CHICAGO — For small-business investors, especially those trying to get into the laundry industry for the first time, securing financing for a laundromat can be challenging under normal circumstances. When events like a public health crisis create economic doubts, the process takes on added weight.
This month, American Coin-Op polled a handful of manufacturers and commercial lenders on the state of lending today, how the laundry industry has responded to the now-waning pandemic, and the best approach to take to get your laundromat financing approved.
Part 1 addressed the resources available when applying for financing and the records one should gather or prepare to best support their application. Let’s continue:
Q: How has the small-business lending market reacted to the coronavirus pandemic after two years?
Matt Kluesner, director of portfolio management, Dexter Financial Services: Speaking to our industry specifically, laundry operators have been very resilient throughout the coronavirus pandemic. While some areas did see declining revenues during the height of the pandemic, which led to repayment struggles for a period of time, the vast majority of customers saw little to no drop-off and were able to function normally. The majority of areas that did see a decline have rebounded back toward pre-pandemic performance.
New laundry projects and subsequent loan requests have remained at record levels throughout these past two years. Some lenders initially tightened guidelines during the pandemic to proactively mitigate increased risk and have since returned to normal standards. A larger issue has been project delays associated with labor shortages and supply chain constraints associated with COVID-19.
Marc Stern, executive vice president and chief lending officer, Eastern Funding: Since the laundry business was declared an essential business to stay open during the pandemic, lenders were and are still lending to the industry. The biggest issues now are increased equipment and constructions cost, supply chain delays, and rising interest rates.
Gary Corley, sales manager, Southwest Region, Whirlpool Commercial Laundry: Because the laundry business was considered an essential business, it fared much better during the pandemic when compared to other businesses. We didn’t see much change in the lending practices as a result.
Jeff Harvey, underwriting manager, Alliance Laundry Systems: Two years into the coronavirus pandemic, we’re seeing strong demand and supply in small-business lending. We are seeing interest rate offerings increase, especially fixed rates, with the expectation that the Fed will raise the fed funds rate to combat inflation.
These trends have been prevalent in the laundromat industry as well. Investor demand and funding supply are strong as the economy and laundromats continue to perform very well.
Q: What general lending criteria must a borrower meet to gain approval?
Stern: They must have an acceptable net worth, cash to invest in the deal, and acceptable credit scores. They cannot have filed a bankruptcy within the last five years.
Corley: Operators should have creditworthiness, a good store location, and a cash investment. Typically, a new store project or acquisition of an existing store requires a 30-40% minimum down payment.
Harvey: Lenders are typically looking for borrowers to have a credit score around 675-700 or greater. Credit scores below that level may still qualify for approval, and I always highly encourage you to talk through your financial history with a potential lender to understand what you may qualify for.
For larger projects and new laundromats, lenders are looking at a borrower's net worth to see if it’s comparable to the loan amount being requested. They will also review your bank statements to confirm it is adequate to cover the build-out costs for a new laundromat and confirm you will have reserves available.
Kluesner: Every lender varies in their lending criteria … we look at several different factors when we are looking to approve a finance request. The key factors are:
- Creditworthiness of the individual guarantors. This will be determined through a review of their credit report history and their FICO scores.
- Capacity of the borrower and guarantors. This will be the determined by the amount of assets and capital there is on hand to be used for the project.
- Experience of the laundry operators or investors. We look at both experience in the laundry industry as well as other business ownership experience.
- Debt service coverage. For this, we look at not only the revenue-generating potential from the specific laundry being funded but also the global cash flow of all related parties to ensure proper coverage.
Check back Tuesday, April 26, for Part 3: How differences in project scope can affect the odds of financing success, and some “red flags” lenders might look for during application review
Miss Part 1? You can read it HERE.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].