CHICAGO — In a world where many businesses are simply trying to hold on, it may seem strange to think about financing new equipment for a laundry and linen service.
However, life, and business, must go on, and for many operations that means buying machines necessary to process goods in a timely matter and exceeding quality expectations. And financing is a way to keep cash on hand with manageable payments.
But how can a laundry best navigate capital financing today? American Laundry News heard from four experts for this article: Scott Hawkins, president and CEO of Commercial Industrial Finance in St. Louis, Missouri; Amy Bartol, consumer finance associate, Girbau North America, Oshkosh, Wisconsin; Mark Thrasher, president and CEO of Lavatec Laundry Technology Inc. in Beacon Falls, Connecticut; and Jeff Harvey, manager, U.S. Underwriting North America for Alliance Laundry Systems in Ripon, Wisconsin.
Part 2 delves into the financing vs. leasing question, the benefits of financing for laundry operations and what to look for in lender, manufacturer programs.
What are the differences between financing and leasing?
HAWKINS: Rates are at historic lows. Well-positioned borrowers can negotiate favorable rates and terms from local banks and national non-bank lenders. Leasing has faded as a desirable offering due to the loss of any tax benefits as operating expenses.
There are new and attractive hybrid offerings, like full-service rentals, where all costs, including general maintenance and repair, are included in the monthly payment.
BARTOL: A lease is handled through a financing source and is very similar to a traditional loan, except the title transfers to the lessee at the end of the term. The sales tax is also handled differently and, depending on the state, is added to the monthly payment. A lease is handled differently on the accounting side, as well.
With an equipment finance agreement/promissory note, the customer holds title to the equipment throughout the loan. Sales tax can be included in the finance amount. The customer sends a monthly payment to the financing company.
THRASHER: The most notable difference between financing and leasing, as it is commonly seen in the auto industry, is the end-of-term structure. With leasing, the lessor owns the equipment and there is typically an end-of-term residual amount, whereby the customer has the option to extend the term, purchase the equipment for the residual amount, or return the equipment.
With financing, which is the structure most commonly selected by customers, the customer owns the equipment and there is no end-of-term residual amount. Given the long, useful lives of our equipment, it is rare for the customer to return the equipment.
HARVEY: There are several differences between financing and leasing. Financing provides ownership of the asset while leasing you are paying to use the asset for a fixed period of time. Typically at the end of the lease you have the option to return it or buy it.
Another major difference is that the two products are taxed differently.
In your experience, what are the benefits of a laundry operation using financing for upgrades and purchases?
HAWKINS: This current market speaks directly to the value of having operating capital in reserves. Negotiate good loan terms, and always have cash availability.
Many small business owners operate on a month-to-month basis, meaning their incomes generally cover expenses, including the operator’s personal salary, with little left for reserves. There is rarely a stockpile of readily available cash.
In most cases when an operator pays cash, he/she is usually using short-term bank financing or his/her operating line of credit.
No matter the scale of a project, financing laundry equipment offers benefits:
- It allows you to keep current capital working—Scheduled loan payments (versus paying cash) allow customers to preserve their cash, liquidity and lines of credit for emergency uses, working capital or other business investments.
- It helps you build business credit—Establishing a strong credit history is important. With a history of paying business debt in a timely manner, customers often secure better terms from creditors or distributors in the future.
- It helps continue business growth—Financing may provide customers the resources and flexibility to purchase additional equipment to remain competitive and to experience continued business growth.
- It gleans tax benefits—Customers may receive special tax benefits for purchasing the equipment. This may also include special tax benefits for depreciation expenses or interest expenses.
THRASHER: Without financing, owners and operators would need to have the cash on hand for large purchases. Similar to buying a house, very few are cash buyers due to the size of the purchase. By financing, it allows for the preservation of capital and larger acquisitions, and the buyer can utilize cash for other aspects of the business.
If a laundry is purchasing a tunnel system with a 20-plus-year life, it makes sense to get a 5-10 year financing package to help improve operational performance or allow for added capacity to increase revenues.
HARVEY: The use of debt to invest in capital improvements has several benefits for laundry operators. Using leverage can help generate increased returns resulting from less liquidity needed to invest. Additionally, it allows operators to convert a large expense into more affordable monthly payments. Finally, the interest expense is tax deductible.
How can financing equipment aid other parts of the business?
HAWKINS: Equipment financing is a fixed and predictable cost. Strategic budgeting is now more than ever, vital to not only survive in today’s economy, but also for planning and growth. This is where reserved cash comes into play, acquisitions, organic growth, vendor discounting, unforeseen emergencies.
THRASHER: If your organization can improve its cash flow with more efficient equipment and help lower operating costs, these savings can be applied to expanding the business, hiring new staff, and using additional cash flow to purchase additional equipment to grow or improve efficiency. There could also be tax benefits for financing your purchase.
HARVEY: Using financing to purchase equipment may free up your capital to be allocated toward other areas of the business. This potentially allows you to maximize your returns.
For example, you may decide to allocate your capital toward improved marketing, tenant or building improvements, etc., that can help grow your business.
What should an operation look for in a lender/manufacturer program when financing?
HAWKINS: Try to find a direct or manufacturer supported lender when possible—direct in the sense that it is the same company that offered the loan, will also be the company who collects your payments and services the loan. There is certainly a place for loan brokers but sometimes after the loan is sold, commitments and loan promises often fade away.
BARTOL: Financing is a major decision for a customer. First and foremost, the customer should feel comfortable with the company and the programs offered. A good financing company will take the time to understand the customer’s needs and find the right program for the customer.
THRASHER: Similar to buying a car, do not focus solely on the payment amount or the rate, as these items may not tell the whole story. I would also ask, how long is the term of the loan? What penalties are there for pre-payment of the loan? Is there an end-of-term payment? What are the costs of any origination fees? And, is there a specific structure that your tax advisor would deem most economical for your business?
HARVEY: There are several factors to review when looking for a lender. One of the obvious ones is that you want a partner who understands your business and helps you evaluate your investment plans. The partner should be quick and easy to do business with to make your life easier.
It’s also important that your finance partner understand your longer-term business goals and is able to match those with a finance offer that fits your needs.
Finally, it’s important to understand what is used as collateral for the loan as this may have an impact on your business for the duration of the transaction. Are they taking a blanket lien on the business or just the equipment being financed? Depending on the answer, your lender can effectively enable or prevent you from making other investment decisions requiring loans or leases.
Miss Part 1 on the effect of the pandemic on financing and also looks at cash vs. financing purchasing? Click HERE to read it. Check back Tuesday for the conclusion on things to be aware of, mistakes to avoid and financing advice.