A Decade Removed from the Credit Crunch of the Great Recession, Here’s What It Takes to Secure Financing in Today’s Economy
Growing your laundry business without outside funding can make you feel as though you’re trapped in a perpetual catch-22.
You need to hire attendants, invest in new washers and dryers, or perhaps open a second location to increase sales and, in turn, boost your company’s profits. However, you don’t yet make enough profit to amass the capital required for such an expansion. And, without expansion, your business is unlikely to increase its revenue.
Of course, financing can help you get from Point A to Point B, providing vital capital to jumpstart your laundry business expansion – whatever that might look like in your specific case.
Whether you’re a single-store owner or a chain operator, financing, borrowing and debt are probably part of your everyday business life. In fact, financing may very well be your second biggest obligation after your lease. And your financing payment can often be the difference between a positive and negative cash flow.
The Lending Landscape
With that said, the current economy will always impact financing within the self-service laundry industry. We’re now 10 years beyond the Great Recession, and the recovery has been overwhelming strong, especially for most in the vended laundry business. However, there’s definitely been a slight shift in the recent economic climate.
“Overall, borrowing for strong credits continues to be flush and borrowing for challenging credits continues to be tighter,” explained Chris Michalek of Prime Capital. “Banks missed their mark in 2018 – there is a lot of money out there available for borrowing, and banks need to get that money out there. If any of that will loosen up for the more challenging scenarios over the next 12 months because of this, it remains to be seen and certainly could further shift the landscape. All in all, the financing climate for vended laundry continues to be strong.”
“Although there are few headwinds in regard to trade negotiations and political uncertainty, we continue to see a strong economic landscape for 2019, with the GDP having a positive growth rate, unemployment at record lows and wages increasing,” said Matthew Westphal, financial services manager for Alliance Laundry Systems. “Given the strong economic indicators, credit is readily available across a variety of different lending solutions. Interest rates have been increased over the past few years by the Federal Reserve but appear to be leveling off.”
“The rise in interest rates over the past two years has definitely affected the lending market,” pointed out Marc Stern, chief lending officer for Eastern Funding. “Customers who have not borrowed since 2016 have been greeted with interest rate shock. The good news is that the Fed has indicated that it will be holding rates for the near future; this – coupled with low unemployment – should indicate steady economic growth in 2019. In fact, with a hold on interest rates and the fact that Section 179 has been increased to $1 million, I believe equipment purchases and financing will be good this year.”
Leo Frazier, vice president and general manager of Dexter Financial Services, is equally optimistic about the future.
“From all of the economic forecasts that I have read, it appears that most areas of the country will experience continued growth throughout the first half of 2019, and then potentially moderate growth toward the end of the year. The economic environment for laundry owners has been strong for the past few years and continues to be. The default rates in the industry have been at or near historic lows. Overall, 2019 looks to be another solid economic year.
“Given that backdrop, the availability of financing for customers looking to replace equipment, expand their existing store and/or acquire or build a new location is still good. Captive and independent finance companies in our industry continue to have a strong appetite for well-qualified borrowers.”
“Interest rates will continue to rise,” predicted Pam Kuffel, financial services manager for Continental Girbau. “With the interest rates going up, new investors and established owners will need to closely analyze their ROI and other investment options before choosing a laundry investment.”
Securing Cash in 2019
“Borrowers who haven’t been active in the last three years – in which the prime rate rose from 3.25 percent to 5.5 percent – tend to have a little sticker shock at where rates are at today, versus the past,” Frazier said. “The fact that we were in a declining to flat-rate environment from mid-2007 to late-2015 tended to get borrowers accustomed to historically low rates. Borrowers who have been active lately understand that – although they would have loved to have borrowed more money when rates were lower – it is still a great time to expand and use leverage to do so.”
So, what financing qualifications are lenders requiring these days? First and foremost, lenders want to make sure that the borrower is going to succeed and prosper, allowing them to repay the debt according to the scheduled terms. An ample amount of working capital, as well as cash flow from a job, existing laundries or other businesses are factors that are always examined closely.
