rates depends on your ability to demonstrate that your business is a low-risk proposition. In-house leasing programs offered by equipment manufacturers and distributors, however, are often better tuned to the industry and can add options such as an early “out” if you’re trading up.
The Business Plan
Put simply, you need one. The business plan is the blueprint for growth and is also the key to clearly defining your business goals. It also gives you a baseline for measuring your progress toward that goal. Do you already have one? For expansion, it may be time to either revise the plan, or create a new one. Why? Unless you’re psychic, chances are that the original plan doesn’t include post-goal expansion. This is an opportunity to revise the plan and in the process, better define what the next phase should look like. What should the plan contain? There’s no single template for a good plan, but a typical framework could be:
Definition of Goals
“To provide the highest quality vehicle service in the region in a modern, profitable enterprise.” “To become the largest and most successful automotive service provider in town.” The mission statement might seem irrelevant, but even if as the business owner/operator you don’t need it, it’s a good thing to put into the hands of a lender. That’s because banks and finance companies usually don’t know the intricacies of the vehicle service industry. A mission statement works for you in a couple of ways. The first is that it moves the issue away from “Garage” to “Business”. Managers in financial institutions think in terms of the return on investment; it’s important to remind them that servicing vehicles is as much a strong business model as the computer software trade, real estate development or a good local restaurant. The second advantage of a strong mission statement is the ability to reinforce the message that the business exists to generate profit, not to repair vehicles. It’s O.K. to assert that by being very good at vehicle service, the business will succeed, but it’s very important to assure the lender that the bottom line is foremost on your mind.
Defining your goals is a must in a business plan, and the clearer the better, both for your business and the individual signing off on your financing. “To grow my business by 50%” is a goal, but it’s not specific enough for a good plan. A better approach might be “to add $175,000 in additional gross revenue per year by gaining 5% local market share in chassis service.” That’s a much more specific statement of what you expect the equipment investment to achieve, but it also requires a lot more homework.
That homework will require analysis of several factors. The first is simple: Is there demand for the capability I plan to add, and if so, where will it come from?
In the unlikely situation that there’s no one in your market that can do alignments, then estimating demand to pay for that new “bench” could be as simple as looking at what you spend jobbing out that service to local dealers or specialists. A more likely scenario is that you’re entering a competitive market, so the key is to estimate now much of the existing business you can win from the motorists’ current provider. That accuracy of that estimate can depend heavily on the nature of your current business.
If it’s relationship-driven with a large pool of maintenance clients, then equipment that feeds into that service can be easy to justify. Alignment, tire, flush and diagnostic equipment that can generate sales from your existing client base, while adding capability that can attract more is easy to plan for. Adding a totally new component to your operation will require a lot more market research. An example could be a high bay with heavy lift capability for truck service. Another could be adding transmission or engine rebuilding services. If the new capability requires a totally new customer base, consider planning it as if it were a totally new business. In fact, talk to your accountant; it might be a good idea to operate it as separate business.
And in Ontario, if you’re considering adding an emissions dynamometer for the Drive Clean program, it’s important to remember that testing fees and repair cost limits are in place, so you need to know your market well before dedicating a bay to smog testing.
With the targets set clearly and realistically, the final part of the plan states how you intend to achieve the goal. This should include a timetable for getting the equipment up and running, targets for staffing and training, as well as a marketing plan for getting the word out about your new services. It’s also important to project how the ramp-up to break even for the new equipment will impact cash flow. The lender will look for your ability to pay the bills first to realize a decent return on the new equipment investment.
Securing financing for new equipment purchases isn’t very much different from that initial round launched your business in the first place. Now, however, you’re more experienced, and have an even better chance at turning a quick and healthy return on your new equipment investment.
Some Useful Internet Resources
There are many useful Web resources ideal for helping growing automotive service businesses understand and prepare for financing issues. A few are:
A Small Business Financial Service Charges Calculator, designed to help small businesses easily compare the monthly cost of most business accounts offered by the major financial institutions in Canada.
The Canadian Bankers Association. Links to major banks and tips for borrowers.
Industry Canada now offers leasing options under its Canada Small Business Financing Program. The federal lending program has been around since 1961, and operates by guaranteein
g 85 percent of the lender’s losses in the event of default. Applicants negotiate loans or leases through their local bank, credit union or caisse populaire. To qualify, the business must have gross revenues under $5 million during the fiscal year in which they apply. Incorporated companies, sole proprietorships and partnerships are eligible.
The maximum amount a small business can access under the program is $250,000, which can be used in commercial term loans to finance up to 90 per cent of the cost of new or used equipment. Capital leases containing a purchase option can also finance new and used equipment.
Under the program, personal guarantees or security can’t exceed 25% of the total amount financed. Interest rates on loans may be fixed or floating rate. Floating rates cannot be more than 3% higher than the lender’s prime rate, and fixed rates cannot be more than 3% higher than the lender’s residential mortgage rate for the term of the loan.
Lease payments include an interest rate of up to 13.25% plus the Government of Canada bond rate for the term of the lease. Rates include a 1.25 % administration fee. Participants also pay a 2% registration fee to the program. All loans and leases must be paid in full within 10 years.
For details, visit: www.cbsc.org, or call 1-888-567-4444.