Small-business lending at big banks ended 2014 on a high note.
In fact, they approved 21.1 percent of the loan requests they received from small businesses last December, according to Biz2Credit’s monthly small-business loan index. That’s up from 20.8 percent in November – marking a steadily upward trend for most of last year.
What’s more, compared with 2013, small-business loans are being approved 20 percent more often by big banks.
“The strong return of banks in small-business lending indicates three things: overall improving economy, entrepreneur confidence that they will be able to borrow for expansion and repay the loans, and the increasing ease and popularity of SBA lending,” explained Biz2Credit CEO Rohit Arora. “This is a sign that the economy continues along the right path.”
Of course, for many laundry owners, that path has been a winding and often-treacherous one.
“The Great Recession was deeper and lasted longer than those in the recent past,” explained Marc Stern of Eastern Funding, based in New York City. “Also, the country’s climb out of the recession has been much lengthier than in the past, and that slow recovery has resulted in flatter growth, not only in our industry but in the entire U.S. economy.
“Interest rates continue to be low and, as long as that is the case, the financing climate for the self-service laundry business should continue to be robust. We do expect rates to increase during 2015; however, we don’t believe the increase will be dramatic.”
“I believe we have the best of all worlds with regard to financing,” said Karl Hinrichs of HK Laundry in Armonk, N.Y. “We currently have low nationwide interest rates, and the banks are finally loosening the controls on money for small businesses. The manufacturers have always been trying to sell laundry equipment throughout the recession and currently have attractive financing terms.
“Before the recession, financing was easy and available for laundromats, but the interest rates were substantially higher, usually ranging from 7 percent to 12 percent,” he added. “During the recession, interest rates plunged to 5 percent to 7 percent, but the bank loan requirements were substantially increased to where it was next to impossible to get a loan for all but the exceptionally well-financed owner.”
To Ted Ristaino of Yankee Equipment in Barrington, N.H., the main difference between the lending climate now and just a few years ago is how lenders view and value risk.
“Pre-recession, some lenders didn’t value risk with high premium,” he said. “In the immediate aftermath of 2008, many lenders became risk-averse. However, that has softened quite a bit. New stores for first-time buyers will undergo more stringent underwriting than before the recession.
“The current climate is very favorable for qualified candidates. In particular, equipment manufacturers and numerous third-party finance companies have been loaning money at competitive rates. Underwriting from commercial banks is a bit more demanding but not impossible – and established store owners with good operating records and payment histories would have no difficulty getting financed.”
According to Bryan Maxwell of Western State Design in Hayward, Calif., the current economic climate for financing is the best he’s ever seen.
“The cost of money is at historic lows, and funds are readily available,” he explained. “If you listen to hints from the Fed, interest rates will probably go up later in 2015 or early 2016. Therefore, if you need to make improvements to your store, the time to do it is now.”
Who’s Borrowing
“During the recession, I was seeing primarily new store purchasers,” Hinrichs noted. “I believe people with money were looking to invest in recession-resistant businesses like laundromats. In 2015, we have seen an upswing of existing laundromat owners retooling several machines at once. I believe that these existing owners finally feel confident in the economy to replace their old inefficient machines with new state-of-the-art washers and dryers. These current owners are being proactive and starting to take control of their expenses and replacing their inefficient equipment.”
At Firestone Financial, based in Needham, Mass., they are seeing more acquisitions of existing facilities and full-gut renovations of previous laundromats than ground-up developments, according to Assistant Vice President of Sale David Nolan.
“The reasons are twofold – the cost of development and time,” Nolan said. “The cost to build new, including the hook-up fees, is both significant and unpredictable. Additionally, there are general risks associated with a new business venture, and this often becomes a bit more than most first-time operators can endure. Secondly, a turnkey operation allows an investor to generate positive cash flow from the outset, especially if the acquisition price is based on a multiple of net income.”
“There are a lot of existing laundry owners who have been holding off, both on re-tool projects, as well as new store development,” said Tony Regan of ADC. “Now that financing is available with aggressive programs, many of these existing store owners are moving forward with these plans.”
Jim Freeze, president of Dexter Financial Services, explained that his company is currently noticing an equal amount of business from both first-time borrowers and current store owners.
“However, multi-store owners are becoming more prevalent each year,” he said. “I think the increasing acceptance of card systems has made it more manageable to run a multi-store operation. In addition, more operators are choosing laundry ownership as a career, rather than a sideline investment, which often requires more than one location to be financially feasible.”
What’s Required
With the Great Recession – for the most part – behind us, what financing qualifications are today’s lenders requiring?
In essence, banks are looking for an established operator with a high credit score and someone who has a significant net worth, Hinrichs explained. Banks also will require a tremendous amount of paperwork, possibly including a business plan, a demographic analysis, a pro forma and a 24-month cash flow analysis, he added.
