GETTING AN SBA LOAN: THINGS YOU NEED TO KNOW
Getting a business loan is tough -- especially these days. But the Small Business Administration can still be
a great lending partner. Chasing a Small Business Administration loan these days is a little like going to a
carnival and expecting to win one of those giant stuffed animals. It might happen, but the odds are probably
against you. As Christine Reilly, the president of small business lending for CIT, points out, about a year ago,
the Federal government tinkered with the formula for getting an SBA loan, and for a brief shining time, even
during the Great Recession, SBA loans were easier to come by.
In what was called "the 90 percent guarantee," the SBA guaranteed 90 cents on the dollar for each loan, instead
of 75 cents, and waived the borrower's fee, "which could be as much as 3 percent," Reilly says. Meaning banks
and business owners
both had added incentive. And so SBA lending jumped -- until the the 90 percent guarantee ended in May, 2010.
And now? In June, according to Reilly, lending dropped 74 percent. Of course, it's still possible to get an SBA loan
and it can be a great way to infuse your company with cash. But how can you navigate the red tape and make sure
all the effort pays off.
Here's three things you need to know to have a chance at getting an SBA loan for your Laundromat.
First, make sure you learn and understand the terms used in lending. Second, make sure you can
document everything on your application. Third, make sure you know how to present yourself to a
lender.
1. KNOW THE LENDING LINGO
If you want to sound like you know what you're talking about when you start the SBA loan dialogue, here's a crash course. The SBA's flagship loan -- the one that has the most flexibility and has been the most popular -- is the 7(a) Loan Program. It's aimed at startups and existing small businesses, and within the 7(a) program are four types of loans: the express program and the special purpose loan program are applicable to Laundromats. The express program is aimed at getting you a loan as quickly as possible. The special purpose loan programs are even more targeted -- designed to help a business that's been negatively affected by NAFTA, for example.
There is also the 8[a] program, which is aimed at "socially disadvantaged individuals," according to one of the SBA's FAQ guides. Odds are, you'll be applying for the 7[a] program or perhaps an SBA 504 loan, which you'll want if you're using the loan for real estate or infrastructure, such as buying land or expanding your building.
2. DOCUMENT EVERYTHING
You can't get a loan simply by asking nicely or scrawling something down on a napkin. So what should your paperwork look like? Consider following the advice of John Martinka, vice president of "Partner" On-Call Network. His specialty is getting SBA loans and he has some smart advice for winning the hearts and minds of any lender: "Prepare a book on the company and yourself," he suggests. "My clients use a 10-tab set with business and personal financial statements, tax set with business and personal financial statements, tax returns, accounts receivable and accounts payable aging, a short business plan, reference letters and whatever else is appropriate. Bankers see a lot of potential loans. A complete package gives them everything they need to make an intelligent decision. It also allows others who are part of the decision process, and who didn't meet the borrower, to get a complete understanding and see some professionalism. Don't just throw a couple years of tax returns on the desk and expect a loan."
Reilly seconds that, noting that she sees a lot of "shoebox accounting," and business owners like that don't get very far in the process before being told to go to the end of the line. And in that documentation, "tell a good story," suggests John Reddish, president of Advent Management International. That story, Reddish says, should give your lender a good feel about both your company and what your plan for your loan.
"Three or four years ago, when credit was flowing and there was lots of
money,some lenders were making loans with not a lot of the borrower's
skin in the game," Reilly says. That isn't the case any longer. "In fact, the
SBA requires that the lender put up all available collateral, which may
include the equity in your home, against the loan, and when some people
realize that, they don't want to do it." Of course, your business may have
plenty of assets to offer up as a replacement for not paying back the loan,
but realize that you're going to have to put down something, and that could
be your mortgage or even your spouse's assets. "That's the norm," Reddish
says.
3. PRESENT YOURSELF AS A SERIOUS BUSINESSMAN
Obviously, you want to get a sense of what your lender wants to see in a
business that they plan on giving money to. So if you really want to be
clever and proactive, Reddish offers this tip: "If you can get a copy of your industry's Annual Statement Studies Report from the Risk Management Association or from a bank member of the association and compare your projections, you increase your chances of getting the loan because you'll know what the industry norm is -- the norm that your bank might be comparing your performance against. If you fit the norms, your chances are enhanced. If not, your chances are reduced or eliminated."
