Gas Station Financing - What You Need To Know Before You Buy
Do you want to own a gas station?Gas stations can be very profitable businesses to own (if you don't believe me, just take a look at the current gas prices!), especially if they are branded.
But what most potential owners don't realize is that financing for these types of properties can be very difficult.
Before you consider buying a gas station, you should have a good understanding of what it will take to get it financed, unless of course you have lots of money and you can pay cash for it! So what are the 4 top reasons why financing for gas stations will fall through? #1 Environmental concerns Rightfully so, most lenders don't want the liability issues that can arise from current or previous owners.
Often times, the costs to clean up a site can be more than what the property is worth.
Make sure you perform due diligence and ensure that the property you are considering doesn't have any contamination issues or improper underground storage issues.
This due diligence will include a Phase I and Phase II Site Assessments by a reputable environmental company.
Lenders will only consider these reports if they are recent, so they are only valid for about six months.
#2 The Borrower Is Inexperienced Because the default rate can be so high in this industry, most lenders want their borrower's to have some experience in this industry.
Experience can be in the form of managing gas station or convenience stores.
Also, most gas companies offer some sort of training for their franchisees, for most lenders this will count towards experience.
What if you don't have any of those?You then might have to take on a partner that does have the experience, so that you can get financing.
#3 The Borrower Has Poor Credit & No Cash Once again, since the default rate is high in this industry, more lenders are paying closer attention to the borrower's current financial strength.
The lenders want to make sure that the borrower has enough equity into the property as well as having a credit score in the 600 range.
If your credit score isn't at that range, you might have to consider a private lender or a hard money lender instead of conventional or SBA loans.
The downside to this option is that the terms are usually not that favorable.
It should be used as a short-term solution.
#4 Can't Determine The Current Cash Flow Of The Business If a lender can't get an accurate picture of the cash flow of the business, then they will reject the loan.
Some sellers of gas stations don't always provide the potential buyer with all of the cash flow of the business (many do not provide it due to tax considerations).
How do you get a better look at the financials?Request copies of the past 3 - 4 years of their fuel gallon total.
This will give you a better idea of their usage.
But what most potential owners don't realize is that financing for these types of properties can be very difficult.
Before you consider buying a gas station, you should have a good understanding of what it will take to get it financed, unless of course you have lots of money and you can pay cash for it! So what are the 4 top reasons why financing for gas stations will fall through? #1 Environmental concerns Rightfully so, most lenders don't want the liability issues that can arise from current or previous owners.
Often times, the costs to clean up a site can be more than what the property is worth.
Make sure you perform due diligence and ensure that the property you are considering doesn't have any contamination issues or improper underground storage issues.
This due diligence will include a Phase I and Phase II Site Assessments by a reputable environmental company.
Lenders will only consider these reports if they are recent, so they are only valid for about six months.
#2 The Borrower Is Inexperienced Because the default rate can be so high in this industry, most lenders want their borrower's to have some experience in this industry.
Experience can be in the form of managing gas station or convenience stores.
Also, most gas companies offer some sort of training for their franchisees, for most lenders this will count towards experience.
What if you don't have any of those?You then might have to take on a partner that does have the experience, so that you can get financing.
#3 The Borrower Has Poor Credit & No Cash Once again, since the default rate is high in this industry, more lenders are paying closer attention to the borrower's current financial strength.
The lenders want to make sure that the borrower has enough equity into the property as well as having a credit score in the 600 range.
If your credit score isn't at that range, you might have to consider a private lender or a hard money lender instead of conventional or SBA loans.
The downside to this option is that the terms are usually not that favorable.
It should be used as a short-term solution.
#4 Can't Determine The Current Cash Flow Of The Business If a lender can't get an accurate picture of the cash flow of the business, then they will reject the loan.
Some sellers of gas stations don't always provide the potential buyer with all of the cash flow of the business (many do not provide it due to tax considerations).
How do you get a better look at the financials?Request copies of the past 3 - 4 years of their fuel gallon total.
This will give you a better idea of their usage.
