Financing a Dry Cleaning Business in California
The dry cleaning market is facing some changes to the industry, but individual businesses are thriving and growing in California. About 30,000 dry cleaners generated $9.1 billion in revenue in 2017. While that sum is expected to drop to $8.7 billion by 2022, there have also been notable success stories in recent years.
Whether they are storefronts with a few family members running all operations, or have multiple outlets and dozens of employees, the most successful dry cleaning businesses are trying new business models and offering new services. Small business owners seeking to expand their dry cleaning business will find that the Small Business Administration (SBA) 504 loan is an accessible and affordable sources of financing.
Financing Innovation in the Dry Cleaning Industry
There is no one-size-fits-all approach to financing a dry cleaning business. A dry cleaning business can be started for less than $50,000, or it can be worth several million, depending on how innovative you are willing to be in an increasingly competitive market. The most competitive businesses will offer expansion to combat issues in the current market, and can mean taking on corporate clients like restaurants, caterers and events planners to supplement or replace household fare.
Another approach is to add services, such as pickup and delivery, alterations, rug and drapery cleaning, same-day service and even off-season clothing storage. Location is an important issue when designing a full-service dry cleaning business model. Upper-income households use cleaning services most regularly, and market research has shown that people tend to use the cleaner closest to their homes.
There are also numerous franchising opportunities for dry cleaners. The creation of Zips, the top-rated dry cleaning franchise on the Enterprise 500 list (at No. 153), is an inspiring story of what small business owners can do with a common goal and an innovative spirit. Besides name recognition, training and advertising benefits, franchises can provide access to financing that might not be available otherwise. Besides premises to house their operations, dry cleaners require a comparatively large amount of rather expensive equipment to function.
Getting Incentives From California’s Environmental Standards
When attempting to finance any business, it’s worthwhile to consider state and federal environmental incentives. This is especially relevant in the dry cleaning industry, since the safety of their cleaning solvents is a major concern within the industry and in California specifically.
The vast majority of dry cleaners use perchloroethylene (often referred to as “perc”) as a cleaning solvent. Perc was hailed as a major safety advance for the industry when it was introduced in the 1930’s due to the fact that it is non flammable. However, it is a likely carcinogen, and several other health risks have been ascribed to it. The State of California banned the sale of new cleaning equipment using perc in 2007 and is set to ban its use entirely in 2023.
The use of perc can have grave consequences for a business’s financing as well. Besides making it harder for a business owner to secure financing, the use of perc can have repercussions at the site of the business far into the future. The alternatives to perc are “green” only in comparison to it, and all of them have serious drawbacks. The current gold standard of clean dry cleaning–captured liquid carbon dioxide mixed with detergent–is difficult to obtain because of the high cost of the technology.
California offers a $10,000 incentive to dry cleaners currently using perc to switch to safer technology. Since the environmental risks of dry cleaning are well known, switching cleaning technologies can be valuable for advertising as well.
For example, TMC Financing has worked with Menlo Shirt Laundry & Dry Cleaners in Menlo Park, CA. They used a 504 loan to purchase their laundry facility to enhance their business for a total project cost of $1,287,500. They are a minority women-owned business that uses the GreenEarth Cleaning system—one of a number of similar solutions. More information about their loan can be found on the TMC website.
Financing a Dry Cleaning Business with an SBA 504 Loan
So how would you finance your expansion? While dry cleaners have the same financing options as all small businesses in the United States, the industry is not typically targeted by banks or nontraditional lenders. Therefore, the owner of a dry cleaning business who is seeking to expand has to make their own way through various options.
A borrower should remember that banks loans are the hardest to qualify for. They also typically involve balloon payments. Finance companies and online lenders will lend more readily, but at less advantageous rates. The SBA 504 loan offers an easy prequalification process and ample funds for your small business venture.
The 504 loan provides affordable financing for small businesses like dry cleaners and encourages lending by conventional lenders (banks and credit unions) by providing them with low-risk conditions. The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender to provide a loan in three parts:
- The first is a loan from a conventional lender—a bank or a credit union—for 50% of the total project cost. The amount and conditions of that loan are determined separately, and it becomes the first mortgage. TMC can help match the borrower with the perfect banking partner for this loan, if requested.
- The CDC facilitates a separate SBA loan of 35% of the total at a fixed, below-market rate. Projects eligible for the SBA’s Green Energy Program can receive up to $5.5 million. This is the second mortgage.
- The borrower contributes 15% to the loan as down payment.
The 504 loan has a 10- or 20-year term, with a 25-year option recently included. It is fully amortized (so there are no balloon payments).
A 504 loan can be used to:
- purchase land or buildings
- construct, improve or upgrade buildings
- purchase equipment with a service life of ten years or more
- refinance conventional debt
A 504 loan is flexible enough to finance independent businesses or franchises.
Overall, a business owner who enjoys finding new opportunities and new solutions to familiar challenges is likely to find dry cleaning an exciting venture and do well in it. And a 504 loan provides opportunities for dry cleaners to access affordable financing to expand their businesses and decrease their environmental impact.
You can find out more about 504 loan financing and the Green Energy Program from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.
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