The auto repair industry has never been as capital intensive as it is today. In the past, assets such as frame racks, prep stations, and spray booths could be used for several decades without much regression. This made it easier to associate the cost of these assets over a long term.
But like most industries, the auto repair industry evolved. Investments are now continuously made in technologies, tools, and equipment to keep both your customers satisfied, and set yourself apart from other auto repair mechanics.
According to Spectrio, independent repair shops perform 75% of the aftermarket auto repair. The consumer trend is also increasing towards franchise auto repair businesses. The average duration of vehicle ownership, whether new or old cars, has increased by 60% in the last ten years and by 2020, vehicles 12 years and older will increase 15 percent. The longer people choose to keep their cars, the more they become dependent on repair shops.
Despite what the numbers say, it can be frustrating when tens of thousands of dollars are invested in equipment that doesn’t bring in profitable returns. So let’s look at the best option for your auto repair business.
Let’s get started:
Before jumping into buying or leasing auto repair equipment it’s best to have a plan of what you need and how to get them. An analysis of the value and estimated returns from the equipment can give you a first fair picture of the decision you should take.
- Prepare a list: Make a “need” list of the equipment and tools you need. You can classify this into two groups-immediate and future. Be sure to consider how urgent of a requirement it is to building and expanding your auto business, as well as how soon you can make returns on each. Try to update and revise this as your business grows.
- Measure your workspace: Does your garage have the space to accommodate all the equipment you need? Try checking out the dimensions of your equipment online (shops like Garage Equipment Supply, Best Buy, and Automotive Service Equipment allow you to do this) and plan your garage and machinery layout using a digital space planning tool like this one. A cluttered and over-crowded workspace will seem to reflect your work as shabby to prospective customers, and you don’t want that. If you still don’t have enough place, you may want to consider expanding your garage.
- Outsourcing: Instead of leasing or buying expensive equipment, there may be services that can be outsourced to larger franchises or a domain-specific garage to cut down on capital requirements and keep a clean workspace.
- Brand new isn’t easy on the wallet: Check if the equipment you want is available as pre-owned. This will save you money you can spend on other tools or technologies that may be more expensive.
- Don’t compromise on quality: Although it’s smarter to save some money, it should never compromise on the quality of the equipment. The repair and maintenance cost of cheap equipment can be more than you imagined. Keep an eye out on customer reviews and feedback from credible sources which can give you an idea about the quality of the equipment.
- Additional considerations: Take into account ongoing maintenance, tax deductions, and the expiration of equipment besides comparing overall costs.
Leasing Vs. Buying:
To lease equipment means borrowing equipment under a contract. This equipment could be either second-hand or new but its terms of use are restricted by the contract. Buying equipment is simply purchasing it entirely under your name. The equipment becomes fully yours to use and any alterations to it are entirely up to you.
Of course, it’s not all that simple.
Leasing:
While leasing does mean that you’re bound to the terms of the equipment lease, it becomes easier to update to the latest equipment if you lease it. This is of value in competitive businesses when you may need to upgrade equipment and tools annually to stay relevant. Leasing gives you both flexibility and a wider choice of options on equipment. Additionally, you can choose to budget over a longer period of time per the contract than paying a large amount upfront for equipment. If the leased equipment breaks or has issues, the leasing company has to bear full expenses saving you undue costs. Leasing is also 100% tax deductible, falling as an operational expense under the 179 IRS Tax Code.
All this doesn’t make leasing the best choice though. You may even end up paying more over time than you would have if you had bought it upfront, which is generally the case. A strict loan term might make you pay and keep a piece of equipment longer than you need to (terminating early always brings terminating fees), and getting it fixed might become difficult. Since you don’t own the equipment, you won’t be able to sell it back when you’ve finished using it. This eliminates the potential to make money back. Most of the times, the exact equipment you ask for may not be available, forcing you to settle or opt for something that doesn’t meet your ideal requirements.
Buying:
Buying an equipment gives you full control over what you get. You get to order exactly what you want and you’re not limited to another lease company’s stock. Consequently, equipment repairs fall in your hands and you can get issues fixed immediately and from whomever you want. Section 179 of the IRS Tax Code addresses that tax incentives are larger for purchasing but there are limits. Although buying equipment won’t be 100% tax deductible, you may be able to claim depreciation costs as a tax deduction. And since you own the equipment, you can make any alteration you wish.
Buying equipment too comes with its own set of disadvantages. If your equipment has technology that is outdated quickly, you are stuck with it because you own it and may not be able to recover much value even when it’s sold. Maintenance and repair costs may get high and it may prove difficult to pay for expensive equipment all at once. Fortunately, there are several types of equipment financing options to help you out.
Equipment Financing:
Several options exist to finance equipment for your auto repair business. The most common of these are:
- Traditional Bank Loans: It’s very likely your commercial bank offers general equipment and/or expansion loans. Depending on the bank, a down payment may be required. Many banks file an assignment where business assets are pledged as collateral. This can become quickly onerous when you require additional financing or when there is a sale of equipment and a change of control. Successfully availing a bank loan would also require strong credit and financial history.
- SBA Loans: Although the Small Business Administration (SBA) doesn’t provide loans themselves, they provide guarantees to other lenders to give you the loan. The SBA also includes microloans for small equipment purchasing (below $50,000) and 504 loans for large equipment (over $10 million) For this reason, a stamp of approval from the SBA is highly sought after. Although the SBA loans are easier to apply for than traditional bank loans, they have just as long of an application and processing time. They require personal guarantees on loans and additional collateral, and if you don’t have a long-standing established business, high chances are you won’t be selected for a loan.
- Vendor Financing: Some vendors will finance the equipment for you through a partnership with a financial institution to provide credit to the purchaser. These loans are similar to a credit card but can make things frustrating if the principal is not paid within a limited time frame.
- Alternative Financing Options: This is one of the best options for financing for auto-repair and other small business financial requirements. Although they don’t specifically provide an equipment funding, they address working capital needs for anything you may require. They also have the shortest application and processing time. As the financial demand for tools and equipment increases with a growth in business, alternate funding platforms like Reliant Funding help ensure you have the right financing when you need it.
Whether you’re buying or leasing equipment, consider tax deductions and potential resale value. Finally, take the decision that suits your auto-repair business the best. Leasing is the best option for those who don’t have enough capital and need to constantly upgrade their equipment. Buying proves the winner if you want full control of the equipment with a long life for your established business.
