CHICAGO — Establishing a coin laundry business can be a daunting process.
From site selection to equipment consideration, a lot of thought and preparation goes into the overall life of a Laundromat.
The foundation under all of these decisions stems from how much capital an operator has to help grow his/her coin laundry business.
Whether an existing operator, or a new investor, applying for credit to fund coin laundry projects can also be an intimidating process.
What financing options do operators have in today’s market and, once a lender has been chosen, what key documents do they generally require from a borrower?
American Coin-Op reached out to experts in the financing industry to answer questions like these to ensure that coin laundry operators understand the ABCs of funding.
‘CONVICTION IS A KEY ELEMENT’
What do lenders look for in a borrower?
“Generally, a borrower must have a sufficient credit score, along with a borrowing history and net worth equal to the loan amount they are trying to obtain,” says Matthew Westphal, financial services manager for Alliance Laundry Systems. “When the request is for a new store, or acquisition of an existing store, the borrower must have liquidity available for roughly 30-35% of the total project cost for their investment into the project.”
Carol Dang, vice president of sales and marketing at Valley Village, Calif.-based Elite Business Investments, says she tries to determine how much capital a borrower has available.
“Is this cash in the bank, or are they planning on borrowing this from a line of credit, or home equity loan?” she asks.
In addition to analyzing a borrower’s credit, Dang says she also looks for “any surprises” in the application process.
“I do this so that when I am showing them stores for them to invest in, I want to make sure that they are not going into a store that is over their means,” says Dang.
When interviewing a loan applicant, Robert “Bob” Rinaldi, vice president, Milnor Capital, says he makes sure to ask how long the borrower has been in the industry.
His advice: “The shorter the time in business, the better prepared the package of information must be.”
He also advises operators to have knowledge of their business model when describing their operation to the lender.
“Practice it and, above all, you need to believe it yourself,” says Rinaldi. “Conviction is a key element. Nobody wants to lend money to a business owner who isn’t 100% committed and confident in their success.”
FINANCIAL RECORDS
Once an operator decides on a lender, Jim Freeze, president, Dexter Financial Services Inc., advises them to first determine the equipment mix with their distributor before completing a credit application.
For the application process, all experts stressed the importance of having several financial records on hand.
“In preparing for a loan, there are several items that most lenders always ask for,” says Dang.
Among records in this list are items like current personal and business financial statements; two years worth of personal and business tax returns; and the last three months of all personal and business bank statements, according to Dang.
If an operator is applying for an acquisition loan, Dang adds that, in addition to these items, they should also have a copy of the income/expenses of the prospective business; copy of the current lease or proposed lease terms; utility bills for the last six months; and a current list of the equipment in the store.
Regarding financial statements, Rinaldi advises operators to partner with a certified public accountant to help prepare the documents.
Outside of these records, he also advises operators to provide a “short narrative history about the business, its formation, its growth prospects and the market it serves.”
RED FLAGS
Typical red-flag items in loan applications, according to Freeze, include: “poor credit history, insufficient cash for the project, high levels of existing debt relative to cash flow, lack of successful laundry or general business experience, and inability to explain merits of project/location.”
Another red flag Westphal says he sees is “overvaluation of current businesses and real estate on [an applicant’s] personal financial statement, thus inflating their net worth.”
In any event, he stresses the importance of honesty in the application process.
“Operators can avoid making these mistakes by being open, honest and upfront with their lender about their current situation,” he says. “Many times, a simple explanation and conversation with the analyst on a past credit issue can help them overcome any negatives and get the deal approved.”
“List all the banks that you do business with and the amounts in all of your accounts,” Dang says. “Now is not the time to be coy about how much money you have.
“Be honest! Show what your expenses are, because they will show up on your credit report.”
ROADBLOCKS
Finding a lender that “fully understands the laundry business” can be a challenge for operators when applying for capital, according to Westphal.
“An additional challenge for some operators is not having ready access to documents and/or records that are typically required when applying for credit,” adds Freeze.
One major hurdle Dang advises borrowers to be wary of are documents from lenders that require a landlord’s signature.
“Without [these] documents, the lender won’t fund. This should be addressed at the beginning if it is going to be required,” says Dang. “Most of the lenders are willing to negotiate on some of the points in this document, so dealing with this in the beginning will make the process go a lot smoother.”
Check back Tuesday for the conclusion!
Missed Part 1 of this story? You can read it now HERE.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].