Banks were one of the major causes of the last recession; therefore, they are extremely cautious when it comes to lending money these days. What’s more, banks are under a lot more scrutiny from the public, as well as regulators – so everything decision needs to be justified and backed up with supporting documentation. As the saying goes, when in doubt, require more documents.
“We want a partnership with the customer, so our involvement is not just a fax or email,” said Pamela Kuffel, financial services manager at Continental Girbau. “The personal interface with the customer and distributor is crucial in long-term relationships of trust and mutual success.”
As far as specifics, with a new store, financing companies will require an owner to use his or her own funds to invest in 30 percent to 40 percent of the total cost of the project, Hinrichs noted.
“This is the laundromat owner’s ‘skin in the game,'” he explained. “The financing companies have found that once the owner puts up $100,000 to $200,000 of his or her own money into a laundromat, that owner is highly motivated to make the business work.
“For new operators or for full-store purchases, some down payment will be required, but this is usually on a case-by-case basis, and how much equity the owner has in the deal will offset the down payment requirement.”
The biggest misconception Maxwell witnesses regularly is with potential laundry owners.
“Many investors don’t realize the laundry industry is very capital intensive,” he said. “Unlike purchasing residential real estate, where 5 percent to 25 percent down is typical, most of the time financing the purchase of a laundry requires 30 percent to 40 percent down.
“I’ve met with many wonderful people who have experienced sticker shock when discussing the cost of a new laundry and the down payment required.”
So, what’s considered “good credit” in 2015?
“Generally, finance companies are looking for a minimum credit score from 625 to 675,” Hinrichs said. “This is a starting point for the credit analyst. If you can explain and make a case for why your credit score is low, there is wiggle room to the make the deal. If the credit score is high, but the applicant just doesn’t pay his bills, there is a good chance of a loan rejection.
“The bottom line is that the lender is looking at the risk-reward relationship. If the lender has any doubt about being re-paid, you will be rejected. Your job in applying for a loan is to remove all doubts.”
Standards and requirements have remained fairly consistent over the years, according to Kirk Stone of U.S Capital Corp., headquartered in Hoffman Estates, Ill.
“One issue that started becoming a problem for securing new loans were the short sales that started appearing on borrower’s credit histories, starting back in 2008,” Stone said. “These were a problem for lenders, as they lowered the applicant’s credit score. If applicants have maintained good pay histories since a short sale occurrence and they have logical explanations for the short sale, we can often work around these situations.
“We like to see FICO scores over 700; however, we don’t base our credit decision strictly on an applicant’s credit score,” he continued. “We try to work with the applicant to verify the accuracy of the derogatory information reported and then try to get more background on the reasons for the derogatory information.”
Business Experience vs. Laundry Business Experience
Everyone knows that business experience will help your chances of receiving a loan, but is laundry business experience critical for receiving a laundry business loan?
“In my opinion, business is business,” Hinrichs said. “If you’re a successful small-business operator who prints calendars, you can do just as good of a job operating a laundry. The problem occurs when the owner doesn’t consider operating a laundromat to be a real business. In fact, I have met very successful businesspeople who completely ignored their laundromats, while I have meet housewives who never ran a business before do terrific jobs at operating their laundromats.
“I believe that underlying determinate of how well a laundry operates is directly related to the amount of time that operator spends in the store. The more time spent in the store, the better managed and operated the laundromat.”
Although laundry experience is helpful, it’s not always required, Nolan added.
“If the applicant has experience in a related field, or other experience owning and operating a business, this can be quite helpful with the application process,” Nolan explained. “Like many things, the experience requirements are commensurate with the loan amount and purpose. The larger the loan request or the more complicated the business model, the more emphasis is placed on experience.”
In general, although overall business knowledge is transferrable between different types of businesses, there’s no substitute for successful industry specific experience, Freeze noted. Then again, an individual with a successful track record in another business and a well-thought-out laundry business plan also will be very attractive to lenders, he said.
Best Options for Borrowers
What options are available to today’s laundry operators and potential store owners?
Basically, there are four difference sources of funding for self-service laundries, as outlined by Hinrichs. And each has its own strengths and weaknesses. They are:
Bank financing. This includes standard bank financing, along with SBA loans, which are processed through a bank. This option usually provides the lowest interest rates, but it can be a long, hard and time-consuming process. Often, the loan process can taking up to six months for an approval – not to mention endless paperwork requests.
Private lenders. This option includes leasing companies, as well as commercial lending institutions specializing in self-service laundries. The range of the interest rates with this option can vary greatly – and, usually the higher an applicant’s credit worthiness and experience, the lower the interest rate.
Manufacturers. Most manufacturers have relationships with lending institutions, and their approval rate of laundry equipment loans is generally high. “This is only natural, because the manufacturer wants to sell machines and easy financing greatly helps this process,” Hinrichs said. “Many times, a manufacturer will buy down the interest rate to create a special promotional interest rate.”
