By Bob Nieman | Jun 03, 2009
The Chairman of the Senate Committee on Small Business and Entrepreneurship has some bad news.
In a letter to President Bush late last year, Sen. John Kerry relayed that the United States’ largest source of long-term small-business capital, the SBA 7(a) loan program, had fallen by nearly 50 percent compared with the same period in 2007.
The Small Business Administration loans are drying up for various reasons: Cutbacks by the Bush administration and increased fees have been the most common culprits. To make matters worse, since SBA loans are government-backed and the government is now busy backing banks with $700 billion elsewhere, things may get worse before they get better.
No, the SBA has never been a huge player in the financing of coin laundry businesses. However, its troubles are certainly an accurate barometer of the overall economic climate in the U.S.
And what about conventional banks? Their plight seems no less precarious. With many large banks now partially owned by the government, so-called “toxic loans” still on the books and the credit crunch not nearly un-crunched, many laundry owners will find that big banks are not nearly as friendly as they used to be.
No doubt, the era of “easy credit” is over.
Unfortunately, whether you are 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 Financing World Has Changed
Clearly, the current economic landscape has changed financing in the self-service laundry business.
“Lenders are tightening their guidelines and criteria for loans to everybody, even experienced owners are subject to greater scrutiny especially from SBA and commercial bank lenders,” said Ana Figueroa, director of finance for PWS, Inc.
“Finance companies in general are having a more difficult time securing funds these days,” added Leo Frazier, director of Dexter Financial Services. “Many funding sources have either temporarily or permanently stopped lending money to finance companies. As the number of available funding sources has decreased, the remaining sources are lending at much higher interest rates and fee structures than we have seen in recent years. This is due to the fact that the risk of lending in today’s economic environment is seen as being substantially higher.”
The fact that coin laundry financing is a niche market that many funding sources know little or nothing about results in even fewer sources that are willing to invest in the industry.
“Financing in the coin laundry industry has taken a significant turn toward the more difficult, as you would expect,” said Harvey Kantor of Triumphe Leasing. “The industry has never been a favorite of banks, relying upon captive finance companies and industry specialists. New stores, which are start-up businesses, now require manufacturer funding in most cases. The exceptions are individuals with high net worth who have their own bank relations or distributors that have the financial capability to guarantee start-up transactions.”
It’s definitely becoming harder to explain the business and the reasons for asking for the loan to a lender who is not in the laundry business. There have never been a lot of banks that would lend to this business in the first place – especially since it doesn’t have the asset base of other industries.
“We are still very actively financing coin laundry equipment, literally daily,” said Ed Beitenman of Trinity, A Division of Bank of the West. “However, the credit and financial requirements have become slightly more stringent in the current economic landscape.”
“There are a declining number of local banks willing to lend to owners, existing or new, within our industry,” said Journal columnist and the owner of Wonder Wash Family Laundry Centers in California. “There are numerous reasons for this, but primarily is boils down to a fear of making small-business loans across the board nationally. The first half of TARP [the government’s Troubled Asset Relief Program] did almost nothing to increase small-business lending in our nation’s banking system. I hope that the new administration will use the second half to do so.”
“Generally speaking, it is becoming more difficult to get a loan,” said Howard Herman, president of Wascomat Laundry Equipment. “We are giving more credit to existing owners with history with our company, and new owners who put more into the ground. We want to know that the new owners are financially committed.”
Perhaps not surprisingly, today’s tight economic climate has led to an increasing number of laundry loan defaults overall in recent months.
“The industry, in general, has had some macroeconomic factors that were definitely a strain on laundry owners in the past 18 months, thus defaults have increased from historically low rates,” Frazier explained. “However, many times when borrowers are having payment trouble, we discover that the trouble doesn’t stem from the performance of the laundry, but rather other factors such as a borrower getting overextended in other areas. I do feel that we are seeing some important positive developments for laundry owners – such as lower natural gas prices, lower fuel costs, lower food costs and lower location costs in many areas – that are allowing stores to become more profitable.”
In addition, it is possible that default rates have not increased across the board for every single lender. But, taken overall, defaults are higher than ever. For example, it’s true that some stocks are up, but the stock market is down overall. And the overall default rate of the self-service laundry business has skyrocketed, according to a number of industry experts.
Securing Cash in 2009
With default rates up, what new financing qualifications are lenders requiring?
“The qualifications themselves have not changed much,” Frazier noted. “However, the amount of analysis and scrutiny for each qualification has increased. Lenders are definitely working diligently to better understand the collateral and the assets that make up a borrower’s overall net worth. Lenders want to make sure that the value of the existing equipment and any marketable assets are more than enough to cover the amount owed throughout the term of the financing.”
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.
“The variables that we review and the guidelines surrounding those variables have not changed,” explained Jennifer Whitney, finance relationship manager at Alliance Laundry Systems. “We do a comprehensive review of the investor’s credit score, liquidity and net worth, as well as the projections, competition and demographics for the target laundromat.”
An ample amount of working capital, as well as cash flow from a job, existing laundries or other businesses are factors that are probably looked at a little more closely today than in the recent past, admitted Frazier.
“Finance companies today cannot afford to have delinquent and non-performing accounts,” he said.
