Starting an Auto Repair Shop with No Money - A Free Guide
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Posted on Aug 6th 2020
***The information on this page is provided for informational purposes only and should not be considered as legal, tax, financial or investment advice. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions.***
Opening an auto repair shop is anything but a free endeavor. Like any business venture, a new garage or automotive repair shop will always have initial startup costs.
However, for the sake of argument, let’s assume a person had little to no savings and decided to take the plunge into entrepreneurship.
We asked ourselves: if we had to open a brand new automotive repair business starting from square one, where would we begin? What are the important factors we need to think through? And how would we get funding to open a business?
The below guide covers the earliest steps of a new automotive business, from early stage planning through obtaining funding.
Read on to learn more.
Business plan & Profitability assessment
“Those who fail to plan, plan to fail.”
Without a solid foundation, no business can be profitable. And at the end of the day, an auto repair shop is exactly that: a business.
That’s why it’s important to plan ahead. This is the first and most crucial step in increasing your odds of success.
A business plan will help you answer a few basic questions that potential shop owners should think through:
- How much funding do I need for equipment and startup costs?
- What will make my auto repair business different from my competitors?
- How will I market my business?
- What types of repairs will I do that are most profitable? What about least profitable?
- How many repairs a week do I need to break even?
- Outside of simply repairing vehicles, what are other ways I can provide value to my customers? I.e. Providing great customer service.
Outside of helping organize your thoughts and ideas, a business plan will also become a necessity to apply for funding later on.
Not sure how to begin? Here is a standard business plan for automotive businesses to help you get started.
Those who fail to plan, plan to fail.
Mobile mechanic, home garage, or rented space?
If you are starting out with little to no money, it is unlikely you’ll be able to afford to purchase your own garage.
However, there are several common ways to bypass purchasing your own space in order to reduce your upfront costs.
If you have the space, a home garage is the fastest way to get started with a repair business is by simply doing repairs for friends and family.
Be sure to give your friends and family a discounted rate, and tell them that you’re getting an auto repair business off the ground. Word of mouth is crucial in helping an early-stage business grow.
This will also help you validate your business idea and give you the confidence that you can provide value that potential customers will pay for.
Note that different areas of your country will most likely have specific legal and zoning restrictions on running a business from your phone, so you’ll want to look into your local laws before proceeding with this option.
Mobile mechanic business
Starting a mobile mechanic business is a great way to get experience running a business without needing a large amount of upfront capital.
Instead of having a stationary garage and repair bays, mobile mechanics bring their business to customers.
Being a mobile mechanic has several benefits compared to traditional repair shops:
- Reduced upfront costs in expenses for tools and equipment
- Flexible way to start getting repeat customers and word of mouth referrals.
- Freedom to bring your business to areas with less competition.
Many mobile mechanics choose a specialization in order to distinguish themselves from other stationary repair businesses, i.e. wheel repair.
Ultimately, you’ll want to assess your current skill set to figure out whether specializing provides you with the profit margin needed to have a sustainable business.
Rent a Garage
Rather than buying your own garage, you can look into renting a repair bay from existing shop owners that are looking to bring in an additional source of income.
You could also seek to find existing owners who are willing to share their space in your area. If you go this route, ideally you would find shop owners that offer complimentary services to yours.
For example, if you plan on specializing in German-made cars, find another shop that specializes in Japanese cars. This will prevent any potential conflicts that arise from direct competition.
Business Licenses, Equipment, and other Auto Repair Shop costs
As part of your business plan, you’ll want to think through any necessary expenses to get your business up and running.
(For more information on ways to raise funding, we’ll cover that in the next section.)
When operating under a tight budget, this is the step where you’ll need to make the hard decisions on what is truly necessary and what is a nice-to-have.
Things that we recommend absolutely not skimping on:
- Business license
- Accountant fees
A comprehensive list of possible expenses will ensure you have the necessary repair equipment and utilties accounted for prior to opening up your auto repair shop's doors.
Ways to Raise Money
With a solid business plan in place, the next step is to find funding for your new business.
In the following section, we discuss just a few of the ways to raise funding for a new auto repair shop.
A quick sidenote: this section is meant to provide a high-level overview of general funding options for future shop owners and does not cover COVID-19 or coronavirus-specific relief funding or resources.
Funding from family and friends
One option for raising funding is by asking family and close friends for the necessary capital to get started.
When taking funding from your friends and family, it’s important to have clearly listed terms to avoid potential future conflicts and disagreements. It’s also recommended to have a small business lawyer look over your contracts and paperwork to protect you from liability.
A few things to consider to putting into writing:
- How much money will be lent?
- When will the money be repaid?
- Will interest be charged?
- What happens if the money is not paid back by the agreed upon date?
While there are potential risks with accepting money from friends and family, one potential benefit is in increased motivation.
Specifically, you’ll be taking money from people you have personal connections with. You may feel more of a weight of responsibility in order to prevent losing others’ money. Remember: this is not necessarily a bad thing. It will motivate you to work harder to recoup their investment.
Small Business Grants
While there are no grants available specifically for new auto repair shops and mechanics, there are a number of grants available to broader subsections of the population. For example, there are government grants for minority business owners, female business owners, and veterans.
Note that applying for grants can be competitive, because unlike loans, grants do not need to be paid back. For more information on grants, see the following list.
Sidenote: If you’re still in school or about to graduate, note that there are a number of grants and scholarships available to you. Note that most of these require a written essay in addition to the application.
Business loans come in a variety of forms. There are both government and privately-backed loans. Most loans require a minimum level of credit, while others require you to put in a fixed amount of money from your own savings.
Certain loans also require that you’ve been in business for a number of years. Nearly all loans you encounter will have interest or additional payment due. Below is some additional information about common loan types.
