What If I Have Bad Credit

What if I want to buy a gas station with bad credit or no credit?

If you want to buy a gas station with bad credit, how do you define bad credit? Do you have a low credit score because you have little credit or you have former credit issues such as bankruptcies, foreclosures, charge-offs, late pays, short sales or other things? 

First and foremost, the verifiable cash flow of the gas station business or real estate you’re buying is the MOST IMPORTANT THING, You could say #2 and #3 really are tied, but they are the non-borrowed equity you are putting into the transaction and your direct industry experience are equally important. 

Some of the issues regarding credit “issues” are 1) When did these issues happen? 2) What were the accompanying circumstances? 3) Were there issues like a collapse of the economy or real estate values in the area? 4) Were you experiencing health issues, i.e. cancer or something other life altering health issue which affected their ability to pay? 5) Did you experience a divorce from a spouse 6) Did you terminate a partnership with a business partner in a previous business? 

Nobody can be prepared for everything.

In theory, SBA loans are supposedly a little easier than conventional loans.  However, if you have defaulted on an SBA loan in the past, you may be ineligible, or if you’ve defaulted on any government backed loan, that might also be the case. 

Some banks will not finance a borrower that has filed bankruptcy for any reason.  Be transparent and disclose anything that might apply to you so they don’t discover it down the road. 

If you have had issues with your credit in the past and they show up on your credit report, have a typed explanation in great detail as to time periods and the reasons behind it and have supporting documentation. 

A lot of the credit issues that lenders have relate to is what are your personal expenses, meaning, do you have a lot of credit card debt?  If you need to earn $200,000 from the business after expenses, it will be more difficult than if you only need $40,000.  

Let’s do an exercise in logic.  Would you rather lend money to someone with $100,,000 in revolving credit card and installment loan debt and an 820 credit score, or someone with $5,000 in revolving credit and a 700 credit score? It should be an obvious answer. 

If in fact you think your credit is bad, first look on one of the service like Free Credit Report or Credit Karma and see what exactly shows up or does not show up. Minimize the surprises and know what you’re facing. If you have sufficient time, we’d suggest you contact a company such as Lexington Law or any reputable credit repair so that the derogatories can be removed if there are errors as soon as possible.

Your personal credit fits in with the five C’s of credit: 

1) Character 

2) Capacity

3) Capital 

4) Collateral 

5) Conditions

Character is the first of the five Cs of credit. .  Do you pay your obligations or not? If it’s determined that you have the tendency to not pay your obligations or pay them in a timely manner, it’s a tough hill to climb.  A lender will pull credit from all of the three major repositories.  

Capacity is usually the most frequent reason why gas station loans are not approved. Many underperform but in fact, more underreport revenues. SBA loans require a 1:1 Debt Service coverage at a minimum. What that means is for every dollar of liability and expense, one dollar of gross profit is required.  This is a bare minimum that is required and if any other parts aren’t satisfied, the less likely to be approved.  Conventional loans are normally going to require 1:3 – 1:0 Debt service coverage for gas stations and convenience stores. 

Capital – Some borrowers come to us with relatively little to no money for a down payment.  Some of them will borrow from friends, relatives and people that love them.  There is nothing illegal about getting “gifts”, however full disclosure must be made. Important to know, the two main common denominators of failed gas station loans are 1) Not enough money (non-borrowed) equity and 2) Insufficient direct industry experience.

Collateral – Business only loans typically are more difficult to obtain because of the lack of collateral and the loan-to-values are typically less than something that is real estate backed. A bank will normally discount an appraisal by 20-25% on real estate value, up to 50% for machinery and equipment and most lenders give no value to the business value or good will.  That $1,000,000 appraisal you have on a property might be worth $700,000 – $750,000 to a bank for collateral purposes. 

Conditions are the least controllable.  Things like hurricanes, construction, COVID, real estate crashes, recessions, etc are the least predictable..  they lower the loan-to-value on a deal will be less negatively affected than the high loan-to-value loans. 

Practical steps to get business financing with challenged credit

1) I can not emphasize enough the importance of submitting an ORGANIZED loan package. Most loan packages we receive are disorganized, and are lacking a coherent Executive Summary, a Use of Proceeds which makes the deal even less desirable. 

It took me years to realize this myself until a lender pointed out to me that I had poor packaging. 

2) Lenders do not need business plans that take forever to go through.  A sermons doesn’t have to be eternal to be everlasting.  Neither does a business plan.  A high percentage of business plans look like they were created by software where you fill in the blanks. They are ignored for the most part. 

3) Define your company’s mission statement.  What will make you better or at least equal to your competition? How will you compete with your Box Box convenience store down the street.  You’re probably not going to do it with fuel pricing, so what is your “hook?” 

4) Make sure you know what your credit is to begin with. . If you have blemishes, have detailed explanations as to who, what, when, where and why. 

5) If you’ve owned a business before, check your Dun and Bradstreet (D& B) profile.  The lender will.