Even for pizza restaurants with a solid track record of success, it can be extremely difficult to obtain funding for growth. Why are lenders so skittish? Considering the industry’s over-saturation and its notoriously high failure rate, their reticence is understandable. There are other deterrents as well.
“Unless they own the building, restaurants typically lack collateral assets,” says Charles Botchway, director of IPA Advisory & Intermediary Services LLC, based in Buffalo Grove, Illinois. The company provides business fund-raising to small-to-medium-sized businesses (those with annual revenues under $50 million). “They also typically have poor cash management — they tend to think day-to-day rather than long term, and there aren’t always good controls in place to monitor the inflow and outflow of money, so theft is a big problem.”
Compounding the challenge, is that many owners automatically approach the nearest bank rather than investigating other (perhaps more receptive) alternatives, says Chris Lehnes, vice president of business development for CIT Small Business Lending, an SBA lender headquartered in Livingston, New Jersey.
Following, we offer advice from these and other lending experts (all of who make loans to the restaurant industry) on how to better your funding prospects.
Before You Approach
Plan ahead. Nothing turns lenders off faster than lack of preparation. “Do your homework,” Lehnes says. “Don’t show up and have the lender ask you questions that you can’t answer.”
“Get organized, show you’ve thought things through,” says James Hojnacki, senior vice president and chief credit officer of Liberty Bank, a full-service community bank based in Twinsberg, Ohio, that focuses on small-to-medium-sized businesses (sales from $1 to $20 million).
Be clear about your request –– what you need, how the money will be used and how it will be repaid, Hojnacki says, adding that having a thorough business plan at the ready is essential.
Lenders will also look at your:
Management team and its strengths, experience and skill.
Industry background and track record.
Working capital. You should bring a sufficient level to the table. For start ups, this would be about 50 percent of what it takes to get the operation going and to keep it running for a period of time, says Robert Filipiak, executive director for the Cascade Capital Corporation, an Akron-based certified development company that participates in SBA programs.
Projections. Owners should be able to chart out monthly what they’ll need to keep the business running for two years, says Filipiak.
Demographics/competition. What businesses would supply the lunch traffic? How many people would come in for dinner? What’s the competition in the surrounding 10-mile radius?
Be ready for some grilling. For example, Hojnacki always asks applicants:
What skills, talents, and experience do you have that will make you successful? What’s your unique selling position? “I’m looking to see if applicants have a realistic sense of the competitive environment,” he explains.
How much money are you personally investing? “If you have a substantial investment in the business, then you have a vested interest in succeeding,” he says.
What are your contingency plans in case you don’t achieve your goals as quickly as expected? Is there additional capital? “People are overly optimistic about the time it takes to open a business,” Hojnacki says. “I’ve seen people run out of money before they open the doors.”
And there’s an important preliminary question you should pose, he says. “Ask if the lender has lent to restaurants. If not, you may want to go elsewhere.”
Research Your Options
Check out programs that would enable you to acquire backing in addition to the bank loan you’re seeking, says Hojnacki. The SBA offers several, say Filipiak and Lehnes.
“People think SBA loans are only for start ups or troubled businesses, but they can be good for successful, established businesses,” says Lehnes. “And often, their terms, rates, and conditions are more favorable than a bank’s.”
Consider the following two:
7-A: The lender extends a loan and the government guarantees up to 85 percent of it, explains Lehnes. There’s a maximum loan amount of $2 million. To qualify, the business must be owner-operated and small (earning less than $6 million in annual revenue for all sites). The money can be used for starting, expanding, or buying an intact operation, Lehnes says.
504: This assists small businesses in conjunction with other lenders. “We take a secondary role/lien position in terms of funding, providing up to 40% of the funds necessary to purchase fixed assets,” Filipiak explains. “So, if a bank doesn’t want to provide 75-to-80 percent of the funding, with our program, they can do up to 50 percent, perhaps making them more willing to loan.”
This program allows you to finance major capital expansion projects such as buildings, equipment purchases (see sidebar) or the acquisition of other businesses. To qualify you must have a net worth of less than $ 7 million, or most recent two years average net profits of less than $2.5 million, says Filipiak.
Lehnes suggests that operators seek out SBA lenders identified by the SBA as “certified” or “preferred,” which indicate lenders experienced in the intricacies of processing SBA loans.
“These are government programs, so there are a lot of rules, regulations, and paperwork,” he says. “Working with an inexperienced lender could slow the process down. Also, look for those that lend to restaurants. Owners shouldn’t have to spend time educating lenders about their industry,” says Lehnes. “They should focus on what’s most important—location and management skills.”
| Keep up with the latest trends, profit making ideas, delicious recipes and more. Delivered hot
and fresh to your email every Wednesday.