By Jennifer Whitney | Apr 17, 2012
When starting a new business venture, the initial capital investment is one of the first preparatory measures an investor will need to research. Your research will lead you to a reputable equipment distributor who will want to know how you plan to fund your project. How much cash do you have available? How much financing do you need? Do you need a referral to a lender?
Choosing a lender is a crucial first step in the investment process. There are different routes an investor can take, but knowing what your capacity is as a borrower is essential before selecting a location, finalizing a budget or initiating lease negotiations.
You have options when choosing a lender, but you should strongly consider one that is familiar with the laundry industry and has seasoned analysts that will work with you from the application process to loan servicing to help support your investment strategy. Some laundry equipment manufacturers offer in-house financing, which is a significant advantage.
A manufacturer’s finance team specializes in the laundry business and understands that the strength of the transaction lies not only with the investor’s credit score, liquidity and net worth, but also with the demographics of the community around the target laundromat and how your location stacks up against the competition. You can take comfort in knowing that you are working with an industry expert who understands that there is a ramp-up period for new stores and will customize a financial solution to work with the cash flow projections of the location.
Industry expert analysis leads to a quick decision. You don’t want to spend three months explaining the value of the equipment or translating the demographics and their impact on revenues. With the right lender and a comprehensive package, you can have your financing in place and shift your focus to lease negotiations, budget preparation and build-out of the premises.
You want a lender who advises you on the best balance between credit and cash investment for your project, thereby maximizing your return on investment. The goal is to structure the loan so that neither the investor, nor the location, is overleveraged and you retain working capital during the ramp up of the laundry business.
Getting approval for financing your laundry project is really a process, which includes (1) getting investor preapproval, (2) project development and (3) location approval.
The Preapproval Process
Ideally, buying a laundromat should be similar to buying a house. You should work with your distributor and their financing partner to get preapproved, as this predetermined amount will guide you and your distributor as you enter the due diligence phase of finding a location and making the equipment purchase.
For the preapproval process you will need a series of documents to prove you have the financial ability to move forward with this project. The lender will need:
• A credit application
• A personal financial statement
• Bank statements to verify liquidity
Your strength as an investor, and subsequently the preapproved amount, is based on a review of your borrowing and payment history, as well as your net worth and liquidity position, as those variables determine your strength as an investor.
Once you have your preapproved amount, your distributor now has the confidence that you have the financial backing needed and will direct you to the location and equipment mix that best fits your financial strength. In the project development phase of your project, you will find your location, set a budget and consult with the distributor on how to effectively negotiate the lease.
In your search for a location, you and your distributor will discuss the location size that best fits your liquidity and financing position. The location search will include an analysis of the competitive laundromats in the area and a complete demographics study, which includes the number of households, the percentage of renters and the median income of the households within a certain mile radius of your target location.
Develop a Budget
A budget is essential to keeping your finances in order and showing your lender that you are prepared for this new business venture. Your distributor will work with you to estimate the build-out costs, equipment mix and ancillary equipment needs based on your down payment and available financing.
Lease or Purchase
This is the time in the process when you will want to negotiate the terms of the building lease or property purchase with assistance from your distributor. Take the lease negotiations to the point where signing is contingent upon obtaining final approval for the purchase of the laundry equipment. A preapproval only becomes a formal credit approval once the location variables are reviewed and approved by the lender.
Location Approval Process
You now take all of the information gathered during the project development phase and submit it to your lender in a complete and comprehensive package for formal approval on the location. The package will include:
• Business plan, including revenue and expense projections
• Total project costs, including build-out and equipment (washers, dryers, ancillary)
• Demographics (number of households, percentage of renters, median income)
• Competitive analysis of other laundromats in the area
The more information your financial service provider has about your background, your goals and the location, the more credible you look as an investor and the more effective the lender can be in structuring a financial solution for your laundromat project.
Know Your Loan
Don’t feel that the loan process is all one-sided. You have a right to know what you’re signing yourself up for and no matter how much research you do, there are bound to be some underlying questions.
Be aware of closing costs, which are any costs associated with the business transaction such as application fees, security deposits, and attorney or inspection fees. Unexpected costs can be a significant surprise.
A lender experienced in the laundry industry understands the value of the equipment and will structure the loan so that only the laundry equipment will be required as collateral. Be cautious when a lender asks for your home as collateral. You may be taking on more debt than the location can support, and you run the risk of losing your home if your store does not meet the projected revenues.
Research, Research, Research
Most importantly, ask questions throughout the process. Know what you have to submit during the application process, how long it will take to receive a response, what documentation will be required of you at loan funding and what documentation may be required of the landlord before you sign the lease.
At this point, you have secured your financing and are well on your way to being a successful laundry owner. Will your lender be there for you now that your deal is done?
Unlike banks, in-house financing teams won’t sell your loan, meaning you are working with an industry expert at every stage of your loan. They have representatives who will support you in the management of your existing loan and will have financing options available to you for upgrading equipment, purchasing an existing laundry or assisting in the development of a second or third store. Some lenders also offer online account management, so you can constantly have access to your loan. This simplifies the management of your business.
Choosing a financial service provider that is unfamiliar with the commercial laundry industry can lead to unnecessary risks and costs, including overpaying for services, hidden fees and slower responses to time-sensitive issues.
The knowledge, experience and reliability found through in-house financing assures that you are working with a team that has continuity in the management of your financial portfolio even after the loan has been processed.