by John Stockman, Wag’n Tails Mobile Conversions
Financing a grooming vehicle can sound intimidating, complicated and downright scary, but it doesn’t have to be if you know the rules ahead of time and be smart with your income and expenses.
First and foremost, know your credit score and what makes up your credit history. Check it regularly and be aware of who is looking at your credit and why.
There are many credit monitoring services available for a monthly fee. Some are more expensive and in depth and others are less expensive and just provide alerts when someone looks at your history. Most credit card issuers offer the service (usually through a contractor) so you might want to start there.
If you don’t want to pay to monitor it closely then you can visit the website annualcreditreport.com and get a full report annually at no charge.
Lenders have some basic criteria that they look at with all loans, including grooming vans, so this advice is relevant for buying a grooming van, a house, a car or really anything you’ll need to borrow money to own. We’ll focus on grooming vans here, of course, and this article applies to a first time buyer as well as the mobile grooming veteran looking to add a van or to replace an older one.
The Basic Lending Criteria
Lenders primarily look at 3 main criteria when evaluating your creditworthiness for a loan.
The first is your credit score or FICO (Fair Isaac Corporation) score. FICO scores range from 300 up to 850. 650-699 is moderate; 700 and higher is seen as good to excellent. The average FICO score in the USA for 2010 is 732.
Many factors impact the FICO score. 35% of the score is based on your payment history. That is the heaviest weighted factor so be sure to pay your bills on time.
Another 30% of the score is based on credit utilization or the amount of debt used vs. the amount of debt available. Maxing out your credit cards is not a help to your score
15% is based on the length of your credit history. As your history ages, it helps your score rise. That’s a tough one if you’re young but like fine wine, it will get better with age.
10% is based on the different types of credit you have. Managing different types of credit (installment, revolving, mortgage, etc.) helps your score too. The remaining 10% has to do with credit inquiries when you are seeking new credit sources. Shopping for a car loan or a mortgage for a short period of time are fine and won’t hurt you but a trend of looking for different types of loans over time will.
Another important factor lenders scrutinize is your debt to income ratio. Most lenders want to see the ratio below 50% including the monthly payment for the loan you are applying for. If your income is $3000 per month and your debt payments are $1000, your debt/income ratio is only 33% so the lender will look at that as an indication that you can afford the loan.
The only way to improve that ratio is to reduce debt or increase income. Since income tends to be relatively fixed, concentrate on reducing the debt. Maxed out credit cards are a no-no. Another major indicator to be aware of is the high credit limit. Lenders want to see if you have been successful in meeting the payment obligation of higher ticket items (like a home mortgage, a business loan or line of credit), especially if you are applying for a larger loan.
In a nutshell, what a lender is looking to do is minimize their risk. That is all they want to do so a solid FICO score, a good debt to income ratio and a demonstrated ability to manage larger loan amounts will make them feel all warm and fuzzy. As long as you have a good credit score, a reasonable debt to income ratio and timely installment payment history (like on a house or car) you should be able to get financed on a mobile grooming vehicle.
IMPORTANT NOTE! It’s absolutely critical that you report all of your income. Deposit all of it into your bank account. Many people get turned down for loans because income is not deposited and accounted for at tax time. Grooming tends to be a cash business and it is not only illegal to not account for it, which is risky enough in and of itself, but it can blow any chance of a lender granting you a loan.
Because in many cases, you have to prove your income and if you aren’t reporting cash, it doesn’t exist and can’t be included as income by the lender. If you can’t prove you earned it, you didn’t! Lenders want to see either bank statements or tax returns for income verification. We’ve had many people turned down for loans because of this. Just don’t do it! It isn’t worth it.
Finance Source Options
There are 2 basic sources for you to look to for financing your grooming van purchase. Captive finance sources such as Ford Motor Credit or Daimler Financial Services and traditional banks like the one you do your banking with.
A captive finance company is called that because they are owned and/or affiliated with automobile companies. The only way to access them for financing is through a dealer of that make of vehicles or through an authorized converter like Wag’n Tails. In other words, you can’t trot down to your local Ford Credit Branch and apply for a loan but if you are buying a Ford through a Ford dealer or us, you can access them that way.
