Laundry Financing: Fixed or Variable Rate?

By J.P. Nicoletta | Jan 25, 2010

There is no question that difficulty in securing financing has been a point of frustration for distributors and operators alike. Although credit standards tightened since 2008’s unprecedented financial collapse, some lenders in the self-service laundry industry have continued to write loans for qualified borrowers. In this difficult economic climate industry lenders are going back to basics with the types of loans they approve.

For years, variable rate loans were the norm for self-service laundry financing. Market demand moved lenders away from this trend; however, today lenders are once again favoring this type of loan. The question is whether or not this is a good thing for you. The answer is yes.

Fixed rate loans do not fluctuate over time, regardless of what is going on in the world around you. Once the terms are set, the deal is locked in. Your payment will not change and you are protected against rising rates in the market. This can make budgeting and expense tracking easier for you as you manage the cash flow of your business. Lenders will charge a premium for this luxury, and you might have a higher monthly payment than if you took out a variable rate loan.

With a fixed rate loan your interest rate will never go lower even if national rates go down. Admittedly, it is hard to predict rates going lower than their current levels, but you can never know for sure. Generally, the only way to change a fixed rate loan is to refinance to a lower fixed or variable rate if you can find a lender willing to do so. And, if you do, there may be points or pre-payment fees that will have to be paid. These fees could effectively wipe out the savings benefit of moving to a lower variable interest rate.

Variable or adjustable rates are often “pegged” to a market rate plus a predetermined spread in excess of that rate (i.e. Prime Rate plus 2 percent). When Prime goes up so will your payment and the amount of interest you pay every month (or year depending on the adjustment terms). Conversely, when the Prime Rate goes down your interest rate and payment will go down. Variable rates are most often used for small loans, short-term loans, credit cards, home equity lines of credit, and, as noted, they have been the norm for the self-service laundry industry.

You can actually save thousands with variable rate loans because such loans generally offer lower initial rates. The risk is that your monthly payment can fluctuate as interest rates change. If your lender is willing, you might be able to negotiate no pre-payment penalties after 12 months of timely payments. By doing this you can limit the potential risk of rising rates by securing fixed rate financing elsewhere and paying off your variable loan with no penalties. In the housing market, studies have shown that, on average, an investor who has chosen a variable rate mortgage enjoys a roughly 1 percent reduction in the average interest rate over the life of the loan.

It should be noted that no one has a crystal ball to predict where interest rates will go. The decision to go with variable rate over fixed rate financing could be a sound one, but you need to follow interest markets to gauge the possible direction of rates.

A hot topic of discussion has been special financing programs that offer a new type of loan, which allows borrowers to commence the term with a variable rate then choose when they’d like to fix their rate. With this loan you can take advantage of a variable rate until such a time when you see fit to lock in.

This allows you the opportunity to enjoy lower rates today and then strategically lock your rate as rates begin to move up. In other words, you can play it both ways.

The bottom line is that there is no textbook “right” and “wrong” to the fixed versus variable rate debate. Understand your needs, know what your future plans are and choose accordingly. Either way, excellent financing terms are available for coin laundry operators who seek funding in this challenging economy.