What’s the best financing option for my restaurant?
High interest rates, inflation and labor challenges can make any restaurant feel financially stretched right now. If you’re looking for some relief in the form of a loan or line of credit to help you manage expenses or invest in critical infrastructure, there are a number of financing options you may be exploring. To ensure you’re maximizing the upside potential of a cash infusion and minimizing the possible downsides, consider some guidance from Jacques Famy Jr., cofounder of the small business loan agency Advancepoint Capital. In a recent Forbes report, Famy recommended a hierarchy of financing options available to restaurants.
Consider your current bank first. You’re most likely to find the best rates there on business lines of credit or SBA loans. From there, look to online business lenders. They often offer a faster, easier financing application process than your bank would, but it comes at a price: shorter terms in which to pay back a loan (often six to 18 months for restaurants, and at a higher interest rate than you might find from your bank). Next, you might look into a merchant cash advance. It’s become a tool that more operators are considering as they need to find creative ways to preserve profits in the challenging economic conditions of the past several years. These advances are agreements in which a business receives a lump sum of cash up front in exchange for a portion of future revenue. They can be a preferable option for businesses that struggle to present themselves as creditworthy because the providers base the advance on current and historic sales volumes as opposed to credit scores. These options are more readily available than traditional financing but also come with higher fees and overall costs. Consulting a business loan broker could help you make sense of the broader lending landscape if you’re unsure which financing option you want. You can shop around for the best product and lender with help from the broker — and the options may be more plentiful than what you’d find at your bank. Just know that the broker may be representing only certain products. In general, as you prepare to make your case to potential lenders, gather a range of information to help you make a case that you’re a good risk. Beyond submitting a complete application, gather all bank statements needed, as well as tax returns, profit and loss statements, debt obligations and other financial documentation that demonstrates your restaurant’s financial history and health. Know the credit score of the business and the owner’s personal credit score. Also be prepared to submit other documentation proving ownership of the business, supporting licenses and other documents that would help with your background check. Presenting yourself as organized and thorough could help you lay the groundwork for a stronger partnership with your lender — and help you secure additional financing options at beneficial terms down the line. Small brands, big potential
Winning over banks when lending options decline
Amid rising interest rates, lending relationships are about more than singular transactions these days. As credit has become more expensive – and will likely become more expensive – banks are considering the value of their overall client relationships. They may well be looking for business opportunities beyond loans to help support their offer of credit. Smaller restaurant brands are more likely going to feel the pinch of this than their larger, more established counterparts. Banks are moving deposits to where they can generate the best returns, leaving less capital to lend to small and mid-size companies. The prospect of a recession, as well as of the potential for additional bank failures, places additional pressure on these smaller brands. That’s why it’s especially important for smaller brands to focus on lender relationships too. This could involve franchisors proactively scheduling one-on-one discussions with a range of lenders to discuss the brand and where it’s going. Building stronger connections across a range of lenders can help ensure that when franchisees need capital, their business has already cultivated a base of lenders who understand the brand and how it is evolving. Lend your voice to manage credit card swipe fees
Credit card swipe fees remain one of the largest costs for local restaurants — the costs have more than doubled in the past decade. Visa and Mastercard control the vast majority of the market and set the prices banks charge, thereby removing competitors from the space. Without pressure in the marketplace to lower these fees, they are likely to continue to climb. Even small increases can mean the difference between being able to offer employees important benefits or make other investments for the business.
The National Restaurant Association has been trying to urge Congress to pass legislation that raises competition and puts some downward pressure on swipe fees. The organization is launching a grassroots effort to send a message about the support restaurants need in this environment. Sean Kennedy of the National Restaurant Association recently sent out information about how restaurant leaders can support this effort and learn more about next steps. A second-half M&A pickup?
It’s challenging to buy – or sell – a restaurant in the current climate. The volatility has made it difficult for many operators to reliably pin down costs, sales and margins for the next few years – or even the next 12 months, according to James Short, senior vice president in Global Commercial Banking for Bank of America. As a result, there have been large gaps between sellers’ asking prices and buyers’ bids. “This is the first time in my career where buyers are negotiating the purchase price more on varying EBITDA than the price multiple,” he says.
Restaurant lenders have been responding with hesitation to these conditions – particularly if the restaurant brand doesn’t have the backing of a strong multinational brand. Erik Herrmann, partner and head of the restaurant investment group at CapitalSpring, told Restaurant Dive that a combination of challenges is making many lenders hold back: performance and operating challenges at the company level, as well as the repricing of risk amid higher interest rates. At a time when the cost of borrowing has effectively doubled in two years, many would-be buyers have been forced to sit on the sidelines in the current market. However, smaller restaurant brands may still be able to secure financing, if not from their traditional lender, then perhaps from an experienced one they haven’t considered before. And of course, restaurant businesses with capital could be in a position to find some favorable deals right now. Cristin O’Hara, managing director and restaurant group head at Bank of America, is optimistic about the second half of 2023 in terms of the landscape for deals. Once we get past the weaker winter months and lenders see some additional signs of economic recovery, they may be more likely to support restaurant brands seeking capital. |
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