Thursday, June 11, 2015

Restaurant Tip of the Month

Tip #3: Financing Your Restaurant 


What should a financing requisition presentation include?

A lot of the work has already been completed when you assembled your business plan in last month’s Step #2, “Developing a Business Plan.”  There you should have compiled: Executive Summary, Company Summary, Concept Statement, Implementation, Management, Market Analysis, Financial Profmoras.
Now it’s time to add:
1.       Contract of Sale
2.       Personal information
a.  Resume, credit release authorization, financial statement and three years’ tax returns.
3.       Business information (if you are purchasing a business)
a.  Three years’ tax returns, current profit & loss statement.
4.       Property Appraisal (if you are purchasing real estate).
5.       Lease Agreement (if you are leasing space).
6.       Demographics within a 3-5-10 mile radius of the subject business.

 What are your funding sources?

1.       Personal Resources 
       a.  Savings, IRA accounts, credit cards, home mortgages, and personal assets, family or friends.
                     i.  If you are borrowing funds from friends and relatives be careful to arrange the loan in a    business-like manner. Draw up papers stating the loan repayment schedule and interest to be charged.
       b.   Real Estate assets; you may have enough equity in your home and/or other properties to finance your business.
       c.    Life Insurance; you may carry a life insurance policy that has a loan value. You can borrow on the cash value at a low interest rate.

2.       Private Investors
       a.  Also known as "angel investors,” are investors who provide financial backing for small startups or entrepreneurs.
                     i.  Angel investors are usually found among an entrepreneur's family and friends. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times.

3.       Banks 
        a.  Commercial Banks will lend money to purchase a business, generally when there is real estate involved as part of the purchase.
                       i.  This source of financing is still difficult when purchasing a restaurant.
        b.   A Small Business Association (“SBA”) guaranteed loan is the most common form of financing for a restaurant business with or without real estate.
                       i.  SBA-guaranteed loans are made by a private lender (bank) and guaranteed up to 75 percent by the SBA, which helps reduce the lender's risk and helps the lender provide financing that's otherwise unavailable at reasonable terms. 

4.       SBA Guaranteed Loans 
        a.  There are three most common types of SBA guaranteed loans.
                       i.  7(a) Guaranteed Loan Program
                  ·         The SBA's primary business loan program is the 7(a) General Business Loan Guaranty Program. It's generally used for business purchases (with or without real estate), start-ups and to meet various short and long-term needs of existing businesses, such as equipment purchase, working capital, leasehold improvements, inventory, or real estate purchase. The maximum amount of an SBA guaranteed loan is $5,000,000.
                      ii.  504 Local Development Company Program
                   ·         The 504 Loan Program provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery, or equipment. The loans are administered by Certified Development Companies (CDCs) through commercial lending institutions. 504 loans are typically financed 50 percent by the bank, 40 percent by the CDC, and 10 percent by the owner.
                      iii.  The Express Loan Program
                     ·         The SBA's Microloan Program offers anywhere from a few hundred dollars to $150,000 for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment to businesses that cannot apply to traditional lenders because the amount they need is too small. Proceeds may not be used to pay existing debts or to purchase real estate.

5.       Line of Credit
       a.  An arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement. 
            i.  This type of funding is typically available only to established businesses with good credit and banking relationships.

6.       Merchant Cash Advance
       a.  Business cash advances, also called merchant cash advances and account receivables factoring, give businesses money in return for a cut of future credit card sales.
             i.      Merchant cash advance companies stress that this is not a loan because the client "purchases" the money with a business asset.
            ii.      Once again, this type of funding is typically available only to established businesses.

What are funding sources looking for?

Whether you are purchasing an existing business, an existing business and real estate or looking for financing to start a new business, funding sources habitually want to see:

1.  A borrower with good credit. 
     a.  720 or above

2.   A borrower with experience.
     a.  Very few funding sources will lend to a borrower without experience in the industry. The more experience you have in the field.

3.  Adequate collateral. 
     a.  Usually when real estate is involved, funding sources will look at the amount of the requested funding in relationship to the value of the real estate collateral (“Loan to Value or LTV”).
                  i.  Normally lenders are comfortable with a LTV of between 70 and 80%.
          ii.  Outside collateral can also be used to help secure a loan.

4.  Adequate debt coverage ratio:
      a.  Most funding sources are looking at a minimum debt coverage ratio (“DCR”) of 1.2/1. 
           i.  For example, if your annual mortgage and/or note payments are $100,000, funding sources will generally want to see that you have a minimum of $120,000 in available annual cash flow, after paying all costs and expenses to satisfy the debt.

Hire a professional

A professional consultant or consulting firm with experience in securing funding within the hospitality industry may be the right way to go.  One such firm with a great deal of experience in this arena is Equity Enterprises, Inc., Allenhurst, New Jersey (732.922-2722).  The firm has participated in securing in excess of $500,000,000 in financing to facilitate restaurant and hospitality positioned transactions.

Make sure to look for Tip #4 next month... "Design and Layout." 

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