“The qualifications to borrow money at every level have changed,” Kantor countered. “Most transactions over $50,000 are currently not getting approved due to the need for supporting financial statements on the business. The absence of reported profits from the laundry business is a serious limitation, which cannot be easily overcome now, unlike just a few months ago. No longer can the laundry owner claim, ‘It's a laundry, a cash business.’ Lenders are like deer staring into your headlights. They are frozen in place, fearful to make a loan. They view the next three to six months as uncharted waters. I would direct laundry owners to concentrate on getting financing from the equipment manufacturer first or their local bank, based upon an already established relationship.”
According to Beitenman, the main change has been in the liquidity requirements of the borrowers. His company’s credit department wants to see that the borrower has the liquidity – cash money market funds, mutual funds, stocks and bonds – to weather any financial challenges.
“My company has always financed just the equipment,” Beitenman explained. “We’ve never taken liens on real estate or other assets. Therefore, the only possible change in collateral requirements for us might be less willingness to finance items that are totally soft, such as excessive installation, plumbing and electrical. We still finance these for strong credits, but might be little more reluctant to for the weaker credits these days. Other than that there’s been no change at Trinity.
“Aside from the above mentioned liquidity requirements, which is a big one, for existing owners they must have good credit,” he added. “For new owners, we are requiring that they have more business and management experience than we used to. We’ve found that those who have extensive business and management experience, particularly owning their own businesses, are the ones that do the best in tougher economic times.”
“Credit scores are now and always have been only one small component of what we look at when we evaluate a prospective borrower,” Frazier said. “Obviously, the higher the credit score the better when applying for a loan – laundry or otherwise. Borrowers with too much debt or unresolved credit issues are going to have problems securing financing in today’s marketplace.”
At Trinity/Bank of the West, the credit department is looking for scores 50 points higher than a year ago, according to Beitenman. For existing store owners, they should have a score of at least 700; for brand new store owners, the score should be at least 750, Beitenman explained.
“Even small replacement equipment transactions require 650 to 700 or better credit scores, as well as more time in business and a lower percentage of available unused credit availability,” Kantor stated.
In general, many industry experts acknowledged that credit score requirements have gone from 500-600 to 650-700. A higher score and money in the bank is what prospective borrowers need today – a job and steady income are often no longer enough.
“Credit score is a very important criterion for any lender to review,” Whitney explained. “What is 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.
Meeting Today’s Challenges
Perhaps the greatest challenge facing prospective borrowers today is the realization that we are living in an entirely new world that is changing daily with regard to the credit markets.
“Deals that were done at certain rates and terms in the past may not be doable today,” Frazier said. “I remember when everyone thought that a mortgage rate below double digits was a great rate. That is where we are at today in the financing of coin laundry equipment. Coin laundries, even with the tougher credit markets, are still a viable business that can generate consistent long-term returns.”
“It is very tough to get significant amounts of replacement equipment financing from anyone other than the manufacturer,” Figueroa added.
The challenge with the commercial marketplace is that many banks are just not making loans – period. It’s not necessarily a laundry issue. However, laundry loans are even harder to get because they are usually cash flow loans. Self-service laundries typically have very few assets. What’s more, those assets that are in the business have low resale value and are not easily sold or liquidated. Also, in many cases, the real estate of a coin laundry business is not owned by the borrower.
“Borrowers need to be aware that the world of credit and lending has changed significantly in the last year,” Beitenman said. “Lenders now want to clearly see the borrower’s ability and resources to make the payments any financing.”
Also, borrowers who control the underlying real estate are much more likely to get a loan in today’s marketplace.
Best Options for Borrowers
What options are available to today’s coin 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 coin laundry or purchasing replacement equipment, coin 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 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,” Frazier suggested. “It is also important to understand how the current economic circumstances have impacted lenders. There are substantial differences between mortgage lending and business lending. By dealing with a lender that understands our industry, a laundry owner can get the best terms to meet their needs.”
As far as replacement equipment, it is very easy to do 100 percent financing with very little documentation if the store owner has good credit, according to Beitenman. He added that 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 laundromat based on the cash flow from operations,” Whitney explained. “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,” Kantor said. “I am able to finance re-sales as long as they make economic sense, and the customer has at least one-third down. It's a buyer's market for these re-sales since the number of existing laundries having financial problems seems to be escalating.
Kantor added that owners who did not put needed vend price increases into effect in 2008 may see their cash flow drop precipitously if revenue falls as little as 5 percent or 10 percent due to local economic difficulties.
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.
“If you’re an existing store, make sure you have excellent credit, and by that I mean don’t overlook or neglect small items that can hurt your score,” Beitenman suggested. “If you’re new to the business, then you should have the items I mentioned earlier – and if you don’t, you’ll need to get partners that do.”
In addition, record-keeping and documentation are more important than ever for all prospective borrowers, according to Figueroa.
“The bottom line is that laundry owners will need to become more professional in their financial reporting and cash flow management if they are to be able to obtain needed funding in the future,” Kantor 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:
1. 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.
2. 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.
3. 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.
4. 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 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.
While 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, it’s no doubt a necessary evil for the health of your business. And at least if you approach your lender prepared, the process will hopefully be less painful.
“Come well prepared with a solid business plan, historical financial statements, a current personal financial statement, copies of tax returns, a completed pro forma, demographics, written proof of any settlement of prior credit issues or judgments,” Frazier concluded, “and a willingness to fully educate the lender on your business and its credit worthiness.”