“Our criteria have always been the same,” Stern explained. “We look not only at the borrower but at the laundry as well. Of great importance today, with respect to the borrower, would be past business experience and cash investment into the project. For the laundry, size of the store and rent are very important factors.”
For Frazier, the main collateral requirement is “our equipment and the strength of the individual borrower.”
“Our equipment has a long useful life with strong marketability,” he continued. “Thus, we look to maintain a good balance between the contract balance and equipment value over the life of the deal. Our qualifications have not really changed or waivered from our core values over the years. We are always looking for quality operators, who have a strong repayment history, along with a well-thought-out plan for where they would like to go in this industry. If we believe in their plan, then it is just a matter of finding a solution to meet everyone’s needs.”
Manufacturing-based lenders continue to mostly require their equipment as collateral, whereas bank sources may require additional security on real estate or other business and personal assets, according to Westphal.
“Over the past couple of years, equipment finance companies have been able to lend more with less documentation required for customers looking to replace equipment at their existing laundromats,” he noted. “And, with the improvement in technology, readily available reports and verifiable income can come straight from the machines. With a large amount of existing stores being bought and sold, providing accurate records of income and expenses can lead to quicker finance decisions.”
“In the case of new store development, lenders are looking for a stronger cash investment and an overall in-depth review of each location,” Kuffel explained. “Typical requirements are a 30 percent cash investment, with collateral that includes a landlord waiver and equipment.”
In general, lenders today are seeking a level of contribution from the investor into a project, where a finance committee “can feel comfortable, should challenges arise, that the investor isn’t going to attempt to punt,” according to Michalek.
“Lenders are looking for a clear plan of action, an understanding of the competition and potential competition, and complete and total engagement in the business,” he said.
“Credit scores are only one piece of the investor profile,” Westphal pointed out. “Certainly, higher scores in the 700s are desirable, and those customers may be approved for better rates and terms. With lower credit scores, lenders will take into account other factors, such as liquidity available, net worth and business experience when rendering a credit decision.”
“Credit scores – while giving a good record of past repayment history, which in turn helps predict future repayment – are not the end-all for us,” Frazier concurred. “We are a relationship-based lender, and someone with a lower credit score might have mitigating reasons for his or her score. There is always a story behind every credit score, and that’s what we are most interested in finding out.”
At Eastern Funding, Stern said that, in general, a credit score of 650 or higher is acceptable. However, he really prefers scores in the 700s.
Credit score is still a critical criterion for any lender to review. But what’s more important is that the lender understands what the factors are that are contributing positively and negatively to that score.
Negative items include bankruptcy, tax liens, collection items or consistently late payments. By contrast, positive items include on-time payments, high comparable credit to the request that is being made, and availability on revolving credit to assist during the ramp-up period if necessary.
What Are Your Options?
What options are available to today’s laundry operators and potential store owners?
Beyond conventional bank financing, borrowers should seek out other sources, such as local economic development councils, financing through the seller and potential investment partners. When contracting a new laundry or purchasing replacement equipment, laundry distributors and their parent manufacturers often offer their own financing programs to customers.
Here is a listing of potential financing resources:
- Family and friends.
- Business partners and acquaintances.
- Venture capitalists.
- Investment bankers and stockbrokers.
- Commercial and consumer loan companies.
- Small Business Administration.
- Leasing companies.
“The key is finding a lender who truly understands your industry and your specific needs now and in the future,” Frazier suggested.
If you decide to use a commercial bank for your financing, there are basically two types of loans you can obtain from them. The first is a revolving line of credit, where the bank agrees to lend you a set amount of money and you can choose when and how to use it. This type of loan is usually used for short-term borrowing, and you will be expected to pay at least an interest payment on the money you borrow every month. You also will be expected to repay the complete amount at least once every year or so. A credit line is perfect for emergency purposes. For instance, if a 50-pound frontloader breaks down, you know you will have the money to purchase a new model immediately.
