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Loan Types
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Start your own car dealership with a car yard commercial loan
If you've always dreamt of running a car dealership, you'll need finance. Find out how to get approved for a car yard commercial loan.
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Fuel prices have been steadily increasing for several years now, and the recent economic crisis and the strong Australian dollar have many Australians tightening their belts. It comes as little surprise that demand for large, expensive, petrol guzzling cars has reduced, with demand for second-hand and more economically viable, small and mid-sized cars correspondingly increasing.
Despite Australia's difficult economy over the past decade, the car yard industry has managed to succeed in otherwise tough financial times. In fact, the industry experienced 5% growth in revenue in the five years from 2011, becoming a $64 billion industry by 2016.
If you've ever dreamt of running your own car yard, don't let Australia's difficult economic climate hold you back. Now is the time to take advantage of Australia's increasing demand for second-hand and economy vehicles.
Commercial loans you can apply for to start a car yard
Choosing the right car yard to purchase
The importance of location and zoning
Location is important in almost any business industry, but has particular significance when it comes to car yards and dealerships. Consider the following:
- Car yards tend to do well when positioned on main roads.
- Unlike other businesses which aim to position themselves far away from their competitors, car yards perform best when located close to each other. Customers like the idea of visiting one area to compare and test drive a number of different cars from competing dealers.
- The demographics of the local area is an important consideration. Does the area consist mainly of working class families, or is it a more affluent area? Ensure you offer the appropriate sized cars at the right price range to suit your target market.
- The zoning of the area is vitally important. Check with your local council to ensure the area is of an appropriate zone to allow you to run a car yard, especially if creating a new car yard from a vacant block.
Existing car yard versus a new development
Note that purchasing a vacant block with the intention of constructing a car yard is an entirely different endeavour to purchasing an existing car yard outright. The purchase of vacant premises or an empty lot would be considered the purchase of standard commercial property, which is property that can be used for a number of different purposes and is considered of a lower risk to a potential lender.
A loan to fund the development of a car yard is considered a commercial development loan. In order to be successful in your loan application, you would need to provide development application approval, construction plans and construction forecasts in addition to your business plan. Construction loans are different to business loans, which is what you would be applying for if you seek to purchase an existing car yard.
Freehold versus leasehold
One of the first decisions you will need to make when purchasing a car yard is whether you intend to purchase the freehold property on which the car yard is situated, in addition to the car yard business itself. Your decision will not only affect the total purchase price, but will also affect the way lenders view your loan application.
If purchasing a leasehold car yard, the amount of the loan will typically be restricted to around 50% of the value of the business. For this reason, you will need your own cash savings or an existing residential property to offer as security for the loan to increase the loan amount.
If purchasing the freehold property in addition to the car yard business, lenders will typically offer a higher percentage of the value of the property and business combined, because they will use the freehold property itself as security for the loan. However, note that car yards are purpose-built and are considered specialised commercial property. Specialised commercial properties pose a higher risk to lenders because they cannot easily be converted to other uses and can be harder to sell.
Navigating licensing requirements
In order to sell motor vehicles, you will need a licence or permit. The licensing requirements vary in each Australian jurisdiction, with some states and territories also requiring the completion of a training course before a licence or permit is issued.
Additionally, some Australian jurisdictions require a separate licence for a yard manager, who supervises or manages a car yard business without engaging in the sales process itself.
Consider the following sample licensing forms and requirements from various Australian jurisdictions, and enquire with the relevant government department in your state or territory to ensure that you fully understand the licences and permits applicable to your area.
