Credit flowed so freely before the recession that people in the restaurant industry often use hyperbole to describe how easy it was to get financing before the collapse.
“I could have gotten my dog a loan three years ago,” says Paul Steck, president of Saladworks.
“The perception was, anyone who can breathe can borrow,” says Mitch Jacobs, founder of On Deck Capital, a lending technology company that works extensively with restaurant operators.
“We went through a period in society when nobody ever heard ‘no,’” says John Hamburger, president of the Restaurant Finance Monitor.
But after the financial meltdown, when overleveraged commercial banks large and small were imploding around the country, the flow of credit came to a standstill. Suddenly, operators couldn’t get a loan big enough to buy a dog, let alone the financing necessary to open a new restaurant.
As time passed and the economy backed away from the precipice—at least a few inches—the credit markets remained frozen. Restaurant franchisees who were used to walking into a bank and easily securing a loan grew increasingly frustrated as their best-laid expansion plans went awry. For some operators, frustration turned to fear when the lack of access to capital threatened their ability to pay the bills.
“I’m so scared right now I can’t even sleep at night,” John Brodersen, a Popeyes franchisee in Detroit, said in August, shortly after Treasury Secretary Timothy Geithner wrote a New York Times op-ed titled “Welcome to the Recovery.” Unable to get a bank loan—“I could wallpaper my walls with rejection letters,” he said at the time—Brodersen didn’t agree that a recovery was underway.
Now, however, things have changed—not dramatically, but noticeably.
“It was like the sky was falling before,” Brodersen says. “But now I see some hope. I know for at least three years, I’m not going to go bankrupt.”
The cause of Brodersen’s relative optimism is a recent closing on a $3 million deal, something he says would never have happened earlier in the recession. While securing financing for the deal was a chore—“I’ve spent a third of my life over the last two years talking to bankers,” Brodersen says—the fact that it got done signals a slight thaw in the credit markets.
“Toward the end of [the third quarter of 2010], you could hear it in the bankers’ voices that things were a little different,” Brodersen says. “It sounded like they got their ducks in a row and were starting to at least send out proposals.”
Of course, things are far from what they used to be. Banks are scrutinizing loan applications much closer than before, and they have almost doubled their debt-to-cash-flow ratios. The stricter criteria make it harder for any business to get financing, but the prospects are even worse for restaurants.
Banks have always viewed the restaurant industry warily because of the high fail rate in the business and because the industry’s specialized equipment has little collateral value. Now, with the emphasis on cash flow stronger than ever, restaurateurs have a lot to prove when they apply for a loan.
“The financial statements of the restaurant companies probably don’t look very good [to banks] right now,” Hamburger says. “If you’ve got declining sales, declining income, declining margins, it is easy for the banks to say ‘no.’”
But, Hamburger says, the credit crisis has been exaggerated. Before banks started lending to anyone with a pulse in the mid-2000s, restaurants always had to make a strong case to get a loan. Historically, those businesses that impressed banks with a sound loan package were approved, and those that didn’t were rejected. In the wake of the financial collapse, that simple standard has been reestablished, Hamburger says.
“Companies that have decent operating results have been able to get financing,” he says. “For companies that don’t have decent operating results, it is a new game.”
And the new game is not much fun. Operators who have had recent success in securing a commercial loan, at community banks for the most part, do not have any exciting secrets to share. Their advice boils down to the obvious: show good cash flow; have experience in the industry; craft a concise loan package; don’t dwell in the details; and don’t leave anything crucial out.
“The worst thing restaurants can do is give the banks only 70 percent of what they need, because it sits in the ‘waiting for more information’ pile, and it loses momentum,” says
Joseph Houk, a CPA and former commercial banker who now secures financing for a D.C.-based restaurant company.
Houk says having a knowledgeable number-cruncher who knows what banks are looking for can help a restaurant’s chances at getting a loan.
“I’m going to make it easy for banks to say ‘yes,’” Houk says. But, he adds, “there is no magic secret.”
There are, however, alternatives to commercial loans. Private money, for example, has become a viable financing option for restaurants, especially as low interest rates in money market funds or CDs and an unstable stock market have made those investments less attractive.
John Cassity, a former commercial lender with J.P. Morgan Chase and Bank of America, operates six Einstein Bros. Bagels in Colorado’s Western Slope. He is financing the growth of his franchise in part through private funding.
“Right now private money is an option, and it’s a great option because you can structure it without some of the heavy regulation and compliance that you have to deal with in a bank,” Cassity says.