The second is a term loan, which is the standard loan used for major purchases, such as a new location, and long-term borrowing. Term loans usually need to be paid back in 10 years or less, and usually require about one-third of the total loan amount as a down payment. While some banks charge less, you should keep that number in mind when determining how much you need to borrow.
Of course, the disadvantage of financing with a bank is that many banks don’t understand laundromats. They’re looking for hard assets, something where they can kick the tires or that they can get their arms around. Most of the value of a laundromat is good will and the lease itself. Often, that’s not something banks like to lend on.
Sometimes a bank will like a deal, but for whatever reason, don’t feel comfortable lending the money. Perhaps there simply isn’t enough collateral.
Some banks go out of their way to make loans to small businesses, while others simply don’t. Those with special programs for small business, or that at least advertise the fact that they are Small Business Administration lenders are generally more receptive, because they can get the guarantee from the SBA that the loan will be repaid. Typically, the government will guarantee a percentage of the loan, while the bank is exposed for a smaller percentage.
The SBA doesn’t actually lend money to small-business owners. Rather, it works in conjunction with banks across the country to secure loans for those entrepreneurs who are having difficulty obtaining financing. To be eligible for an SBA-guaranteed loan, you must first seek private financing and be turned down.
The most strenuous requirements fall in the category of the SBA loan, which requires very detailed records of the business and the buyer. In addition, SBA loans typically require the most paperwork; however, they also offer the longest terms.
Of course, several large laundry equipment manufacturers also offer equipment financing directly through their companies. These companies regularly offer special rates and little or no money down offers. The main benefit? They want to sell you the equipment, so you’re more likely to be approved.
Another benefit is the fact that, like specialized financing companies, equipment manufacturers know the business, and can help you obtain exactly the amount you need with the terms that are favorable to opening a self-service laundry.
“In scenarios where customers are new or seasoned in the business – and may or may not necessitate financing – we always suggest working with an entity that brands itself as a trusted financing advisor that completely and thoroughly understands the vended laundry business, to provide customers with an extra set of eyes to help hit a homerun,” Michalek said.
Obviously, there are several tips and strategies to help smooth out the financing process – and to increase the odds that you’ll walk away from the lender with the cash your need, whether for a new store buildout, an existing laundry acquisition or an equipment upgrade.
“Be organized,” Stern said. “Send the finance company a complete financial package, and don’t wait until the last minute to send that information to the lender.”
“Do your due diligence and understand the time and investment needed for the project,” Kuffel advised. “Additionally, provide good detail to the lender. They need background information in order to understand your needs for financing. Your local distributor will provide detailed site analysis and demographic valuation tools that can assist in building a package that tells the story about you and the validation of the site for the lender to review.”
Here are nine more best practices all loan seekers should follow:
Organize your financial information.
This is probably the most obvious – and most important. Lenders love to see laundry owners come in with complete, organized financial packages.
Here’s a brief overview of the financial information needed:
Balance sheet. The balance sheet, summarizing assets and liabilities as of a given date, must demonstrate that the company enjoys a satisfactory financial condition. Two primary concerns typically interest a banker’s review of the balance sheet – liquidity of the assets and the debt load of the prospective borrower.
P&L statements. Profit-and-loss statements going back three years up to the latest reporting period are necessary to demonstrate your vended laundry’s past and ongoing profitability. The first consideration and the banker’s bottom line is pre-tax profit. Profits of at least 10 percent of net sales are impressive.
Predicted budget and cash forecast. This budget forecast shows the company’s recent operating experience, plus the owner’s best judgment of future performance over a given period, usually one year. The cash forecast is your best estimate of cash receipts and disbursements during the budgeted period.
Personal financial statements. This includes federal income tax returns.
Prepare a business plan.
