CHICAGO — When it comes to laundry equipment, service providers have different options for acquisition.
The most traditional is an equipment loan, through which the laundry borrows the money necessary to purchase equipment from a financial institution and pays off the debt according to the terms of the loan.
The challenge for some laundries going this route is the down payment, the initial capital outlay needed to secure the loan and purchase the equipment.
Another financing option that can keep capital in a laundry’s bank account is equipment leasing.
“Many customers with an on-premises laundry (OPL) consider leasing as an option as a financing solution to acquire new equipment,” says Dennis Mack, president of Western State Design, an equipment distributor based in California. “We provide laundry equipment leasing options to all types of commercial customers, including hotels, motels, hospitals, sports clubs, linen rental, correctional facilities and municipalities—and all types of for-profit commercial laundries.”
Keith Ware, vice president of sales for Lavatec Laundry Technology Inc., an equipment manufacturer with a U.S. base in Connecticut, sees all types of laundries taking advantage of the leasing option.
“We don’t see much financing from publicly held companies due to their financial options and their size,” he says. “Most often, it is smaller, privately held laundries where ownership is looking to preserve capital and avoid large down payments. Most of the finance deals we work on do not require a large down payment, which is a big help to the borrower since they are conserving their cash.”
“The best part of leasing is being able to budget,” adds David Chadsey, vice president of sales for TLC Tri-State Laundry Companies, a laundry equipment distributor in the Southeast. “Parts and service can be expensive on machines as they age. Large electrical components and bearing issues can cost thousands of dollars to repair if they fail. Leasing takes all of the risk off the facility, and guarantees an operating machine at a fixed cost.”
Ware considers the preservation of capital the greatest benefit of leasing laundry equipment. He adds that leasing might have tax advantages as well, depending on the ownership structure of the laundry.
Mack adds that another benefit of leasing is that when the lease term expires, some equipment leases allow customers to simply return the equipment and acquire newer, updated laundry equipment that incorporates the latest technology with the updated payment program.
He says many long-term capital leases are full-term payout, with various options available to purchase at the end of lease term period. This allows the customers to acquire the equipment and pay for it with an amortization schedule that is affordable.
Tod Sorensen, Western regional sales manager for Continental Girbau, an equipment manufacturer with facilities in Wisconsin, says the equipment his company typically leases includes 30- to 90-pound washers, with associated tumblers and ironing systems.
Both Chadsey and Mack see similar equipment leased. Chadsey says most of TLC Tri-State’s leases involve washers and dryers in capacities from 60 to 160 pounds.
“We have also provided finishing equipment for specific customers, where the fit is right,” he says.
Mack says the equipment he sees being leased is 40- to 170-pound OPL washer-extractors, and dryers in similar capacities. Other equipment includes lint collectors, water heaters, boilers and laundry carts.
“We have provided financing for entire laundry plant equipment needs,” says Ware. “We work with our partner, U.S. Capital Corp., which has access to many banks and financial institutions that a small operator would not. Any purchase could have finance opportunities, but the final decision is not made by the manufacturer. It is made by the borrower after considering the variety of finance options developed by U.S. Capital. Since U.S. Capital offers both equipment leasing as well as equipment loans, we use the term ‘financing’ interchangeably.”
Mack says there are many sources available for equipment leasing. These include bank leasing, vendor leasing and third-party broker leasing. He says the decision about which source to select varies depending upon on the amount of capital required, terms, customer credit and other factors.
“It is also beneficial to work with a financing partner that understands laundry equipment, its life cycle and, if necessary, disposal value,” Ware says. “If a laundry approaches their local bank, the loan officer may not understand the equipment being bought or financed, so often they assume a larger risk on the purchase, which may lead to higher rates or up-front costs. Traditional banks will also typically ask for a considerable down payment.”
Ware says that if a laundry chooses an equipment lease structure, rather than a more traditional loan, there are a variety of structures available. He says that most equipment leases are structured as a capital or finance lease. The customer would choose a lease term ranging from 36 to 84 months, and at the end of the lease term, there is a fixed buyout ranging from $1 up to 10% of the original amount financed.