As a general rule of thumb, we recommend taking out a loan only as a last resort. Only look into loans if A) you’ve exhausted other options for financing and B) you are confident you will be able to pay the loan back.
Auto Repair Shop Equipment financing
If you need to purchase an expensive, specialized piece of equipment for your shop, you can look into a loan which is backed by the specific piece of equipment or machinery you are financing.
Commercial / Equipment loan
With commercial or equipment loans, the lender provides the money upfront to purchase and you are then technically the owner of the equipment. From that point forward, you are simply paying off the money used to buy the equipment over time, with interest. One benefit of this type of loan: this means that you can claim any interest and depreciation of purchased equipment as a tax deduction.
This type of loan involves your lender purchasing the equipment you want on your behalf. You would then essentially rent the equipment from them for an agreed period of time. While you can not claim depreciation in your taxes since you do not own the equipment itself, the lease payments you make to the lender are usually tax deductible.
With these and any type of loans, In the long run you will end up paying more than the original cost of the machinery. However, if you don’t have the cash on hand and the equipment is critical for your work, then this may be a viable option. Depending on your needs, you can also look into an outright equipment rental.
A traditional bank loan will generally be harder to obtain than the other loan types listed due to favorable interest rates and longer payment terms.
Bank loans have higher qualifications for the amount of time in business, your credit score, and your business’s established revenue. Bank loans also require collateral to secure the loan, and takes a number of weeks to receive funding.
If you are able to qualify for a bank loan, this can be favorable in that the lower overall total cost of the loan over time will be lower due to lower interest rates.
Business line of credit
Lines of credit work similarly to credit cards: they offer a revolving amount of credit up to an approved amount.
You can pick and choose how much of the line of credit you’d like to use in a given time period, pay it off and then continue to use the line of credit again in the future. You end up only paying the premium and interest on the portion of money that you withdraw.
A business line of credit is different from a term loan, i.e. taking out one lump sum loan and making regular payments to pay back the loan over a set period of time.
Small Business Administration (SBA) loans
The Small Business Administration (SBA) is a department of the United States federal government that sets up guidelines for banks to follow when offering loans.
Lenders can offer SBA-backed loans with more flexible terms and lower interest rates since they know their loan is guaranteed by the federal government. If the borrower defaults on the loan, the SBA pays out a guaranteed amount to the bank to help recoup their losses. As a result, lenders find comfort in being able to offer more favorable terms for auto repair shop owners.
There are two types of SBA loans relevant for auto repair shop owners:
SBA 7(a) loans
The most common type of SBA loan, 7(a) loans can provide auto repair shops with funding for working capital, purchasing equipment, and refinancing debts.
SBA 504 loans
SBA 504 loans can’t be used for working capital. However, the funds can be used for major fixed-assets, like equipment, property, buildings and more.
Merchant cash advance (or Working Capital Advance)
A merchant cash advance is a one-time cash payment to you that is repaid either A) using a percentage of your repair shop’s daily credit & debit card sales or B) through fixed daily or weekly debits from your bank account.
Requirements for a merchant cash advance are generally less stringent than traditional bank loans, however this comes at a cost: you can expect to pay back the loan at much higher overall rates. Additionally, merchant cash advances are not regulated by federal banking laws.
Collectively, this means it is easier to fall victim to a cycle of debt where you may find yourself borrowing money to keep up with past loans. Because of this, we would recommend extreme caution.
Saving up until the time is right
If the above methods of financing seem daunting or unattainable, this may be a sign that you should re-assess whether you are ready to open your own auto repair shop. Keep in mind that many of the methods of financing listed above will favor existing auto repair businesses, rather than new businesses with no customers.
Rather than taking out loans with unfavorable interest rates, you could consider working in an established business to build your savings and continue gaining business experience.
In addition to working at existing stationary repair shops, you can also gain experience working for established mobile mechanic businesses as well, such as Getwrench.com and Yourmechanic.com.
Use your time working to continue learning tips and tricks to build upon in the future. Once you’ve built up your savings, you’ll then have the option of moving forward with your new business without needing to accrue debt.
Hopefully the above steps provide some helpful insight into the earliest stages of a new automotive business.
If you’ve already obtained the needed funding, then congrats! Now begins the hard work of executing your business plan.
If you’re interested in reading advice from actual mechanics including their journeys in how they became mechanics, check out our interview with 3 young mechanics.
Key Terms [Glossary]
- Business Plan - A document containing a new business’s marketing, financial and operational goals and the methods on how these goals can be attained.
- Bank Loan - Money provided by a bank to a borrowing third party, with an agreement on terms of how the money will be repaid.
- Business line of credit - A revolving amount of credit up to an approved amount. Lines of credit generally reset after a given time period, assuming previous payment periods have been reconciled.
- Commercial / Equipment loan - A loan in which the lender provides a third-party with money upfront to be used for the purchase of equipment.
- Finance lease - A loan agreement in which the lender purchases equipment on behalf of a third-party.
- Grant - Non-repayable funds, generally provided in exchange for a proposal or application.
- Home garage - An automotive business run from a residential space. Home garages vary in legality depending on local jurisdictions’ zoning and permitting laws.
- Loan - Money that is borrowed; generally expected to be paid back with interest.
- Merchant Cash Advance - A one-time cash payment that is repaid through either a percentage of a repair shop’s daily credit & debit card sales or through fixed daily or weekly debits from a bank account.
- Mobile mechanic - An automotive repair professional with the ability to work independently of location.
- Small Business Administration (SBA) - a department of the United States federal government that provides standards for banks and lenders to follow when offering loans. SBA-backed loans generally have more favorable terms for borrowers than traditional loans because they are guaranteed by the federal government.