Need to Finance Your Coin Laundromat?

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What is the best way to finance a coin laundromat?  Should I pay all cash for the store or should you finance it?  These are the questions I hear frequently.

The answer depends on:

  • The financing terms
  • How much cash you have to invest
  • How much cash flow you expect to pocket from your business each month

In most cases, it makes a lot of sense to finance the business though. So, if you’re looking at your financing options, here are a few choices available.

Seller Financing
I would argue that the best method for financing a coin laundry is to get the seller to hold a note for a portion of the purchase price (or the entire purchase altogether).  This is a win-win situation for both the seller and buyer.  Why?

From the seller’s perspective, the sale could throw him/her into a higher tax bracket and a good portion of the money received from the sale of the Laundromat would be eaten up by taxes.  In addition, the owner receives a steady stream of income, but now without the “headaches” of having to run a business.

For you, as the buyer, you don’t have to deal with a mortgage company and worry about loan qualification.  In addition, this gives you more piece of mind because the seller now has a vested interest in your business success.

Home Equity Line of Credit (HELOC)
In some cases, using a home equity line of credit to purchase a business that generates monthly cash flow is a really smart idea. I like the HELOC method because the interest rates are usually lower than those of traditional business loans and the loans are easier to qualify for, especially if the property is your principle residence.  In fact, if you choose the option of paying interest only on your HELOC, you can maximize your net cash flow thus increasing your overall return on investment.  I used this option to purchase our very first store.

Small Business Association Loans
This is probably the most common loan for a business of any kind.  This is a full documentation loan which generally requires 2 to 3 years of your personal income tax returns and may require you to use your primary residence as additional collateral. They may also want to see at least 2 years financial records on the business (Profit & Loss Statements and Balance Sheets), plus the tax returns of the seller. If the store has had declining revenue over that period, there is a good chance that they will decline to loan, or require a greater amount for the down payment. A word of caution, SBA loans can take anywhere from 45 up to 60 days to close, so make sure your escrow period is long enough to account for the lengthy funding process.

Private Investor Financing
Sometimes you can obtain financing from private investors to help you with your purchase. This can come in several forms, but here are a few of the more common ones.

Hard Money Loan (HML) – These are loans made many times by private investors in the secondary loan market to those who may have a hard time qualifying for a traditional SBA loan. These loans typically have higher interest rates ranging from 2 to 5% above the prime rate and have shorter term lengths (24 months or less).  The primary advantage to borrowers is that these loans can fund in as little as 3 days.

Promissory Note (Prom Note) – This is a loan where the lender holds a note for say 5 years, at maybe 10 to 15% interest. In most cases, you need only make the interest payments either monthly or quarterly, with a balloon payment at the end of the term of the loan. Prom note investors are looking for a higher return on their investment and essentially offer the borrower a no or low documentation loan.

Direct Investment – In this example, you give up a piece of the business and profits to get the project funded. Why would anyone do this? Well, fifty percent of $4K a month is better than 100% of nothing! Besides, there are ways to structure it so the partner becomes a silent partner and gives you money up front.

In conclusion, I’ve shown you various options when it comes to financing your store.  Wait… Why didn’t mention paying full cash?  You end up negating leverage, but that’s another topic for another day.

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About Brian Brunckhorst

Brian Brunckhorst is one of the top experts on laundromats. He is dedicated to teaching entrepreneurs how to find, evaluate, analyze, and buy a coin laundromat. Brian is also the author of the best-selling eBook, “Secrets of Buying and Owning Laundromats”, and the Laundromat Teleseminar System.