Financing, Lending & Leasing
Financing a Laundry
One of the many questions that the Coin Laundry Association receives is, “Where can I get financing for a laundry?” There are many options out there for veterans and newcomers to the industry.
Financing for a brand-new laundry is considered by banks as venture capital, which is a market in which they are not typically involved. Being regulated by the government, most banks are precluded from using bank funds for start-up businesses‚ unless they have 100 percent collateral outside of that business. For owners who are building an additional store, such as a second or third laundry, this loan would no longer be considered a start-up. It would often be referred to as an expansion and banks have more leeway in this case.
To facilitate the sale of laundries for their customers, many manufacturers offer in-house finance programs. Just as automobile dealers do, the manufacturers of laundry equipment provide financing as a means to sell equipment. Having control of their own funds allows this “captive” finance company to look beyond the start-up nature of the financing and be able to finance qualified individuals for the right location. There are also several independent finance companies that specialize in the laundry business and can provide financing for start-up businesses.
Financing for a new laundry can be in the form of traditional financing or equipment leasing. As there is a substantial amount of equipment in a laundry, it lends itself to leasing companies that can get around the nature of a start-up business by using the equipment as collateral. However, be wary of traditional leasing similar to leasing a car when a large amount of money is due at the end of the lease to purchase the car; or in some cases it is left open for the leasing company to determine the amount. This is too risky. Consider a “finance lease” where the purchase option at the end of the lease is minimal or “one dollar” and it is in writing upfront.
Although it does not always seem to be, financing for start-up laundries (or any other business) is typically more expensive than traditional bank financing. As secondary sources of money, leasing companies and captive finance companies purchase their money from banks and other sources and turn around and lend it to consumers at a higher rate. Because of the risky nature of start-up businesses, they also have to build in a “reserve” for possible bad debts. However, just as in the automotive business, there are advertised low-rate financing by manufacturers — some manufacturers will “buy down” the rate to look attractive and in many cases it is. But beware, because as in car ads when it indicates “X.X percent financing” or “$XXXX rebate,” it is clear that the car manufacturer is playing with money. Yes, the interest rate is important, but as it is with a car lease, the monthly payment is equally important. A buyer may end up paying higher interest rates but purchase the equipment at a smaller figure, so the monthly payment is lower or the same.
The monthly payment is the key factor in the cash flow of any business. In the laundry business it is paramount. A good location can be successful or fail over two items, rent (or mortgage) and the note payment. The vend price charged is pretty much determined by the local market conditions (or what the market will bear) and the expenses of a laundry are mostly fixed; the only variables become the rent and the note. When examining a new laundry location, always put the equipment mix at the real vend prices and the actual expenses and rent into a spreadsheet including the note payment.
Read the fine print on some of the “special” finance offers. Some are only a low rate for the first year, and then they balloon up at the end of the term. Some load up the payments up front and the payments at the beginning of the loan are higher than at the end. It is in the beginning of the start-up business that the owner will need lower payments, not higher payments. Then there is the entire subject of fixed-rate financing vs. floating. As in home mortgages, floating rates are always lower upfront, but can rise with prime rate fluctuations. Most accountants will arrange for borrowing short term at floating, but long term at fixed; however, this is your choice. Fixed-rate financing is a guaranteed monthly payment for the entire length of the loan, and with this type of financing there can be no surprises no matter what happens to the economy. Most lenders prefer floating as it protects them, not the consumer. Banks typically borrow their money floating, so they charge more for fixed as they do not want to take a gamble. Ask any lender what their floating and fixed rates are; the fixed will always be higher.
Assuming that the location qualifies with the lender, the owner will need to provide information and be willing to invest money of his or her own. Typically the bank or lending institution would like to see an investment of 20 to 30 percent of the entire project. The project will include equipment, installation and leasehold improvements. Plus, the owner should also have another $30,000 for start-up costs such as utility deposits, initial advertising campaigns and a reserve, which will carry the owner until the break-even point is reached. That means the bank or lending institution is investing up to 80 percent of the cost of the business and has more money invested than the owner does.
To process an application, the lending source will usually need the following items:
- Credit application signed to authorize a credit investigation
- Bank verification forms as proof of funds to be invested
- Personal financial statement
- Last two years personal tax returns
- Details of anything that might show up on the credit report
- Location analysis including a demographic study
- Cash flow forecast or pro forma
- Signed sales agreement
- Any business financial statements for full or part ownership
The bank will need all of the above, plus other information that is required by their bank policy. Then they will need some time to verify the information and go to their credit committee. Typically this could take five to seven business days, but varies from lender to lender. What usually takes the most time is to get back the bank verification forms from the bank. To speed up the process, take the forms into the bank and wait while the loan officer fills them out.
For financing of replacement business, the process is much easier and faster. More lenders will finance expansions or replacement equipment at lower rates. Some do not understand the nature of a cash-based business‚ and will require a business financial statement and proof of cash flow that will be adequate to repay the loan.
Shopping for financing is the same as shopping for a distributor. The owner must feel comfortable enough with the lender so that they will enjoy a long-term relationship. Over the course of five to seven years many things can happen. Will the lender be a good partner or “fit” for the business? Does the lender understand the long-term goals and can the lender grow with the business? Does the lender understand the business and can it be an asset to the future plans? Prospective owners should interview the lender as the lender interviews them.
