How Banks Interpret Your Restaurant Loan Application

Lending to restaurants (aka Diners, Catering Facilities and Fast Food Establishments) has always been a difficult task for Banks. The primary reason is that a percentage of sales are cash. When reviewing either Federal Tax Returns or Financial Statements, banks know they are not seeing a true accounting of sales and expenses.

What we advise all owners is that banks want to see consistent sales growth with predictable cost of sales and profits that support the growth of the restaurant. Ultimately banks look for the businesses cash flow to support the loan payments on the loan they are requesting. The ratio a bank looks at is called a “Debt Service Coverage Ratio” or DSCR. What does that mean?

Cash flow of a business is Depreciation/Amortization (non-cash expense), Net Profits before taxes, interest on existing loans that will be paid off with the new loan, and in some cases Rent (if the restaurant has a closely-held real estate holding company that it pays rent to or if the restaurant is financing the option to purchase the land & building from a third party landlord),

So lets say the annual cash flow for all those categories is $125,000 for the previous year and the loan you are requesting has annual principal and interest payments of $100,000. You would divide the annual cash flow by the annual bank payments ($125,000 divided by $100,000) which would be 1.25X. What that means is for each $1.00 of loan payments there is $1.25 of cash flow to support the loan or a cushion of .25.

Banks seek a minimum of 1.20X, but in most cases they look for 1.30X+ DSCR in these economic times.

Although it is easy to find what your Restaurant’s historical cash flow is by reviewing your last three years Federal Tax Returns (what a bank always requires to see the trend of the Restaurant), but owners can never figure out what their proposed loan payments will be monthly and annually. To find that out, do a Google search for “Loan Amortization Calculator”. Once on a site with a loan calculator, enter the amount of your request, current market interest rates and the term of the loan you are seeking and it will provide you with the monthly payment.