Finance for mechanics and auto workshops

Most workshops rent. The landlord owns a building that exists to house exactly this business, the lease renews, and the rent goes up. At some point the landlord offers to sell, or the lease comes up and the numbers on buying start to look better than the numbers on staying.

That transaction is usually the best deal an auto business will ever do, and it has one complication no other trade has: a lender is not only assessing your earnings and the building. It is assessing what is underneath it.

What actually differs

The ground under the building

Workshops handle fuel, waste oil, solvents and degreasers, often on sites that have done so for decades and sometimes on land that was a service station before that. State environment regulators recommend an environmental site assessment before purchase on any property that contains or contained underground fuel tanks, and the assessment covers the whole site rather than just the ground around the tanks, because surface spills, oil storage and workshop activity contaminate areas well away from them.

This matters to a lender for a simple reason. Contamination reduces what the land is worth, it can trigger a remediation obligation, and it can delay or block a change of use later. A facility secured against a site with an open contamination question is a facility secured against an unknown number.

• Ask early whether there are, or ever were, underground tanks. Disused tanks corrode and leak, so decommissioned is not the same as resolved.
• Expect the assessment to be commissioned by an environmental consultant who states whether the site is suitable for the intended use, not just whether something was found.
• Build the timeline into the contract. An assessment is not a two-day job and a finance clause that ignores it will expire while you are waiting.
• Price remediation as a possibility rather than a surprise. It is a funding question as much as a legal one.

The add-backs an auto workshop has

One of these is far larger than the rest, and it is the one created by the transaction rather than found in the history.

The rent is the point. It has been a cost in every set of accounts a lender has ever seen from you, and from settlement day it is not a cost at all: the money that went to a landlord now services a loan against an asset you own. It has to be evidenced from both sides, the operating accounts and the landlord's statements, and the loan replacing it has to be serviced on top of everything else the business already carries. That is the whole exercise.

What those add-backs are worth

The four categories above at the illustrative amounts shown, $110,000 in total, against the two facilities a workshop actually buys.

Those two numbers are the argument for splitting the deal. New hoists, an alignment rig and diagnostic gear funded separately by asset finance over their working life keeps them off the property facility, which leaves the building being assessed on the building. Capitalising the equipment into the property loan does the opposite: it stretches a five year asset over twenty-five years and uses up capacity against the one piece of security a commercial lender is genuinely comfortable with.

Why the equipment is worth less than the building

A hoist is worth what a buyer who already has a workshop will pay for a used one, minus the cost of getting it out of your building and into theirs. Specialised diagnostic equipment is worse, because it dates and the resale market is thin. A lender discounts both hard, which is not a comment on the quality of the gear.

The building is different. Property is the security a commercial lender is most comfortable with, and an owner-occupier, generally meaning the business occupies the majority of the floor space, is usually the strongest position of all. Levels vary by lender and every lender sets its own.

The covenant that binds

Debt service cover is the number the decision turns on. After settlement the one that catches workshop owners is usually a loan to value covenant on the property, because the value is tied to a specialised building on a site with a history, and a revaluation can move it in a direction nobody modelled.

What the file needs

• Two to three years of financial statements and tax returns, plus current management accounts.
• The current lease, so the rent being replaced can be evidenced from both sides.
• The contract of sale, and the site history if the vendor holds one.
• The asset register, covering hoists, rigs and diagnostic equipment.
• Any existing environmental assessment or tank decommissioning record for the site.
• Details of every existing facility, because the new debt is tested on top of what the business already carries.

The acronyms, in one place

What we can and cannot tell you

Andorra Advisory Group is a commercial finance brokerage and advisory practice. We build the analysis and the documents, and we arrange the facility where you want us to. Nicholas Clunes: Credit Representative Number 530711 is authorised under Australian Credit Licence Number 387856. The advisory fee is fixed, quoted before the work starts, and payable regardless of whether finance is approved or what the analysis concludes. Where a lender pays commission on a facility it is paid to The Lending Lab Pty Ltd; it is not payable on every transaction and the amount is not ascertainable at the time of quoting. You are free to take the analysis to any broker or lender you like, at the same fee.

So no lender is named here and no policy is quoted. Every threshold is a level commonly seen, and every lender sets its own. We give no taxation advice, no legal advice, no financial product advice and no environmental advice. Contamination obligations belong with your solicitor and a qualified environmental consultant, and the state regulator's own guidance is the place to start.

General information only. Not credit advice, not a credit assessment, and not an offer of finance. Lending decisions rest with the lender and depend on your circumstances and their criteria.