Financing for your New Laundromat Business

Contrary to popular belief, your bank is probably NOT the place to finance your new Laundromat. Banks see any new business as venture risk, and typically won’t even look at your loan application unless you’re already an established customer with current business activities and assets (in which case, you’re really just re-financing existing assets to build something new).

You’re going to need some cash, either from you savings, or by taking a second mortgage on your home or other real estate. But you DON’T need to have ALL the cash required to start a Laundromat.

Financing the start-up of a Laundromat may come from several different sources, but in any case the new-laundromat owner’s biggest piece of the financial picture is the actual coin-op laundry machines. All of the major Laundromat equipment manufacturers offer financing or leasing plans, either “in-house” or in cooperation with finance and leasing companies. It is important for you to understand the difference between the two terms, “financing” and “leasing”.

Financing allows you to purchase equipment by paying monthly payments, just like you are familiar with when purchasing a car. At the end of the financing term (typically 3 to 5 years), you will own the equipment outright. In order to gain your business, manufacturers may even offer low or “zero-down” financing, though typically the purchasers of equipment need to place a down payment of 15 to 25 percent of the Laundromat equipment price.

Leasing, on the other hand, is a variation on financing where the equipment company “rents” the equipment to you for a fixed term, typically 5 to 7 years. Leases typically result in either the equipment being taken back by the company at the end of the term, or allowing you to purchase the equipment for a price negotiated at the beginning of the lease. If you choose to lease your equipment, make sure your end-purchase price is specified in the lease agreement…NEVER sign a lease that calls for the equipment’s value to be determined by the leasing company at the end of the term.

It is very common for a lease to stipulate that you may purchase the coin-op washers and dryers at the end of the lease for just one dollar... this is called a “finance lease”. With this in mind, you might ask what’s the difference between financing and leasing…it all ends up pretty much the same, doesn’t it?

The primary difference is that at some point in the future, you may be able to use the equity built up in the Laundromat machines as an asset against which to borrow additional money (just like taking a second mortgage on your house). With a lease, the ownership of the machines remains with the manufacturer (or leasing company) until the end of the lease term. In addition, there are a myriad of convoluted taxation issues to be considered (by both the equipment company and yourself), too many of which to clearly address here. Your accountant will help you determine which is right for you and which might save you money on taxes. Suffice to say that you have several options besides paying tens of thousands of dollars up front for your equipment.

The second largest item in consideration of financing is the remodel of the premises in which you intend to place your Laundromat. Unless you are fortunate enough to locate a rental space for you business that was previously a Laundromat, you’re going to need to provide substantial “build out”. (By the way, if you DO find a space previously occupied by a coin-op laundromat, you should do some serious research to find out WHY they went out of business, and judge accordingly!) You will need to modify your Laundromat space to be able to provide hot and cold water and drain lines to all those washers, high-current electricity to all those driers, and all the other things that make a store a store: Counters, clothes-folding tables, chairs, linoleum floors, and a restroom are the bare minimum…if you’re building anything larger than the smallest coin-op laundry, you might need to include televisions, a kiddie-play area, snack bar area, etc. This is all in addition to the costs of the rental agreement itself, which will likely be several months rent plus a security deposit.

If you don’t have the cash on hand to pay for your Laundromat build-out (and this could easily reach into the tens of thousands of dollars…plumbers and electricians don’t work cheap!), your most likely source of funds is a second mortgage on yours house. If that’s not a possibility, explore these other avenues:

The SBA (Small Business Administration) offers a variety of loan programs for businesses just like Laundromats. While they can take a little longer and require more documentation than other sources, the SBA exists specifically for people with good ideas who have researched their potential business thoroughly and can argue conclusively that the business will succeed. Click HERE for a link to the SBA

Friends and Family: More small businesses have been started with this kind of “venture capital” than any other. If you’ve been trustworthy with your friends, family, associates, or even clients, and can convincingly show them a well-researched business plan, these can provide the most attractive means of financing.

Barter: Especially valuable if you personally know electricians and plumbers. Offer a percentage of the business or barter your particular skills for the Laundromat build-out. Of course you can also offer free laundry services.

Construction Financing: If you happen to be in an area especially hard-hit economically, you may find electricians and plumbers willing to take the job for little money now in exchange for monthly payments.

Real Estate Owner Financing: On occasion, you may be able to get the building owner to pay for your build-out. Where a retail space has sat vacant for a lengthy amount of time, the owner might be looking for any opportunity to fill the space and receive rent again. If the location in question actually works to your benefit business-wise, suggest the owner complete the build out and allow you to repay over several years in addition to the normal rent.  (see story in >>link>> start-up)  Also worthy of note in this category is under-development retail space. If an under-construction retail center is ideally located for your new Laundromat, contact the owner with your interest SOONER rather than later. The developer may be interested in building out your space at a considerable discount in order to be able to sign a lease well before the building is completed, and because the build-out can be accomplished considerably cheaper if done as part of the site construction as a whole. Do NOT, however, ever choose a location purely on the availability of owner-financed build-out…you’re BOTH likely to lose.

There are a myriad other number of items besides the laundry machines and premises build-out you will need, and financing for these smaller items will be more difficult. You’re likely going to need laundry carts, a cash register, change machines, soap vending machines…and everything almost any business might need like mops and buckets and janitorial equipment and on and on. While a few Laundromat equipment vendors have offered “complete packages” for lease or financing, you’ll generally get better prices buying these items from their respective manufacturers or distributors. Typically, you should consider all these items as ‘non-financeable’ and have the cash to purchase them.