All good chefs know that the start of a great dish always begins with the correct prep work of the ingredients that compose the dish. Proper prep work starts with choosing the right proteins, vegetables, fruits and seasoning——and putting in the work ahead of time to prepare those items prior to cooking.
The same holds true when applying for bank financing for your restaurant, diner, catering facility, or any other food establishment you own. Without the necessary work ahead of time, your desired results may be doomed right from the beginning. So let’s start from the beginning of the prep work.
Choosing the Bank
Banking is no longer a relationship business. Banks try to sell themselves as working with the communities they serve, but we now live in a global marketplace where results are measured monthly and quarterly, and the days of “It’s a Wonderful Life,” with Jimmy Stewart, is long over.
Most of the time, you will apply with the bank that holds your restaurant’s deposits and is the beneficiary of your money and credit card fees. That is a natural place to start, but the most important part of this process is not so much the bank, but the banker.
It is important that you deal with a banker that has experience in lending to your industry and is well-respected within his bank. Easy to say, harder to do. My first step would be to ask the recommendations of successful restaurateurs you know. First hand experience is important, therefore, I would ask as many of my peers as reasonably possible to share their experiences with their recent bank loans. This is not fool proof, but it beats making an uninformed decision.
Remember, initially choosing the wrong bank results in the need to reapply at other banks. Banks consider this a red flag and may dismiss your request based on the number of banks that have looked at your application and passed. Additionally, each request will trigger an inquiry on your personal credit report resulting in a reduction of your FICO score; which leads me to the next point:
What is your Credit Report going to show
What is your FICO score? FICO is a computer evaluation based on a number of factors to anticipate your future ability to repay a loan. The biggest factor is the amount of loans and your payment history of those loans to date. Scores range from a low of 450 to a high of 850. Most banks will accept scores as low as 650 with explanations but prefer to see scores in the 700’s and up.
Prior to applying for a loan, order your credit report online to determine what your score is and review your report for accuracy. A number of times, I have seen mistakes on reports and those inaccuracies have dramatically reduced the scores of the applicants. Again, knowing your credit history and correcting any inaccuracies prior to applying for a loan, is much better that trying to correct the mistake, or explaining the situation after the bank questions your credit situation.
Like your patrons expect a clean and professional experience when they dine at your restaurant, a bank expects a clear and concise understanding of your business and loan request. There is nothing more frustrating to a banker than a disoriented, hodge-podge packet of information. Surely, this will render a slower decision process and a possible rejection of a loan request. Your presentation is just as important as the presentation of an entre’ on your menu.
What a bank requires is three years of business tax returns or financial statements of the borrower and any other affiliated companies or other business you own. Interim Financial information for the previous quarter ending within the year you are applying, generated from your QuickBooks, should also be provided. If your business has only been in existence shorter than three years, provide only what you have. Start-ups and business that are applying for loans with less than one year previous tax returns will find obtaining a bank loan near impossible. Banks want history. If you were successful at a previous restaurant that was sold, provide the financial information from that previous restaurant to show your ability to operate a restaurant. If you are purchasing a new restaurant or expanding an existing restaurant, projections of future revenues and expenses are required for the next two years.
Personal tax returns of all principals for the last three years with a current personal financial statement of the principal(s) are also required. Your accountant can prepare a personal financial statement, or you can obtain a form online to complete yourself.
Finally, contract of sales, copies of leases, copies of banking statements, mortgage statements and other confirmations of assets and liabilities, both corporate and personally, should also be presented with the application.
If you own your restaurant’s land & building, this will be the primary collateral on your loan. As a condition of the approval, the bank will require the current market value of that property “as is”, or if you are expanding and/or renovating the property—“when completed.” The same holds true if you are purchasing a new restaurant.
Should you order your own appraisal prior to applying? That is a tricky question that you should consider prior to application. If there is more than enough equity in your restaurant, based on either having no loan or a small existing loan on the building, then I would not suggest obtaining an appraisal. If you are purchasing a new restaurant, I would also not obtain an appraisal prior to application because this is part of the confirmation process in your contract of sale. For all other situations, I would strongly recommend getting your own appraisal. The cost of the appraisal can be as low as $1,500 to a high of $5,000 depending on the scope of the appraisal and the size of the building.
Most banks will not accept your appraisal as confirmation of value and order their own independent appraisal, as required by banking law—but in some cases they will only charge you for a review of your existing appraisal at a fraction of the cost. So why would you order an appraisal when a bank is going to order its own appraisal after approval? For two reasons—-markets change and so do real estate prices. Prior to 2008 appraisals supported values of $300-$500 per square foot, whereas, today it is not uncommon to see values at $150-$250 per square foot.
When a bank issues you a commitment letter, subject to an appraisal, in most cases they will require a commitment fee of 1% upon acceptance. For a loan of $3 million that’s $30,000. If the appraised value does not support the required loan to value ratio the bank imposes on the loan, that money might not be returned. That’s a lot of money to lose when you can obtain that information prior to application at a fraction of the price.
Additionally, banks and bank appraisals are not always correct. Appraisals are an art, not a science. I have experienced appraisals with inaccuracies in square footage and/or dated or incorrect comparable properties which should be challenged.
Should you Retain a Loan Broker
You would expect my answer to be “yes,” but every situation does not require the need for a broker to obtain your loan. The complexity of the transaction, amount of the loan, your experience within the industry, and your previous credit and credit score should be considered prior to hiring a loan broker. My personal mantra in this matter has been, if you are know you are a terrible potential borrower, or a sure bet —- you don’t need me. I’m best with the borrower on the fence, that can go either way.
That having been said, due to my previous experience in banking, I know the market. I have the ability to structure a loan in order to obtain a better rate and term than a bank may otherwise offer, because they are limited in how they finance commercial loans. Additionally, I deal with a number of banks and bank products that I can custom tailor to your needs, saving you the time and effort necessary to find the best bank.
As I tell my restaurant clients——“I don’t need to come to your food establishment to eat what I can cook home, for a fraction of the price. I come to your restaurant because I don’t have the time to cook and clean afterwards, and I will pay for a professional to give me a meal that I probably couldn’t duplicate on my best day.”
Isn’t that worth the price?