When the Federal Reserve left its benchmark interest rate unchanged this August, it was a signal to small-business owners and other borrowers that there shouldn’t be any lazy days of summer when it came to requesting financing. The Fed’s decision not to raise rates left the investment community expecting modest rate hikes in September and December in order to keep inflation near the central bank’s 2 percent target. Message to small-business owners: Submit those loan applications now if you want to save money.
In June, the Fed had raised its benchmark rate – the rate that banks charge one another to borrow money overnight – for the seventh time in three years to a range of 1.75 percent to 2 percent, citing the nation’s solid economic growth and strong job market. The Fed had formerly lowered its benchmark rate to almost zero in response to the financial crisis of 2008, an effort to encourage lending and to kick-start the economy.
Despite the steady string of rate increases, car wash operators and the broader business community still enjoy easy access to capital from a number of sources, and that is unlikely to end due to small rate hikes this year and beyond.
“The access to capital is exceptional, and I think that will continue,” said George Odden, principal of Scottsdale, Ariz.-based Commercial Plus Capital Advisory Services LLC. “I think it’s important to note that interest rates have started to inch their way up, and that trend is likely to continue. Financing markets are wide-open right now, but there certainly are some signs that that could at least slow down in the future.”
For car wash operators looking to borrow, there’s no time like the present. Following the Fed’s interest rate hike in June, Rohit Arora, chief executive of Biz2Credit, a direct lender to small businesses, said he expected the benchmark rate to climb as high as 2.4 percent by year’s end, and to reach as high as 3.4 percent by the end of 2020.
“Time is money when it comes to securing capital for your small business,” he wrote in a report posted by Forbes. “The longer you wait, the more costly loans will become. Business owners who have fared well during the past two years and who are optimistic about their near-term success will want to apply now if they plan to secure financing for growth during 2018.”
Odden said that the majority of the highly fragmented car wash industry continues to get financing from local and regional banks, with larger commercial banks a bit more reluctant to lend. He said real estate investment trusts are increasingly willing to lend to car wash operators through the sale-and-lease-back model, in which the car wash operator sells its facility to the REIT and then rents it. Additionally, private equity groups searching for ways to deploy their growing bankrolls provide another source of capital for small businesses.
According to the U.S. Small Business Administration, small businesses such as car washes borrow money for four main reasons: to start a business, to purchase inventory, to expand a business and to strengthen their financial foundation. Small businesses account for about 73 percent of all business borrowing because they typically don’t have the same access to capital platforms and equity-based funding that large corporations do. That makes it important that small businesses have a wide range of financing sources.
“The money is coming from REITs, local and regional banks to a large extent, large commercial banks and private equity funds, and it’s coming from what I would call nontraditional lenders who are not necessarily bound by the same types of regulations as the large commercial banks and are more flexible in how they look at covenants and guarantees,” Odden said. “They are more likely to do a cash-flow-based type of loan as opposed to an asset-based type of loan.
“I don’t see anything that is going to cause the tap to get turned off, and it would take something pretty dramatic to substantially stem the tide that we’re seeing. The capital is still available, and the terms are still attractive.”
In August, the Fed’s Senior Loan Officer Opinion Survey revealed that almost one-quarter of bank loan officers were easing their lending standards for commercial and industrial loans, citing increased certainty about credit conditions. The report did note, however, that bigger companies were significantly more likely to obtain increases in their lines of credit than were small businesses.
“Notably, almost all domestic banks that reportedly eased standards or terms on [commercial and industrial] loans over the past three months cited increased competition from other lenders as a reason for easing,” the report said. “In addition, significant [numbers] of banks mentioned a more favorable or less-uncertain economic outlook, increased tolerance for risk and increased liquidity in the secondary market for these loans as important reasons for easing.”
Sam Neely, chief financial officer for Zips Car Wash, which has rapidly expanded to 124 locations, said he is contacted almost every day by at least one bank, PEG or other entity wanting to invest capital in the business or offer it financing.
“There seems to be a lot of people in the financial world who have caught on that this can be an excellent return on your money,” he said. “I get a hodgepodge of institutional investors or people representing family firms, to people who want to be landlords and simply collect maybe a note payment on an investment in the future from passive income, to regional and large banks.”
The car wash industry’s reputation as a reliable cash generator has given car wash operators better access to capital than some other small businesses, according to Brian Pifer, vice president of entrepreneurship for the Small Business Majority, a Washington, D.C.-based advocacy group for small-business owners.
Pifer said access to capital is an ongoing problem for many entrepreneurs, including in minority and rural communities and for women and veterans. He said that while business lending has risen this year, many small businesses are still not getting enough capital to grow or even launch operations. According to the Fed’s 2017 Small Business Credit Survey, 64 percent of firms said they experienced financial challenges in the past year, and they usually addressed those challenges by using personal funds.
Financing shortfalls – receiving less capital than the amount requested – were more common among micro-firms (those with annual revenue of $100,000 or less) and startups (zero to five years), Pifer said. Seventy percent of micro-firm applicants and 61 percent of startups said they experienced shortfalls.
“This is why we believe we must ensure greater access and more options for obtaining capital by supporting innovations like crowdfunding and other non-bank, non-venture-capital sources of capital, and by establishing a regulator in the alternative-lending space,” Pifer said.
Pifer said car wash operators looking for unbiased loan comparisons or help in becoming loan-ready should take advantage of free resources such as the Small Business Majority’s Venturize online platform, which the group bills as a one-stop shop designed to help all businesses, especially those who have the most difficulty accessing affordable financing – people of color, women and younger entrepreneurs.