Burgers might seem like an occasional treat, but in actuality, the average American eats three burgers per week. That’s about 150 burgers each year. As a country, we eat 50B burgers a year. The burger generates over $100B annually and is relatively simple to make. As a staple in the American diet, it makes sense that so many chefs have thrown their hats into the ring to craft the best burger they can and serve it to the public. This is likely one reason why the US boasts about 1MM restaurants — or one for every 365 people. Despite their vast numbers, restaurants are a particularly fragile species of (usually) small business. Restaurants have high overhead costs with average profit margins around 3%-5% for a full-service dining model and median lifespans of about 5 years. About 17% of restaurants fail in their first year of business. However, restaurants that succeed become a part of their community’s fabric and a place for community financial institutions (CFIs) to create potentially profitable banking relationships.Ingredients for a Good Restaurant Lending RelationshipTo form those relationships, CFIs first need a knowledge of local restaurant owners. Steve Cornell, who heads National Iron Bank in Salisbury, CT, says his CFI lends to three of the bank’s many restaurant clients. These restaurants are well established and each owner has signed personally for a loan. “I know all three owners very well, and I know they’re very strong,” Cornell says. These three restaurants are profitable and the owners have never missed a loan payment, he adds. In each instance, either the chef has worked at the restaurant for a long time or owns the business, a key indicator of stability. A chef-owner is also more likely to put in the work necessary to help that business succeed.A franchisee can often be a good bet to lend to. This is because the concept of the business is already proven and the franchisor has already vetted the franchisee. For instance, large brands often have net worth requirements of franchisees and business ownership experience. Other experts suggest that appropriate collateral and cash flow, including cash flow from sources that are in addition to the restaurant, help strengthen a restaurant’s loan application. CFIs should also expect to see:
- A defined purpose for the loan — with restaurant-specific nuance. Restaurants have many costs, such as payroll, commercial kitchen equipment, renovations and furnishings, licensing, and required staff training. If the applicant is repaying early investors or family loans, it could affect debt service capacity. Knowing what the funds will be used for can restrict or open additional financing options you can offer the restaurant. Be sure to ask for itemized vendor estimates and recommend the borrower increase their requested financing an extra 10%-20% to account for unexpected costs or changes in quoted prices.
- A business plan that reflects deep market understanding. You’ll want to see a potential restaurant borrower’s blueprint for driving business, including plans for marketing and operations, as well as an analysis of the local restaurant industry, competition, and customers. Strong plans will also address seasonality, labor challenges, and slower months, and may incorporate delivery platforms, takeout pricing, or digital marketing strategies — all essential in today’s restaurant environment.
- A rundown of the management team — with emphasis on relevant experience. Look for previous industry experience, especially within the same geographic market, type of cuisine, and service model — a team that’s experienced in only formal dining and private parties may struggle with a fast-paced casual dining model that demands carryout options. Local experience with labor markets and suppliers can also reduce execution risk.
Though Iron Bank’s restaurant borrowers are all independent operations, many CFIs are more willing to lend to franchises, as a stable, supportive franchising company adds a layer of safety. The business concept is already proven, and the franchising company has done much of a CFI’s financial due diligence, because the same due diligence is part of approving franchisees. Loans to franchisees can be about land, as the underlying company typically ensures that franchisees have enough working capital. Special-Order Financing Restaurant business models are distinctly different from a retail business model, and how you work with a restaurant borrower should reflect an understanding of that. Consider making some adjustments to your standard loan and financing options to accommodate restaurant borrowers, such as the following:
- Customized or flexible repayment plans. For restaurants that see a lot of seasonal changes in their revenue, this is a good option. Repayment plans that let a borrower pay more during peak months and less during slower periods can help CFIs compete for business while also helping borrowers stay current on their loan payments. One consideration is that the rate the borrower pays might be higher than a more standard loan.
- SBA loans. SBA 7(a) loans reduce your risk as a lender while also offering competitive interest rates and longer terms. However, the application process can be longwinded and have many documentation requirements, so it’s best reserved for established restaurants, such as ones that might be expanding or opening a new location.
- Business line of credit. This is a more flexible model for short-term needs that can help a small restaurant cover gaps in seasonal business changes or a brief shutdown for quick projects like repainting or minor cosmetic upgrades. It can also be helpful for managing cash flow between inventory purchases and customer payments.
- Equipment financing. Offering financing for new ovens, grills, or refrigeration and freezer systems can lower your risk, as you can use the equipment as collateral. This can mean more favorable terms for the borrower. It’s particularly useful for newer restaurants that need capital without sacrificing cash reserves.
- Merchant cash advance. If a restaurant needs funds quickly and requires flexibility in how they can use the funds, this is a great option. It’s also an option for borrowers with less optimal credit or ones who need cash for an emergency repair. Keep in mind that this option often comes with higher costs, so it may be best reserved for short-term or urgent needs.
Before you make a final decision, be sure to try out the restaurant’s fare — particularly its star dishes. Bring some colleagues, friends, or family to help you cover more menu items and assess the food against a broad range of palates. If the menu is good enough to lure most or all of your party back for another meal, then the business shows good promise as a client and as a dining spot.To write profitable restaurant loans, work with owners you know well, especially chef owners and franchisees. Expect the same defined loan purpose, industry analysis and management qualifications you’d expect from any small restaurant borrower. Consider offering a revenue-based flexible repayment schedule, to match a restaurant’s likely lumpy income.
