An overview of the current capital environment for restaurants and how operators can best position themselves to capture the cash they need
Uneasy. Cautious. Still.
Just a few of the words describing the current financial climate for pizzeria operators looking to borrow money, largely a byproduct of interest rates surging to levels unseen in nearly two decades.
In March 2020, just as COVID-19 rattled the world, the U.S. prime rate – a significant influencer of loan interest rates – sat at 3.25 percent. After a two-year standstill, the rate began climbing in 2022 and reached 8.5 percent this summer.
Given the accelerating interest rates, many restaurant operators have reconsidered borrowing money to pursue expansion, upgrades or working capital. In BoeFly’s Franchise Growth Confidence Index released in August, in fact, 82 percent of the nearly 700 franchisor executives surveyed said the current interest rate negatively impacted their confidence level.
“The increasing cost of capital has many operators apprehensive about borrowing today as they would have in the past,” says Mike Rozman, CEO and co-founder of BoeFly, a business financing marketplace that matches small business owners with lenders. “They’re looking at interest rates and timid about adding to their debt.”
SBA loans remain an attractive target
It isn’t all bad news, of course, particularly for those seeking loans backed by the U.S. Small Business Administration (SBA), a frequent target of many restaurant owners. Even in today’s high-rate environment, SBA loans remain an attractive and feasible option. Though often time consuming and requiring a down payment as well as personal liability, SBA loans typically feature favorable terms, including lower – and capped – interest rates as well as longer repayment timelines.
“SBAs are an open doorway for smaller operators,” Rozman says.
Joe Reynolds, a senior business development officer at Missouri-based First Bank of the Lake who specializes in SBA loans, labels the current market for borrowing SBA money “just fine.”
For operators looking to purchase a building, for instance, Reynolds calls that one of the easier loan approvals in the SBA world since operators will add back the rent. That was true in years past and remains so today.
“So long as you have cash flow and rent, you’re in a good position,” he says.
Similarly, expansion-minded operators who have a track record of positive cash flow at an existing location sit in a good position to obtain SBA financing as well. The SBA, Reynolds reminds, allows zero down payment for a new location as long as the first restaurant is performing well.
While capturing an SBA loan for working capital can be more complex, it’s still commonplace, Reynolds says. Operators can earn financing by showing a detailed business plan and demonstrating a firm grasp of their business’s financials.
Borrowing money in today’s environment
Whether chasing an SBA-backed loan or a conventional loan – a bank loan without the SBA guarantee, operators seeking capital would be wise to:
Prepare. Before meeting a lender, operators should gather all necessary financials – three years of personal and business tax statements, bank statements, a year-to-date profit and loss statement and balance sheet among them – and be ready to present the data in a professional way.
“Be prepared to articulate to the bank a positive, numbers-based story that gives them confidence,” Rozman says, adding that operators should also brush up on terms like variable rate and personal guarantee and know how far they’re willing to go for capital.
Create real projections. Quite often, Reynolds says restaurant owners seeking capital offer ultra-conservative projections, wary of overshooting targets. In an era of higher rates, however, that will not work.
Reynolds urges business owners to provide real, accurate projections alongside sound assumptions on why those figures are realistic. Existing operators can lean on the performance of their current stores while new operators should craft a forecast based on the eatery’s capacity (dine-in, delivery, and carryout), menu pricing and local restaurant sales data information and trends.
Construct a detailed business plan. A thoughtful, robust business plan communicates professionalism and stimulates confidence. Reynolds recommends operators clearly define their background, the skills they have to enhance and grow the business and the restaurant’s point of differentiation in a competitive marketplace.
Engage the right lender. In the current climate, some lenders are closed for business, particularly conventional lenders left skittish following some high-profile bank closings. Knocking on those doors will leave operators spinning their wheels. Rozman suggests talking to other small business owners or fellow franchisees to see where they’re getting their capital or using a platform like BoeFly to play matchmaker.
Understand the present reality. Operators need to recognize the current commercial lending environment, which isn’t what it was three years ago or apples-and-apples to the home mortgage side. Expectations must be aligned with reality.
“Prepare yourself for this so you avoid sticker shock,” Reynolds says.
Given the current economic climate, some might elect to sit on the sidelines for a bit. If that’s the case, then Reynolds suggests making sure the restaurant’s prices keep pace with inflation.
“When costs go up, it needs to show up in the prices you charge, so you can maintain margin and remain in positive cash flow position when you do seek to borrow money down the line,” he says.
Borrowing Beyond the Banks
While banks remain the most appealing option for capital, operators can pursue alternative options when looking to borrow money. Some alternatives include:
Peer-to-peer lenders: Led by companies like Lending Club and Prosper, peer-to-peer lenders handpick their loans and present borrowers their terms. The process can be quick and the terms favorable, but it’s also mighty competitive.
Private equity: Swap an ownership stake in the business for a capital infusion and, in some cases, even a strategic partner capable of providing work or wisdom in addition to wealth.
Direct lenders: Direct lenders like OnDeck and Fundation offer small business loans with streamlined applications and quick approvals, but often high APRs.
Merchant cash advance: Have an immediate need for cash but poor credit or limited collateral? A merchant cash advance allows a restaurant to sell a percentage of its future credit card transactions for capital right now, though the cost is often hefty.
DANIEL P. SMITH Chicago-based writer has covered business issues and best practices for a variety of trade publications, newspapers, and magazines.