Owner financing. This option is only available for those acquiring an existing store. In such cases, the prior owner (the seller) will take cash and a note for the laundromat. This benefits the seller who now can declare the capital gains over several years, as well as the purchaser who doesn’t have to come up with the full purchase price and can have the business help pay for the purchase.
The best option for laundry owners in relation to any new financing – whether the financing is for replacement equipment, a new store or store acquisition – is to deal with a reputable bank or finance company that is established, committed to the industry, has flexible terms, and has the capacity to meet their future needs. Of course, there are substantial differences between mortgage lending and business lending. By dealing with a lender that understands the laundry industry, owners can get the best terms to meet their needs.
As far as replacement equipment, it is easy to get 100 percent financing with very little documentation if the store owner has good credit. New store financing requires excellent credit scores, a good net worth that includes strong liquidity and, lastly, extensive business and management experience on the part of the borrower.
The best option for acquisition financing is a lender with market-specific knowledge and formulas to value a self-service laundry based on the cash flow from operations. Maximum debt for the acquisition should be 65 percent to 70 percent loan to value. The key is not to over-leverage the location with the acquisition financing because there may be a need for financing replacement equipment in a few years.
On a positive note, owners with outside income from other businesses or full-time jobs or spouses with meaningful salaries can obtain financing in most situations.
“The best financing option is to tap an established credit line with your bank,” Hinrichs said. “This process can take up to one year to complete, but generally once established is the best source of funding with excellent rates.”
“The second best source of funding is manufacturer or private lender financing,” he added. “In either case, you want to not only check the interest rates but also the total amount of interest charged over the length of the loan. Also, be sure to compare apples to apples – with loans, this means compare the APR, or annual percentage rate. Some lenders will advertise 4 percent interest, but that may be a 4 percent add-on interest rate. Also a 0 percent interest “teaser rate” loan maybe more expensive than a standard loan in the long run, because it may cost you more money in interest payments when figured over the course of the entire loan.”
How to Raise That Cash
Obviously, there are several tips and strategies to help you make the financing process less painful – and to increase the odds that you’ll walk away from the lender with the cash your need, whether for a new store build-out, an existing laundry acquisition or an equipment upgrade.
Clearly, record-keeping and documentation are more important than ever for all prospective borrowers.
“Be organized and be prepared,” Hinrichs explained. “If you or your accountant can whip up a personal net worth statement and/or produce a current profit-and-loss statement for your laundromat, this will greatly speed up the approval process. Lenders love numbers – and the more detailed the better. Some lenders offer 48-hour turnaround on loan approvals, but that clock starts only after you have submitted all of the required documentation. The more detail and the more numbers you can show, the better your loan chances and the quicker the decision process. Often, a narrative describing the borrowers, their business experience and their financial situation will give a lender a greater comfort level in approving the borrowers.”
Chris Brick, regional sales manager for Maytag Commercial Laundry, put it this way: know your net worth, save your money and pay your bills on time.
“First and foremost, understanding how to properly evaluate competitor stores and the influence they will have on potential revenue at your location are crucial,” Brick warned. “Also, some investors, unfortunately, borrow too much, creating high operating costs, which can be hard to meet during the ramp-up period of the business.”
The bottom line is that laundry owners need to be professional in their financial reporting and cash flow management if they are to be able to obtain needed funding in the future. With that said…
- 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 coin 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.
- 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 segregated, 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 coin 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 plunk 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 coins for the store, which can be anywhere from $500 to $6,000. 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 likely want to reinvest in your laundry, thus seeking additional financing.
“What you submit to the finance company should be organized and thorough,” Stern said. “Depending on the size of the deal, every finance company wants the same basic information – personal financial statement, tax returns, bank statements and lease information. Try not to wait until the last minute to contact your finance company. Like any other business, they need time to process your application to get you an approval.”
It’s important to do your homework, Nolan stated.
“Attend as many investor seminars as you can to get different perspectives on the business,” he said. “And visit existing laundromats to get a flavor for the business. Find a respectable distributor or broker to work with if you are considering an acquisition or start-up.”
Be sure to discuss your goals and long-term business plans with your distributor and arrange to speak with the financial analyst reviewing your transaction, said Matthew Westphal, financial services manager for Alliance Laundry Systems.
“There is a lot of information that cannot be captured on paper that can be critical to the decision-making process,” Westphal said. “We welcome the opportunity to meet and discuss the projects with our investors, and to then determine how we can tailor a financing solution to help make their laundries successful.”
For many, going through the financing process ranks right up there with undergoing root canal surgery as far as fun things to do in your spare time. However, it’s no doubt a necessary evil for the growth of your laundry business. And, at least if you approach your lender prepared, the process will hopefully be less painful.
