A lender explains what restaurant leaders need to know about the lending process.

Sponsored by Live Oak Bank.

From equipment and labor to ingredients and real estate, opening a new restaurant is expensive. But asking banks for a loan can feel overwhelming, since borrowers need to understand the process, loan terms, and banking relationships being offered.

Here, Sims Richardson, senior loan officer at Live Oak Bank, explains what banks look for in franchisees and how restaurant leaders can prepare for the loan process.

1. Character

One of the top questions a bank tries to answer during the loan application process is whether or not a borrower can be trusted to run a business successfully and pay back the loan. Richardson says character goes beyond financial statements—it’s got a lot to do with personality.

“At Live Oak, we describe it as the ‘eye of the tiger.’ This means, is someone putting all their energy and focus into succeeding?” he says.

Because the restaurant industry is a demanding field, banks want to work with borrowers who are invested in their businesses. They need to be on site often and taking charge of operations. It also means having a strong business plan that accounts for unplanned business disruptions

“What if there is road construction outside your restaurant disturbing traffic patterns?” Richardson says. “Do you have a plan in place to sustain three or four months of lower revenue and pay your bills?”

2. Capital

No bank makes a loan without looking into personal finances and credit histories. This will mean digging through personal assets, debts, liabilities, and other financial obligations.

Though amounts vary depending on the type and size of loan requested, banks will ask what kinds of personal investments borrowers 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. Industry Conditions

It’s not just the borrower that banks look at when deciding whether or not to offer a loan—it’s also the economic environment and costs associated with the building in question, as well as staff, inventory, and equipment needs.

“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

Banks use collateral as a way to prepare for a worst-case scenario—a defaulted loan. Different types of loans have different requirements, but generally collateral is a personal guarantee from primary owners and a lien on business assets, Richardson says.

“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 the cash flow of the business and the operator that pays us back.”

5. Cash flow

Whether or not a borrower can make loan payments is a major consideration, so banks take into consideration projected earnings, the costs of doing business, and the load of 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.”

Though all of these factors are important in a loan decision, Richardson says the most critical is the personal factor, both for the borrower and the lender. Building strong banking relationships is the key to business success.

“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.”

By Peggy Carouthers

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