Sorensen sees typical lease terms from five to seven years, depending upon the amount of equipment. He says it varies by distributor, and the levels of support offered by the distributor all can be negotiated up front in the agreement.
“In some cases, distributors offer a buyout at the end of the lease term in order for the facility to own the equipment,” he says.
“Most of our leases involve a five-year term,” says Chadsey. “Depending on the application, there may be an up-front installation cost. Once the machines are installed, the price is a fixed monthly payment. At the end of the term, customers can buy the equipment, or re-up the lease with a brand-new machine.”
Ware says an operating lease (sometimes referred to as a “true” lease) is such that the customer would have a FMV (Fair Market Value) residual at the end of the lease term. The operating lease structure may offer tax advantages to the customer, as well.
Mack says an equipment operating lease is structured similarly to a renting program, and lease payments are considered operational expenses.
“The expenses do not show on the balance sheet,” he says. “A capital lease is a financing program that leased equipment is considered as owned by the lessee, therefore it should be on the balance sheet.”
There are various options for laundries at the expiration of the lease term, including buyout options, according to Mack. Additionally, there are municipal leasing programs available to local and state government, and the lease is qualified as tax-exempt.
When it comes to maintenance of leased laundry equipment, the responsibility is often shared by lessee and lessor.
Sorensen says that, typically, Continental distributors perform the regularly scheduled maintenance on the leased equipment.
Mack says, generally, the terms of an equipment lease exclude equipment maintenance or service. However, the manufacturer or distributor will conduct regular checks on the equipment or perform service on-demand or scheduled routine maintenance under a separate contract.
“Leasing for us typically includes financing the equipment plus a service agreement to keep the machines in good order with preventive maintenance (PM) and emergency service when required,” Chadsey says. “This type of arrangement seems to work best for organizations that do not have qualified in-house repair personnel.”
For Ware, financed equipment is maintained by the borrower as though they own it.
“If the equipment purchased is new, there are likely manufacturer warranties involved, too,” he says. “They must insure it for its full value during the finance term and, of course, should insure the equipment when the finance term ends.”
There are a few options for laundries when the terms of an equipment lease deal are up. Sorensen says a distributor will either remove the equipment, the laundry can continue with an extended term with the existing equipment or it has the option for purchase, or the laundry can receive new equipment and contract based on the facility’s specific needs.
“If, over the term of the lease, the dynamics of the laundry have changed, Continental distributors typically work with the account to determine if an upgrade is required and recommend changes with laundry design, workflow and production efficiency studies,” he says.
Mack says when the lease is close to expiration, the lessee may consider the option of returning the equipment and executing a new lease program, which will include upgrading or changing out the equipment.
“However, the life cycle of commercial laundry equipment generally exceeds the lease term of any program,” he adds.
“With the exception of a Fair Market Value lease, the borrower or lessee owns the equipment at the end of the term and the lender or lessor will release their UCC filings on the equipment,” Ware says.
If a laundry decides not to purchase the equipment at the end of the term, Chadsey says TLC Tri-State brings the machines back into pre-owned equipment inventory for sale.
“The popular lease models sell very quickly,” he says.
Of course, what happens to returned equipment depends on the condition of the pieces.
“The condition is typically very good because of regular PMs during the terms of the lease,” says Sorensen. “It’s either reconditioned, sold or scrapped, depending on its life cycle.”
Mack says a laundry looking to lease should be aware of a few things. First, be sure the company has a reputable service organization, and require preventive maintenance and emergency service in the contract. Understand all the costs involved, the length of term and what the options are at the end of the lease. Finally, make sure the lease equipment is new.
Ware cautions that leasing laundry equipment is not like leasing an automobile.
“While there is a large market for used cars, used laundry equipment purchasers are faced with the cost of removing the equipment, transporting the equipment to a new location and reinstallation of the equipment,” he says. “These costs can be significant and impact the value of used equipment.”
Have a question or comment? E-mail our editor Matt Poe at [email protected].