CHICAGO — When dry cleaners purchase new equipment, one thing is sure: They need that equipment to pay for itself, and sooner is better than later. In Part 1 of this series, we examined the advantages in updating or replacing aging equipment. For Part 2, we’ll look at options cleaners have when it comes to lining up financing to retools their plants.
Funding the Future
Investing in new equipment as the nation emerges from lockdown isn’t for the faint of heart. Matt A. Lipman, sales representative for equipment manufacturer Union Drycleaning Products, believes that anxiety over the unknown is a significant factor in many dry cleaners’ decisions to hold off on updating equipment. Even though long-term interest rates are at an all-time low, there’s a reluctance to borrow money.
“The biggest thing I hear is the fear of taking on new debt,” he says. “That’s why people look for grants or save up money, because they’d rather pay in cash than have a liability hanging over their heads. I kind of find this counterproductive, because when your business is fluctuating, it seems like the time when you’d want to hold onto cash.”
Securing financing in this economic environment can, of course, be challenging. Sometimes, dry cleaners have to search beyond the obvious.
“Go and see if you have a community development financial institution, or (if it applies) a minority development institution in your area,” says Sarah Crozier, communication director of Main Street Alliance, a small-business advocacy organization. “Those are more community-oriented financial and lending institutions that can work with you not only on the loan, but also potentially on technical assistance and training.”
Finding a financial professional with whom you can discuss the matter may help secure funding, rather than simply relying on an impersonal credit score.
“As you’re starting out, or you’re looking to expand, particularly because of the pandemic of this past year, you’re going to see a lot of hits to entrepreneurial credit,” Crozier says. “If your credit score is the only thing that approves you one way or the other, sometimes having an ‘entrepreneur’s’ credit score can be a detriment. So, look at those types of alternative financial institutions, as well as community banks and public banks, if your state has one. That’s one way to get the support and resources that you need, if a typical bank won’t look at your application.”
When planning on a retrofit or an expansion, however, don’t jump at just any offer. Mistakes made at this point can haunt a business for years — or end it entirely.
“Not all finance companies and finance documents are equal,” says Brad Karpinecz, commercial equipment finance specialist for NewLane Finance Co., “so ask questions. And if somebody is not really willing to slow down and answer those questions, stop and think, ‘Why?’ Because 99.9% of the lenders in the industry are reputable and upstanding, and they’re going to be very transparent.”
More to the point, if the lending agreement isn’t straightforward and, ultimately, simple to grasp, that could be a problem down the road.
“If you don’t feel that way about your borrowing solution — that it’s a very simple program, it’s very transparent, and you understand it — then you should probably look at a different supplier for that financing,” Karpinecz says.
“No matter what loan product you’re looking at, you want to make sure that it’s not a predatory product,” Crozier says. “Something that a lot of people don’t understand is there are consumer protections for personal loans, but those consumer protections do not cover small business. There are predatory loan products out there with high interest rates and high fees that could get you into a debt cycle you don’t want to be in.”
Helping the Environment and the Dry Cleaner?
There are options that cleaners might not be aware of when it comes to financing. In some cases, environmental concerns could actually help a drycleaning business.
“Many states and municipalities across the country are really looking to move away from perc,” says Dru Shields, director of accounts at EnviroForensics LLC, “so many of them do see the value in offering either options for grants, or even low-interest-rate loans, and sometimes a combination of the two, for dry cleaners looking to make the move from perc to alternative solvents. I’ve even seen some where they’ll also reimburse a dry cleaner for a percentage of the cost for professional removal of old machinery. So, there are those options.”
Environmental concerns can certainly complicate matters, but being proactive can help alleviate the pain points.
“Obviously, the sooner that they jump on preparations and get their ducks in a row, the better,” Shields says. “There are a number of things that dry cleaners should be considering if they’re looking at updating or replacing old machinery, especially old perc machines.
“If you lease your space, there may be some stipulations or requirements they would need to work out with their landlord. Also, it’s important to make sure that the removal of any machinery be done by the book. For instance, be sure that your waste hauler removes any perc from the site, or if there is any residual perc inside the machine, make sure that that is removed and disposed of properly before the machine itself gets hauled away.
“Lastly, it would be a good time to look at buttoning up any environmental issues. If your location has a history of perc usage, there could likely be environmental contamination issues that will need to be addressed. So, it’s really the perfect time, especially if the space is going to be empty or even partially empty, to do some environmental investigation.”
Another ally that dry cleaners might not be aware they have is insurance policies of the past.
“Historical insurance is an important part of every dry cleaner’s future,” Shields says. “It’s an unfortunate truth that drycleaning businesses that have operated at any location for an extended period of time, especially back in the day of the early-generation machinery, have some underlying environmental issue that could pop up for a number of reasons.”
The key to cleaning up these environmental problems — and possibly financing newer, more earth-friendly equipment — could lie in the past.
“Dry cleaners can often use old insurance assets, whether it’s their own policies or even from operators before their time,” Shields says. “Many times, we think that once a policy period is up that the policy is no longer of use, but that really isn’t the case. Old insurance policies really can be worth millions of dollars to help shield dry cleaners from environmental liability. Insurance archaeology is a method to help track down those old policies, when a dry cleaner is unable to track down these old records themselves.”
Come back Tuesday for the conclusion to this series, where we’ll look at some of the factors that should go into decisions for plant upgrades. For Part 1, click HERE.
Have a question or comment? E-mail our editor Dave Davis at [email protected].