CHICAGO — Has the financing industry changed during the recession? What should an operator know when trying to obtain financing?
Two industry representatives well versed in industry financing tackle these questions, as well as others.
Understanding Your Financial Situation
“Through industry-focused direct lenders and manufacturer captives, competitive financing for qualified operators has remained available throughout the recession,” says JP Nicoletta, Eastern Funding director of sales and marketing. “This holds true for new-store development, replacement equipment and acquisition financing.
“While certain markets/[geographic areas] around the country require greater scrutiny (specifically those in areas most affected by population loss, and financial and real-estate decline), we believe it has been business as usual for this industry. Eastern Funding has not materially changed its lending criteria from before the recession started. In fact, we have grown our loan originations each of the last three years.
“For new stores, we continue to look for cash investments from the borrower (usually 30 percent), and for replacement deals, in most cases, [we] are able to do 100 percent of the equipment invoice.”
Nicoletta says operators tell him that their banks have backed out of financing deals in recent years.
“We do expect community banks to come back at some point; it has not come to fruition yet. Today, financing for our industry is much easier to get from an equipment captive or a company like Eastern that specializes in the laundry industry.”
Be prepared when seeking financing. Eastern requires a complete financial package for deals larger than $100,000. This includes a credit application, personal financial statement, federal tax returns (business and personal), bank statements, accurate cash flows for existing stores and projections for new laundries. “Supporting records such as contractor estimates and utility bills (for an existing store) also help.”
Are you worried about being a “bad” candidate for financing? “Any deal where a borrower has little invested, either in the financing request or the business itself, is a concern for us. We are also looking closely at a store’s profit potential and cash flow. Operators need to be profitable, and strangling a business with too much debt is a recipe for trouble.”
Assuming there is adequate investment and/or equity in the business, it’s important for an operator to know what is in their personal credit report, he adds. “If there are any missteps or issues out there, it is always best to know about them and have the ability to explain them. If there are mistakes on your credit report, it’s better to take up the fight to correct them and show a lender your progress, rather than to have a lender bring the problem to you.”
Nicoletta says operators can get a free copy of their credit report from three credit bureaus (Experian, Equifax and TransUnion) once every 12 months at www.annualcreditreport.com.
“I [get these reports] every year, and pay the small fee they charge to see my scores. Don’t fall for sites that offer ‘free’ credit reports, which often end up enrolling you in expensive credit-monitoring programs that you usually don’t need.”
When it comes to leasing or purchasing equipment, most operators don’t realize that often times when they lease, they are, in fact, purchasing, Nicoletta says. “Not all leases are created equal and the IRS has defined standards on what constitutes a ‘true’ (also called an operating) lease vs. a ‘lease financing arrangement.’
“The latter is seen most often in the form of $1 out leases. If you see promotions that tout leasing as a way to preserve capital, hedge against inflation, obtain 100-percent financing, eliminate obsolescence and other tax benefits, make sure you get a clear explanation of what all that means. While sometimes correct, this is not always the case. As a lender, I have always been leery of hyping the advantages of financing over leasing and vice versa.”
Consult with tax advisors in such matters, he advises.
“With that said, the sole benefit that I will tell customers when asked is that with a lease, depending on what state they are in, the sales tax can go on the monthly rental payment, instead of paying it all up front.”
Nicoletta believes a misconception exists that financing is not available for self-service laundry operators, or that lenders are unreasonable. “We have all heard nightmares about the condition of our banking institutions, and how the underwriting process for anything is now excruciating.
“As far as residential mortgages lending goes, we’d agree; it’s been rough. The notion that lenders have become unreasonable is often a knee-jerk response to the end of a period where many, now out of business, were irresponsible.”
Check back Wednesday for Part 2 of this story.