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Asking banks for loans or lines of credit can be a daunting prospect.

6 Critical Factors in Securing Restaurant Financing

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These tips can help Italian brands secure cash for growth.
By Peggy Carouthers May 2019 Finance

With rising wages, real estate, and ingredient costs, as well as increasing consumer demand for more efficiency, better-quality food, and more mobile technology, restaurants are feeling the economic strain, and it doesn’t look like costs will go down anytime soon. Whether launching a new concept or expanding or upgrading an existing one, securing financing is a critical piece of the foodservice puzzle.

Yet asking banks for loans or lines of credit can be a daunting prospect. Not only is the approval process sometimes confusing, but understanding loan terms and forming relationships with bankers can seem overwhelming—particularly for smaller chains and independents.

Here’s a quick guide to how Italian restaurants can use financing to improve their loan prospects and make sense of the process.

1. Think About Character

Though financials are an important consideration, they aren’t the only factor banks think about when deciding to offer a restaurant brand a loan. One of the most important factors is the leadership team’s personalities.

“At Live Oak, we describe it as the ‘eye of the tiger.' This means, is someone putting all their energy and focus into succeeding?” says Sims Richardson, senior loan officer at Live Oak Bank.

Banks want to see that leaders will work hard to make the brand successful. The restaurant industry isn’t a passive business, and lenders want to know owners, franchisees, and operating partners can  demonstrate a willingness to be on-site and driving operations. Additionally, leaders should be thinking about the future and have plans in place for unforeseen business disruptions.

“For example, what if there’s construction outside your restaurant?” Richardson says. “Do you have a plan in place to sustain three or four months of lower revenue and still pay your bills?”

2. Personal Assets

It’s no surprise banks look at finances and credit histories to determine whether a particular applicant would be able to pay back a loan. Lenders will look at personal assets, debts, and other financial liabilities and obligations, but that’s not all they look at.

Though most restaurants have funding from outside sources, banks want to see that restaurant leaders have skin in the game. They want to know what kinds of personal investments applicants plan to make in their businesses.  

“Contributing personal assets demonstrates you are willing to take a personal risk for the sake of your business,” Richardson says. “It shows that you are betting on the business to succeed.”

3. The State of the Industry

Though the economic market may not be within a restaurant’s control, it is an important factor in any brand’s success. Not only will banks look at outside factors that may impact a brand’s financial viability, but they also want to make sure borrowers understand the conditions they will operate within and that they have taken appropriate measures to withstand these conditions in their business plans.

“Every concept ebbs and flows, so we look at the franchise concept itself and standard unit volume increases or decreases,” Richardson says. “We also want to make sure borrowers understand the conditions of their particular market, such as labor costs, and what they can expect based on their location.”

4. Collateral

Collateral may not be as scary as many borrowers think. Though many loans require collateral, such as someone’s personal property, collateral is a way banks prepare for a worst-case scenario—a defaulted loan. Generally it is a personal guarantee from primary owners and a lien on business assets, Richardson says. But banks don’t want to use it if they don’t have to.

“We have to have collateral for a loan, but we really have no interest in taking someone’s house or personal property,” Richardson says. “It costs us more money in the long run. The most important collateral is the personal guarantee and the lien on the business, because at the end of the day, it's a cash flow of the business and the operator pays it back.”

5. Cash Flow

In addition to personal assets and collateral, projected cash flow is an important financial consideration. Typically, banks take into consideration projected earnings, the costs of doing business, and the personal and business debt for each borrower.

“What’s most important in the cash flow is that our borrower is in a position that will result in significantly greater income through the loan,” Richardson says. “With personal debt we want to see if those are reasonable relative to the borrower’s situation.”

6. Relationships

Though all of these factors are important in a loan decision, Richardson says personal relationships between borrowers and lenders are the most critical. Building strong banking relationships can help brands not only secure funding in the short term, but also help them build for the future.

“We're very much a relationship bank at Live Oak. Many community banks right down the road never step foot in a restaurant partner’s store, but we visit everybody we do business with before we close a deal and every year after. One of my colleagues says our best customer is an existing customer. We've built this bank off of building relationships with our borrowers and treating every customer like they're our only customer.”