CHICAGO — Let’s face it, industrial laundry equipment isn’t inexpensive.
That means if a laundry operator needs to purchase new equipment or wants to expand, it will likely need to secure financing for the purchase. But what does securing financing in 2018 entail?
American Laundry News spoke with a financing company and several laundry equipment manufacturers to find out what is affecting financing, along with suggestions to help laundry operations navigate today’s financing climate.
Currently, banking regulations and rising interest rates are two key factors influencing the ability of laundry operators to secure equipment financing and competitive terms, says Chris Lewis, a senior regional manager at Summit Funding Group, an Ohio-based company that provides equipment lease and finance solutions to businesses across the United States and Canada.
“Over the last number of years, banks and other depository institutions have tightened restrictions and become increasingly stringent when evaluating corporate credit profiles with heightened criteria that businesses must meet in order to qualify for loans and leases,” he says.
As a result, Lewis says many business owners are adapting to stringent regulations by turning from traditional lenders to independent finance companies like the Summit Funding Group.
“We like to look beyond the bottom line and take the time to understand the ebbs and flows of a business, so if a prospective borrower is experiencing a down cycle, it won’t necessarily impact their ability to secure competitive terms and rates,” he shares.
Further, Lewis says rising interest rates will affect financing in the long term.
“While the Fed has taken a momentary pause, there are no indications that rates will see a pullback anytime soon, so there is still a significant benefit to locking in fixed-rate financing now in order to take advantage of historical lows, while simultaneously benefiting from current Section 179 Bonus Tax Depreciation policy,” he shares.
As most bank lines of credit are floating-rate facilities where interest will likely rise over time, the ability to capitalize on fixed-rate options that most independent finance companies offer is important to consider, he says.
Keith Ware, vice president of sales for equipment manufacturer Lavatec Laundry Technology, adds that banks usually have to research various factors, such as what the value of the equipment is as used, its life expectancy and how is it utilized.
“These are questions our lending partners don’t need to ask since they have familiarity with the equipment,” he says. “Most banks don’t want to get into large laundry equipment leasing if the parties don’t have the capital for large down payments.”
However, Ware points out that there are advantages to working with a local institution.
“The relationship you may have with your local bank is often better, since they may have been with your business for years,” he says. “Most times a manufacturing partner in lending does not know your business or your team and will require more detail on your financials and company’s business.”
That being said, there are advantages to financing through manufacturers. Ware says Lavatec works through its finance partners to offer a variety of finance and lease purchase opportunities.
“The finance partners working with Lavatec can offer a variety of options to meet your budget,” he says. “The key component is these lenders understand the intricacies of laundry equipment that your local banker may not be familiar with. By having a partner who understands the cost of equipment and installation as part of the project, it often makes the process easier.”
Laundry equipment manufacturer G.A. Braun launched Braun Financing earlier this year to provide U.S.-based customers with a variety of financing options on new and certified remanufactured Braun equipment.
“Given our growing product line, it was a logical move to enter the realm of product finance,” says Joe Gudenburr, president of Braun. “We have a fundamental understanding of our customers’ business requirements and financial demands. Consequently, we are more likely to not only grant loan approval, but provide financing solutions that will better enable the operations of our clients’ facilities.”
However, Ware cautions that manufacturers often use a third-party finance company, whether they are open with this fact or market them as their own finance units.
“Manufacturers who do some form of lending are often higher priced than banks, since they need to profit on the money they are lending after utilizing their credit line for financing,” he says. “I recommend knowing your numbers and making sure that low financing or lease payments are not leading to a large buyout at the end of the lease.”
“We work with a couple of proven, financially sound, lending institutions to simplify the process of procuring the equipment they need, when they need it,” says David Netusil, manager of sales support and marketing for JENSEN USA in Panama City, Fla. “Our involvement assists the customer in obtaining the best possible terms.”
As Ware points out, knowledge is very important, especially when it comes to the terminology used in laundry equipment financing.
