Navigating Your Way Through Today’s Restaurant Lending Environment

Wouldn’t it make sense that in better economic times that it would be easier for a restaurant to borrow capital at better rates? Why not?

This is a question that I get asked all the time.  One of the benefits of having been in the restaurant business for close to 30 years was that I saw all economic cycles and one thing I can tell you for certain is that it is NEVER easy for restaurants to borrow money especially at low rates.  Most restaurants, except for the well-funded groups with substantial equity or cash flow, do not qualify for financing that meets their expectation of rates.  Defendable, if not audited financial statements, three years of profitability demonstrated by tax returns, three to five years projections, growth as part of the story and oh yea, collateral.  Not just the assets of the business, but a blanket personal guarantee and very often a pledge of your personal assets – your home.  The other consideration is that banks simply do not wish to originate loans of less than $250,000 as it is not profitable for them to do so.  Most small restaurants do not need or qualify for that much.

What do you look at when you fund not just a restaurant but any retail business?

There are many factors that we take into consideration.  There is of course the quantitative factors, which we can measure – cash flow, number of NSFs, occupancy costs, years in business, amount of debt.  But, there are also incredibly important qualitative issues that speak to the character and integrity of the owner of the business.  Will they pay us back?  Do they put the needs of the business before they benefit themselves?  Does the landlord and vendors get along and respect them?  Have they tried to walk away from obligations such as supplier debt, leases, taxes or things like child support?  When you invest in a business – it’s all about the management! 

You have the advantage of having spent a significant piece of your career in the restaurant industry. What are the characteristics of a successful (financial) restaurant?

Passion about their business. Engagement in what is going on around them. An unrelenting attention to details. These are the same people who plan and anticipate what their financial needs will be as they maintain their business.  It’s called leadership, management.  Are they impounding the sales tax they collected or are they using the tax money to float their cash flow?  Do they have a bit of a cushion put aside for a rainy day?  When we ask them about their sales volume, we can tell a great deal about how they view their financial world.

We constantly hear about Economic Development and State funding? What’s your read on those programs?

I think that these programs have a great deal to offer those who qualify.  They are non-profit groups that were established to help small businesses grow and thrive in the states that they serve. As “alternative lenders” become more mainstream, these groups will serve a valuable role for those businesses that meet their credit box. A key feature for many of the banks and these organizations is that the business can demonstrate a use of capital that promotes growth. The reality is that the majority of small businesses are not seeking to grow – they are seeking stability, profitability or looking to react to an emergency. 

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What’s the reality of SBA lending as it relates to a restaurant?

The SBA is very often misunderstood by most small business owners.  They often think that the SBA guarantees the obligation of the small business owner, which is simply not true.  The SBA does not give the loans.  They work with banks who originate the loans and then they stand behind the owner who pledges personal assets and provides a full personal guarantee. If the business defaults, the bank will go to the owner to pay back the loan before going to the SBA who has guaranteed only a portion of the loan. It is merely an additional incentive for banks to lend into their business community.  Approval rates are only 21% to 49% depending on the bank and type of loan.

We also hear about on-line lending with operations including Prosper and Lending Club? Do they offer a viable solution for the restaurant operator?

These lending platforms were originally designed as “ peer to peer” loan platforms.  Small loans with risk adjusted pricing reflecting consumer credit metrics given to individuals.  As they became bigger they naturally migrated into small business loans but really didn’t modify their underwriting to reflect businesses instead of individuals. Recent events have shown that these companies have hit speed bumps in their business models with both investor interest and on boarding of loans shrinking dramatically.  I don’t think that these marketplaces are the best choice for restaurants today.  

There is also a re-emergence of the Angel investor. How has that market evolved?

Angels are wonderful sources of start up money for restaurants. I had them myself and would never have gotten started without them.  Some are family, friends or just people who are interested in entrepreneurship.  In most cases it works pretty well, but the reality can go the other way.  When the partnership starts it’s like a marriage.  Hearts, flowers, optimism, and a positive common interest.  If things don’t work out financially, or even a conflict of how the business should be managed – the relationship can break down.  I have seen 3 businesses break up this year with this scenario.  Remember that partners don’t go away. Even if the business thrives you will be paying your partner for life – equity is far more expensive than debt.

What niche does a firm like Strategic play?

Having been small business owners ourselves, we have walked in the shoes of our customers.  I don’t need a restaurant owner explaining his business to me – I have lived it, many times over.  We take modern technology and throw in human insights to get the financing the business owner needs and qualifies for.  There is no “one size fits all” solution.  We want to be the full service resource for all kinds of small businesses to advise them on their best options. In a world of high tech and “FinTech” we like to remember that behind every small business are hard working people running them.

David Sederholt
David Sederholt is a multi-discipline entrepreneur who has launched and built numerous companies in specialty finance, foodservice and commercial real estate over 40 years. After owning, financing and operating over a dozen restaurants in his career he found a niche in serving small businesses seeking financing and strategic advice. For 10 years he served as Chief Operating Office of Strategic Funding Source, Inc., (now called Kapitus). David has also been a Managing Partner at a boutique investment bank and a specialty commercial real estate firm. He is a regular guest lecturer and contributor to business and industry publications as well as serving as a Board member and advisor to numerous companies and non-profit organizations. He is currently owner of Ragnar Partners, LLC, a private investment and advisory firm.