Your local bank is a viable alternative to the captive finance companies but they present a separate set of challenges. While a vehicle loan is pretty simple, a grooming van conversion is very different animal, indeed.
First of all, a grooming van is not a Camry. It’s a specialized commercial vehicle with no “blue book” value to tell the banker how they depreciate or that can give the bank a used vehicle value. Because of that, the loan is perceived by the bank as inherently riskier to a bank when compared to that Camry.
Also, many local banks will not entertain a loan for a commercial vehicle. Some have a separate department that does commercial lending so you have to do a bit of research. Since mobile grooming is a relative unknown to many bankers, you should expect to have to educate them. A detailed business plan will go a long way to accomplishing that.
Consideration should be given to getting a home equity loan because you may get a good interest rate and you can usually do whatever you want with the money. This allows you to avoid the challenges outlined above.
When talking to local banks and credit unions, be sure they understand that it is a specialized commercial vehicle up front. Always ask if they make commercial loans so you don’t surprise them, or get a surprise yourself later if commercial loans aren’t an option with the bank.
Captive finance companies can be an easier route to take for a couple of reasons. Speaking strictly about my company, Wag’n Tails Mobile Conversions, the lenders we work with like Ford Credit and Daimler Financial already get it. They understand our business and industry because we have gone to the time and expense to educate them. That eliminates most of the challenges of trying local banks and we handle the entire process for you after you submit an application.
In general, captive finance companies have a vested interest in helping the dealer sell the van. After all, that’s the reason they exist; to help the dealership sell vehicles. Grooming vans are no different other than they’ve been altered to groom pets.
Another critical factor is getting the entire package financed with one loan. You do not want to have to finance the van, take delivery, send it to the conversion company and then finance the conversion with another loan. Not only will you have 2 loans, you’ll have to pay on the van loan, insure the van while it’s being made into a grooming van. The best way to go is to buy it as one package, sign the loan papers just prior to getting the van and have the first payment delayed so you get time to go earn some income before the payment is due.
Down Payments
Unless you are an existing business (at least 2 years in business to be considered “existing”) you should expect to have to put some money down. Lenders want to see you with some “skin in the game” because it demonstrates your commitment to success and lessens their risk in loaning you money. How much down will depend on the lender, your credit history and the price of the vehicle.
To estimate it, take the van price and multiply by 15-20% for the down payment amount. It can be a little more or less but that’s a good rule of thumb. If you are an existing business, there are opportunities for smaller down payments and even zero down payment loans provided you meet the other credit requirements.
Used Van Financing
Now let’s look at used vehicle financing. There is a common misconception that used vans are easier to finance than new because they cost less. This is completely understandable. In reality, they can be more difficult to finance and usually require even stronger creditworthiness for several reasons. These reasons all stem from lenders having a limited understanding of mobile grooming as a concept and the market value for used grooming vans.
First, there is no “blue book” market value for them to reference. They look at the value of a used cargo van which is always much less than the market value of a used grooming van. They see a used cargo van book value that is worth much less than the loan amount you’re requesting.
Next, you explain that it is a specialty commercial vehicle and they realize they have no way to assign a value to it.
Finally, because it is used, they expect wear and tear issues, in some cases no warranty and they assume less dependability. That gives them the perception of a higher likelihood of interruptions in the income stream the van produces. This is perceived as even more risk. Our experience has demonstrated that used van financing usually carries larger down payments, higher interest rates and shorter repayment terms because of the higher perceived risk in the lender’s eyes. That usually boils down to a monthly payment amount on a used van that isn’t much less than a new one.
Summary
I hope this information is helpful to you. It doesn’t have to be an intimidating process when you know how the game is played. Use this information to prepare yourself for the day when you decide that grooming less dog for more money by going mobile is your way to go. If you find yourself seriously contemplating going mobile, Wag’n Tails has all the resources you need to get going, including business plans, accounting projection spreadsheets, launching and operating a mobile grooming business, etc. All you have to do is ask! If you have any questions or comments, feel free to contact me, John Stockman, at 800-513-0304. ▲