Australian Capital Territory
- Motor Vehicle Sale and Repair Licences
- Motor Vehicle Dealer and Wholesaler Licence
New South Wales
- Licence under Motor Vehicle Driving Instructors Act 1992
Northern Territory
- Motor Vehicle Dealer Licence – Corporation
- Motor Vehicle Dealer Licence – Natural Person
- Motor Vehicle Traders Licence and Traders Plate
Queensland
- Individual's Licence – Real Estate Agent, Property Auctioneer, Resident Letting Agent, Motor Dealer, Chattel Auctioneer
South Australia
- Second-Hand Vehicle Dealer Licence
- Licence under Section 17 of the Shop Trading Hours Act 1977 to Sell Motor Spirit and Lubricants for Motor Vehicles and Permitted Goods
Tasmania
- Motor Vehicle Trader Licence
Victoria
- Sole Trader Licence Application – Motor Car Traders
- Partnership Licence Application – Motor Car Traders
- Company Licence Application – Motor Car Traders
Western Australia
- Application for Motor Vehicle Salesperson's Licence
- Application for Motor Vehicle Repairer's Certificate
- Application for Motor Vehicle Yard Manager's Licence
- Application for a Motor Vehicle Dealer's Licence – Individual
- Application for a Motor Vehicle Dealer's Licence – Partnership or Body Corporate
- Application for Motor Vehicle Repair Business Licence – Individual
- Application for Motor Vehicle Repair Business Licence – Partnership or Body Corporate
The importance of honesty and trust in the motor vehicle industry
Honesty and trust is important in any industry, but perhaps more so in the motor vehicle industry simply because car salespeople – and used car salespeople in particular – have become the butt of many jokes and generally have a poor (albeit undeserved) reputation. For this reason, salespeople in the motor vehicle industry are in the unfortunate position of having to build up a reputation of honesty and trustworthiness.
Consider the following to portray an image of trustworthiness to your customers:
- Offer warranties of at least 90 days on all cars sold
- Prioritise customer service at all times
- Offer complimentary vehicle identification number (VIN) checks or background reports for all cars sold
- Follow up with all customers by phone to thank them for their business and to ensure that they are satisfied with their purchase
- Avoid all forms of deceptive or misleading advertising, and be up-front and honest about repairs that have been made to each car sold, as well as defects that have not been repaired
Costs and profitability of a car dealership
How do car yards really make their money?
It goes without saying that car yards make money from selling new and used cars for profit. However, a deeper look into the financial records of a car dealership will show that car sales account for a surprisingly small proportion of a car yard's revenue.
Car yards earn additional revenue from offering one or more of the following additional products and services:
- Car financing and insurance
- Extended warranties
- Alarm systems
- Servicing and car parts
- Trade-ins
- Car inspections
- Subleasing a portion of the premises for an on-site cafe
Finding finance to purchase a car yard
Standard loan terms for a car yard commercial loan
Since car yards are considered specialised commercial property, car yard commercial loan applications will be looked at by lenders on a case by case basis. As with any type of business loan, it is always a good idea to compare your options to ensure you are applying for the best product to suit the business you intend to purchase and your own financial circumstances.
As a guide, the following loan terms may apply for a car yard commercial loan:
- If purchasing the freehold property in addition to the car yard business, a loan of up to 70% of the total purchase price. This proportion could be increased if applying for a business loan with guarantor
- If purchasing a leasehold business, a loan of up to 50% of the value of the business
- Maximum loan term of 10 years
- A car yard commercial loan will be a secured business loan and will require an appropriate asset to be put up as security for the loan. If purchasing the freehold property, the property itself can be the security for the loan; however, this will attract a lower value since it will be considered specialised commercial property. Applicants will have a better result if they can offer residential property or standard commercial property as security
How to get approved for finance
To increase your chances of having your finance application approved, consider the following:
- Ultimately, your chances of being approved for finance will come down to your personal financial circumstances and the perceived strength of the proposed car yard business.
- Your relevant qualifications and any industry experience will also have a bearing on your chance of loan approval. The lender wants to be satisfied that you have the skills and experience necessary to run a successful car yard business.
- The lender will consider whether you are looking to purchase the freehold property in addition to the business, and whether the property has been purpose-built.
- You will need to be completely up-front and honest about your personal financial circumstances, as well as the financial circumstances of the business. Be prepared to provide tax returns and other financial information for at least the last three years for both yourself and the business.
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