“You hear the term ‘leasing’ a lot in our industry, but the reality is that the vast majority of the loans we write are equipment finance agreements (EFA),” says Jason Courter with Milnor Capital, the financing division of manufacturer Pellerin Milnor Corp. “We offer terms that range from 12-84 months. One thing that sets us apart from competitors in this space is that we offer fixed rates. With interest rates on the rise, our customers value the opportunity to lock in their rate for a given term. No one likes to see their payment increase.”
Ware points out that it’s rare for manufacturers to take equipment back, like a car lease. More often than not, these are capital leases and the equipment is purchased at the end of the lease.
“But be knowledgeable on the residual price after the lease term,” he cautions. “Low lease pricing means a much higher buyout at the end of the lease, so make sure all your costs are spelled out in the agreement. This will reduce the chances of unpleasant surprises.”
“I see a few advantages of financing through a manufacturer,” says Courter. “First off, you know you’re working with a credible lender who is familiar with the specific product, dealer support, etc. Customers want a lender they can trust. No surprises. In our case, we’ve been around for a long time and have a track record of providing customers with competitive terms and superior customer service.”
Another advantage of financing with a manufacturer, according to Courter, is working with a finance company that has experience in the industry.
“We have an understanding of the needs and challenges that commercial laundries, assisted-living facilities and hospitality companies have,” he says. “Customers also get the benefit of working with a finance organization that is invested in the success of the manufacturer. We will do everything in our power to get an approval for a customer and terms that meet their needs to encourage the customer to move forward with the purchase.
“Also, because of our relationship with the sales team, we are able to work together to make sure that the customer has a great experience working with our brand rather than going through separate sales and financing processes.”
Courter also says Milnor Capital has the ability to be creative to meet a customer’s needs.
However, Lewis cautions that from his perspective, the goal of an equipment manufacturer is to make the sale, not necessarily provide an operation with the best possible financing option. Attractive incentives offered—such as 0% interest—are essentially subsidized financing added back to the purchase or lease price, he says.
“When a laundry operator is considering financing through a manufacturer, the key is to negotiate sale price first, and then financing,” Lewis advises. “Alternately, working directly with an independent equipment financing company like Summit can allow a laundry operation multiple options with regard to terms and structures so that an operator can determine an option that fits best with its business goals, tax position, bank covenant compliance, etc.”
“The only challenge I see when financing with the manufacturer is that we’re going to be biased in favor of our product,” Courter counters. “We believe that Milnor makes the best equipment in the industry and we’re not afraid to share that belief with our customers.”
While laundry operators have to make a choice when it comes to where it gets financing, overall, there are several actions that they should take in order to help ensure the best financing terms possible. A couple of the most important are maintaining a strong payment history with vendors and lenders and also keeping strong financial reporting standards, according to Lewis.
“For example, if an operator is considering a laundry facility expansion where large-dollar equipment purchases require both extended lead times and deposit payments to the vendors made on behalf of the lender, knowing that the operator pays on time and has proven operating performance through audited financial statements will give lenders far greater comfort, thus driving interest rates down during unsecured integration periods and lease term,” he shares.
“While auditing one’s financial statements can be more expensive than completing a third-party review and isn’t for everyone, it is certainly an investment that will pay for itself over time in the form of reduced borrowing cost.”
“We explain to our potential customers that if the financials are not good, don’t expect a third-party lender to be more lenient than a local bank,” Ware says. “All finance institutions do everything possible to avoid risk. While borrowing money may be cheap in today’s market, it is rarely being given to companies that pose default risks.”
Lewis adds that a common pitfall is when businesses do not fully understand the lease documentation they have signed, including end-of-term options and lease termination policies. He stresses that it is critical to read the fine print and identify a trusted finance partner when entering into an equipment lease of any size.
Laundry Equipment Financing Made Easier (Part 1), March 15, 2016
Laundry Equipment Financing Made Easier (Conclusion), March 17, 2016