Automotive repair and collision shops are not the same shops your father had. Cars are more sophisticated, materials are more complex, and OEMs are in your shorts telling you what to do and how to do it. The industry is rapidly changing and those shops that don’t keep current will soon find themselves out of business.
However, where there is change and disruption in the industry there is also opportunity!
For those shops that keep current, invest in the future of their business, and continuously train and certify, substantial upside growth and profitability are in your future.
Part of investing in the future of your business requires purchasing capital equipment. This means replacing obsolete equipment and buying (or leasing) new updated machines such as lifts, welding machines, spray booths, frame straighteners, computers — almost anything that enables you to fix and repair new vehicles up to OEM specification.
In today’s financial landscape there are generally three ways to own equipment — with cash, with financing, and by leasing. Each has their benefits and detriments.
The simplest way to pay for capital equipment is with cash (the way your father probably did). You don’t pay any interest and you don’t have to go through the loan application and funding process. But this is probably the worst mistake you can make in getting new equipment.
Keeping cash in your business makes you more attractive to potential lenders since they see you are stable and profitable and have money in the business bank to cover unexpected expenses (think leaky roof, unanticipated building improvements and repairs, insurance premium increases, etc…).
Financing and leasing capital equipment has great benefits and is commonplace in the automotive service and collision industry. It allows you to replace your obsolete equipment with new up to date machinery with minimal cash outlay. And interest rates continue to be at or near historic lows which gives you more reason to lock in fixed rate financing now.
When financing equipment either through a bank or independent finance company (to be discussed in a future article), you are typically required to make a downpayment of 15% – 25% of the equipment cost and finance the balance over time. In today’s competitive landscape, and if your credit qualifies, you may be able to obtain 100% financing.
Leasing, like financing, also allows you to keep your cash in your business. Leasing enables you to have a lower monthly payment for the same equipment you finance. Most leases in the automotive service and collision sector have small residuals at the end of the lease which give you the option of owning the equipment at the end of the lease term.
In addition to certain tax advantages with leasing (speak to your accountant for details), it also enables you to obtain 100% financing of all costs including installation, training, and other soft add ons. The bottom line, leasing can improve your business’s cash flow by having one steady low monthly payment throughout the lease term.
In the spirit of full disclosure there are various types of leases and each has certain benefits (will discuss this in further detail in a future article).
The important take away is — it’s not too late and it’s not too expensive to invest in your future. Approach a lender you trust and who understands your business, and see how easy it can be to get new equipment at affordable payments. Kicking the can down the road and pretending that your world is not changing will only cause you trouble down the road.