The business plan is your official analysis of the business venture. This plan should be thorough, yet simple to understand. Many people get bogged down in creating the most technical business plan possible. While it’s great to provide as much information as possible, be sure that the message is simple and the facts are clear. The primary purposes of the business plan are to show potential lenders how you plan to succeed in the venture, and to serve as your guideline for evaluating each potential venture to make sure it meets your goals and expectations.
Go with who you know.
You’re always better off approaching a bank that has made loans to you in the past. Clearly, you have a track record, and getting a loan there typically will be substantially easier.
Find out what particular loans certain banks have appetites for.
Banks go in and out of the loan market constantly. As a result, certain banks will be looking for business loans, while others will be looking for individual credit lines. Some will be looking for business credit lines. Some will be looking for secured real estate loans. Still others will be looking for equipment financing. And all of them will change periodically, as they try to balance their portfolios.
Therefore, if a bank is looking for equipment financing and you present real estate to them, they may not be interested.
Apply to more than one lender simultaneously.
Go to at least three lenders. Perhaps go to three different banks, or maybe apply for one SBA loan and one conventional bank loan, while also trying to secure financing from your seller. Then see which one comes through the quickest – and with the best terms.
If you go to just one bank and run into a dead end, you’ve got to start the process all over again. By that time, the seller may be getting anxious, or the deal has run out of time. Typically, a conventional loan should take about two to three weeks to process, while an SBA loan may require seven to 10 weeks on average.
Don’t double-collateralize, if you can avoid it.
Many financing sources require seconds on your home and so on. It’s best to keep your laundromat loan separate, in case something goes wrong.
When you double-collateralize, you’re using up two assets instead of one. It’s good to segregate your laundry financing, even if the rate isn’t as good, because you’re segregating your risks. You’re treating your vended laundry as an investment at the same time as you’re treating it as something you own and operate. If possible, it’s wise to be a little “arm’s length” from your business financing.
Don’t underestimate the upfront cash you’ll need at closing.
Unlike buying a house, you can’t just put down a $5,000 down payment and walk away.
Not only do you have to come up with a down payment, but you’re also going to have to have enough for closing costs and attorney’s fees. And don’t forget business-related costs – rent deposits, first month’s rent and possibly coins for the store, which can be anywhere from $500 to $6,000 or more. You’ve got to pay utility deposits, insurance premiums and business license fees. Those things are generally overlooked.
Don’t overlook landlord approval.
One area that tends to trip up laundry owners during this process is not realizing the fact that the landlord has to sign the waiver and other documents that allow the financing to go forward. Clearly, some lead time must be built in to allow for this approval.
Never accept a loan for longer than the remaining time on your store’s lease.
Let’s say you take out a seven-year loan and you’ve got four years remaining on your lease. If the landlord throws you out after four years, you’ve got no business, but you’ve still got three years of payments on that loan.
You’ve likely used (or plan to use) some form of financing for your current laundromat acquisition. And as your business matures, you will just as likely want to reinvest in your laundry – thus seeking additional financing.
“If something appears to be so good that you have to have it now, stop immediately,” Michalek said. “Take two steps back, and reanalyze the scenario multiple times over. This repeated analysis will lead you to the correct decision. Above all, build relationships with your financing partners and share insights into your business strategy for collaborative thought. If you feel you need deferred payments or interest-only payments to make the numbers work for a project, again take two steps back and rethink your strategy.”
Westphal advised working closely with your local distributor and the lenders putting together your financial packages.
“Be prepared and be upfront,” he said. “Have your financials in order and have answers readily available to lenders for any outstanding issues. This will expedite the approval process and allow the lender to tailor a solution that fits your needs.”
“Come well-prepared, with all of the necessary financial information in order and be openly honest with your lender regarding your financial history and what you are looking to do,” Frazier agreed. “Lenders, ultimately, want to be repaid and to build a relationship that goes beyond one transaction. Thus, they are more likely to loan you money if they trust you, believe that you will honor your obligation to them, and share your vision.”