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Dispelling Financing Myths (Part 2 of 2)

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.

Three Misconceptions

The recession likely reduced the number of financing sources and/or the the amount of financing available for equipment packages or new locations for all but the most qualified applicants — including those with solid-funding-source relationships, says Jim Freeze, president of Dexter Financial Services Inc.

“As a result, captive finance companies played an even more critical role in providing financing for laundry owners,” Freeze says.

The good news is that there appears to be an improving climate for new loans, as financing sources have worked through a number of problem accounts and are looking for loan growth, he adds.

Being prepared still aids the financial process. “Regardless of transaction size, potential borrowers should be prepared to provide complete and accurate credit applications, as well as recent bank statements.

“For larger transactions, generally greater than $75,000, the applicant will likely be asked to also provide tax returns, personal financial statement, building lease, and store projections. Additionally, the process goes more smoothly if applicants are willing to be forthright and transparent with financial and business information.”

A “bad risk” for lending, in general, can be classified as an applicant with a poor pay history on prior obligations and/or someone who is undercapitalized (i.e., has minimal cash to invest or in reserve), Freeze adds.

Most operators purchase equipment rather than lease, as many prefer to take ownership of the equipment, he says. “Additionally, bonus depreciation rules greatly reduced, if not eliminated, certain tax advantages true leases traditionally enjoyed over loans.”

Freeze urges operators to consider captive finance companies instead of banks or outside financial firms. “The primary advantage of working with a captive finance company is industry knowledge — our staff understands the industry, including the equipment being financed. Additionally, the purpose of captive financing operations is to drive sales volume for the affiliated company, while making prudent underwriting decisions. You might say we have more incentive to make a deal happen than an independent bank.”

Freeze says there are several financing misconceptions. “One misconception is that a captive finance company should approve any applicant, regardless of credit qualifications.

“Our primary goal is to develop a structure that will enable our company to be repaid in a timely manner and allow the applicant to enjoy long-term success in the laundry industry, which might not be possible for nonqualified applicants.

“A second misconception is that every applicant who qualifies for a loan should be entitled to the same interest rate. In reality, each applicant has a certain risk profile, and those with less perceived repayment risk will be charged lower rates.”

Lastly, some may believe that one can get into the laundry business with little or no capital investment, he adds.

Click here for Part 1 of this story.

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Have a question or comment? E-mail our editor Bruce Beggs at [email protected].