A bistro.
Who would think that one tiny eatery could have so many lending options available to it? To really get a grasp of some of the intricacies of business loans and business lending, let's take a look at a few different lending scenarios that could apply to this eatery. Keep in mind that each combination creates unique financing rules and analysis. Brokers that can truly help their clients will understand each combination and the way financing applies to each.
Business Only Model
In this scenario, a client is interested in buying the restaurant, but not the building that houses it.
Because potential lenders will not be able to consider the value of the building as collateral when evaluating the loan, the value of the business becomes increasingly important to securing the business loan. The client will have to establish that the business has potential to make money in order for lenders to consider financing the loan. Additionally, if the business is solely reliant on the charisma of a few people, perhaps the chef and head waitress, the client will have to convince lenders that the restaurant can continue to thrive even if these key players leave the establishment.
The cash flow of the business is also a critical factor for securing a business loan. Collateral is less significant than in a real estate lending environment since it can be difficult to liquidate assets such as furniture, ovens and soda dispensers. Lenders often shorten the duration of the loan, which increases the monthly payment. Lenders will need to know that the EBIDA (earnings before interest, depreciation and amortization) look healthy enough to accommodate the higher monthly payment.
Brokers should also advise their clients to bring their A-game résumé to the table. Lenders will want to know that the client has experience running a restaurant. They might also be further impressed if those existing, charismatic employees that make the dining experience a great one are contracted to stay in their positions for a specific duration.
Building Only Model
Now the client is interested only in buying a building that has the restaurant (or multiple restaurants, in some cases) as an occupant.
This scenario is more like a traditional business loan, whereby the client has the security of real estate that is less likely to lose value. The key with this situation has to do with the stability of the existing tenant or tenants. If the client is desirous of a 10 year loan but has only one restaurant tenant whose lease expires in two years, it's possible that the building's income could be lost at the end of the lease. Lenders could be more cautious with this situation since they will be unable to predict how quickly another restaurant can be found to occupy the space and bring in the rent.
This is not such a concern for buildings that have multiple restaurants since the leases will most likely expire at different times. But, it's still important for the leases to be staggered so that the building has no more than 50 percent vacancy at one time.
Business and Building Model
It's not surprising that combining the two previous business loan types - business only and building only - is the trickiest type to secure funding for. Here, the client must establish the value of the property as opposed to the value of the business, a view that can easily get muddied. Clients must be prepared to meet the requirements of this type of loan: high cash flow, existing and predicted tenancy and also must determine if the property is a single purpose facility (meaning that it can only be used for restaurant purposes). Lenders will scrutinize all aspects of this business loan and will, again, require a top-notch résumé to show experience, this time as both a property owner and a business owner.
Be Prepared
Brokers interested in working with business loans should partner with a trusted investment bank that has experience with all three types of loans. They are also advised to get some information from their client up front so they, in conjunction with their investment banking partner, can make the best recommendations about how to move forward with the greatest chances of securing financing. This information includes whether the client is profitable or in the red, what their business model looks like, their experience in this particular field, and what unique qualifications they have that makes them the best candidate to make this business successful.
Even if some of the answers to these questions might make financing a challenge, they don't mean it's impossible. A broker's choice of investment banking partner becomes more important if challenges exist. Working with a partner that knows how to restructure business loan requests to make them attractive to lenders, or that has a lending network that is interested in challenging deals, can be the difference between securing financing and not securing it.
Remington Financial Group, Sean Allard 480.659.5742, sallard@remingtonfg.com
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