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Playing the Finance Game

Paul Partyka |

If you’ve followed the news lately, you’ve often heard about the need to get credit “flowing” again. In American Coin-Op’s distributor survey, the difficulty in securing financing was the No. 1 obstacle to new-store construction, according to respondents.If you’ve had trouble getting the financing for a laundry-related project, Brian Grell isn’t surprised.“Clearly, lenders in general have cut back, given the current economic climate,” says Grell, Eastern Funding LLC executive vice president. His firm, founded in 1997, specializes in small-business financing with an emphasis on self-service laundries.The good news is that there are stable lenders seeking strong applicants, he adds. “Eastern has significantly increased lending to the laundry industry over the last year. If you have good personal credit and cash to invest, now is an excellent time to apply for a business loan.”Credit scores are not the financing end-all, Grell says. “Cash investment, business experience (especially laundry), and personal net worth can be overriding factors, provided there is a reasonable explanation for the low credit scores.”Grell agrees with distributors who cite credit woes as the key factor in the slowdown of new-store construction. “I believe that is true, but, the truth is, obtaining financing for start-ups has always been more difficult in any economic climate. The real difficulty arises mostly with newcomers to the industry who make an insufficient cash investment. For newcomers, the financing of the ‘soft costs’ (delivery, installation, sales tax and leasehold improvements) is difficult, unless there’s alternative collateral available to the lender.“It’s much easier to approve seasoned laundry operators for start-up laundries. Often, experienced owners have accumulated equity in their existing stores that can be used as additional collateral to build another store.”Grell says his company will essentially refinance an existing laundry to provide part of the construction costs of the new project. “It’s important to note that we evaluate the total indebtedness of the laundries to ensure that there’s sufficient cash flow to cover the debt service, particularly during the ramp-up stage of the new laundry.”All investors need to realize that lenders look for a cash investment in the project; specifically, an overall minimum investment of 30-35% of the project is standard, he explains.The good news is that as commercial rents begin to decline, there will be more opportunities for new, state-of-the-art laundries, especially in areas with a growing population, he says. “The laundry industry continues to attract a talented pool of new investors who have sufficient capital to succeed. The days of 100% financing with relaxed underwriting standards are behind us, and that is a positive trend for the industry.”THE ROAD TO SUCCESSOK, what’s the best way to obtain financing? Stick with the captive or independent finance companies that specialize in the self-service laundry industry, Grell says.“Frankly, industry insiders ‘get’ the business. They understand the nuances of the self-service laundry business, and they understand the ingredients of a successful laundry.”If you deal with a laundry industry insider, you may also be able to get advice on a variety of key matters, such as competition analysis and construction issues. “Insiders can spot a weak deal reasonably quickly, whereas outside financing sources may just be looking to get deals done.”Government intervention has helped the credit process, but it hasn’t done enough, Grell believes. “SBA financing can be an attractive financing solution, but the process is cumbersome, time-consuming, and more importantly, they usually require a mortgage position on the building, if owned, or on a personal residence.“The government has attempted to jump-start the SBA program this year by reducing some of the up-front fees associated with loans, but they have not expedited the process, and many of the closing fees are intensive.”If you’re looking to finance new equipment, you may have to consider leasing. “Most of the leasing taking place in this business is of the ‘$1 buyout’ kind. In short, at the end of the lease, the borrower pays $1 and owns the equipment. This type of lease is virtually the same as a loan. The one advantage in most states is that the lender does not have to finance the sales tax on the equipment that’s being leased. Instead, the sales tax is spread out over the life of the lease and added to each monthly payment. This can assist the borrower in reducing their initial cash investment. Borrowers should consult with their accountants to determine which type of borrowing is best for them.”AVOIDING MISTAKESIf you are trying to obtain financing, give some thought to the following:

  • Don’t hastily fill out personal financial statements that contain inadequate, incomplete or erroneous information.
  • Watch for inflated values of assets, especially in a declining real estate market.
  • Don’t provide insufficient or sloppy accounting records on existing laundries and other businesses.
  • Frequent NSF (non-sufficient funds) notices on bank statements are not good.

Submit a complete financial package that includes a personal financial statement, federal tax returns (personal and business), bank statements, cash flows of existing laundries and projections for new laundries, Grell advises. Clear, concise financial information and supporting records (utility bills, etc.) will also help, he adds.“Always be straightforward and honest with the lender.”If you have any questions or comments about this article, contact Eastern Funding LLC at 877-819-1764 or visit www.easternfunding.com. 

About the author

Paul Partyka

American Coin-Op

Paul Partyka was editor of American Coin-Op from 1997 through May 2011.

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