Yes, risk is in your blood. You've always felt that your ability to turn improbable ideas into profits is one of your most admirable qualities. You liken yourself to a sword swallower, a tightrope walker, Evil Knievel of the business world -- OK, you get the point. Fine, brag about your penchant for risk to your friends or family. You have every right to be proud of your improbable accomplishments. But resist that when talking to a lender. If you've got a solid business and can make a good case for an SBA loan, the last thing you need right now is to give your lender the idea that giving you money is any riskier than it already is.
Lenders want to see that they're lending money to a solid pillar of society, not some fly-by-the-
seat-of-his-pants entrepreneur. So if you have a family-owned Laundromat that's been around
since 1958, and you'd like to expand so you can service more customers -- you're probably in
luck. If you want to expand your business to add a tanning salon, then, well, good luck with that.
Not that we want to discourage risk-taking, but just know that traditional lenders hate risk.
"Stick to what you know," Reilly advises. "This isn't the best environment to go way outside your core
business."
BACKGROUND
When you first start to look into buying a Laundromat most buyers know enough to inspect the washers, dryers and other equipment. You probably go in and check out how the machines wash your own clothes. Good idea that you're looking at the business operation but you also need to look at yourself. Most sales of Laundromats require someone to borrow money in order to make the purchase.
Sources for these loans are often the buyer's bank, equipment manufacturers, distributors, owner
carry-back loans, SBA loans and second trust deeds on other real property owned by the buyer. It
is difficult to buy a Laundromat with little or no money down. Most of the time an amount between
25% to 50% of the total purchase price is required by the buyer. Lending institutions look at three
areas when making a business loan. First, the credit history of the applicant, or how well have you
repaid your previous loans to other people. Second, lenders look for alternate means of repayment
(your overall financial condition) including income from your job, real estate you own, insurance
policies, retirement funds, stocks, bonds and other investments. Third, lenders look to your exper-
ience in the business; most prefer to see three years of successful operation by the applicant in the
same type of business.
SBA LOANS
You've heard of them, but they're pretty hard to get because they look at the three items listed above but they also want to see the books and tax returns of the Laundromat including those of the people who operated it before you. They want to make sure that the cash flow can service the loan payment. It's sometimes very hard to get someone who's selling their Laundromat to provide these records and tax returns. We have an excellent source for SBA funding through one loan officer who has been developed over the years with excellent results on customers referred to her bank.
COMMON SOURCES OF FUNDING
Here are the common sources of funding for buyers of Laundromats:
1. Cash from checking and savings accounts
2. Conventional bank loans
3. SBA loans
4. Loans (or leases) from companies specializing in Laundromat loans
5. Retirement funds (401k, pensions and IRA accounts)
6. Sales of stocks and bonds
7. Gifts from family
8. Loans from family and friends
9. Certificates of deposit
10. Second trust deeds on real property owned by buyer
11. Lines of credit from buyer's bank
12. Seller provided loans
13. Credit card financing
14. Loans from manufacturers
15. Proceeds from the sale of personal property or other real estate
16. Trades of real property or personal property
WHAT ARE MY CHANCES OF GETTING A LOAN?
If you fill out one of the forms on this web site, we should be able to assist you in finding a good source of funding for your particular situation. Being pre-qualified makes buying a Laundromat easier and less stressful on both the buyer and the seller. All responses are kept strictly confidential and are used to obtain credit approvals and financing commitments from industry sources.
FINANCING QUESTIONS AND ANSWERS
KOREAN BANKS IN CALIFORNIA
In Southern California, there has been a large influx of Korean investors in the Laundromat business. As a result, a number of the local Korean banks have developed lending programs specifically aimed at lending to Laundromats.
Armed with this knowledge, it's a great ides to Google "Korean Banks" and give a few a call to see which of the banks are currently interested in Laundromat financing. These banks can often offer longer payback periods and sometimes lower rates, than some tradtitional Laundromat financing entities.
The larger banks, such as Wells Fargo, Bank of America, Chase and others do not appear at this time to be aggresively seeking Laundromat based loans.
sample example of a financing statement
