Financing Options

Hi everyone…Can anyone offer up any information on financing a new (exisiting) shop? It seems that the SBA is now considering restaurants a risky investment and the banks are turning their noses up at me. The economy seems to be making all lending institutions a little gun shy. I know its got to turn around eventually, right? People gotta eat…I’ve seen some of the lending/leasing advertisers here on the site and wondered if any of you had any experience with them.
As always, any help or opinions are greatly appreciated.


Yup, we got the cold shoulder with SBA for our startup. We might get a veteran’s loan for working capital but that is about it. I have had to put my savings in and purchase used equipment instead of funding it. Might be a blessing after all though.

You should be able to find leasing arrangements for large equipment items. Ask the equipment manufacturer your are interested in for suggestions. Typical leases for equipment run 3-7 years with a $1 buyout at the end. The problem is that the effective interest rate is often higher than 10%.

In the end, to get in the restaurant business when the SBA is not lending you have two choices: Raise the cash yourself or seller financing. Seller financing may well be the best bet.

The lowest we have been offered is 13%. :shock:

The other bad thing is you cannot “prepay” a lease so you are stuck with the high interest for the entire term even if you develop great margins and can afford to get rid of it. With the prime interest rate about 4%, that’s a hefty fee to pay.

What I have seen in equipment leases is that the rate they advertise is not even close to the effective rate you pay. Since you don’t pay down principal during the life of the lease, you pay the advertised rate on the whole initial balance for the life of the lease. Adds up to alot more than a loan in the same amount at the same rate.

You are right, Paul. You really have to plug the leasing company’s values into a financial calculator to see your effective rate. After all, there technically is no “interest rate” with a lease. You never own it. You are simply paying for the right to use the asset. The contract usually includes a buyout at the end if you want to acquire the asset. But as long as the lease is in effect, the property is not on your balance sheet as you do not own it, payments are an expense and not an amortization, and the lease does not show up on your credit report as it is not “credit”.

It’s going to be tough for you to find financing. Restaurants have always been on the high risk list for banks, but in bad times, forget about it. To help your chances you will have to offer hard collateral, i.e. real estate with good amount of equity, or marketable securities. Or maybe a parent can co-sign or offer collateral. You are still considered a “start-up” even though it’s an existing shop, which makes your chances even lower. Sorry that’s the reality.

Entrepreneur’s Journal: Can’t get a business loan? Try a credit union
Posted Oct 19th 2008 6:30PM by Tom Taulli
Filed under: Small business

At many banks, there is a freeze on new loans to small businesses. True, with the recent governmental measures, things should loosen up. But it’s going to take time.

Unfortunately, many businesses need money now.

So, what are some alternatives? Well, one idea is to visit your local credit union.

A credit union is a not-for-profit financial institution which is owned and managed by its members (that is, the depositors and borrowers). There are roughly 8,300 credit unions across the nation with more than 90 million members.

Credit unions tend to be managed fairly conservatively, with little exposure to complicated investments like derivatives and subprime loans.

Okay, so how do you become a member? Basically, each credit union has its own criteria, which may be based on occupation, geography, association and so on. Keep in mind that many credit unions allow family members to join. Thus, if your mother is a member, you’ll probably be allowed to join. (You can click here for a credit union finder).

As for the loan process, it is similar to the traditional approach. “With current turbulent financial markets, a loan is likely to get more scrutiny than say a few years ago, but credit unions are in still in the market and lending,” said Bill Hampel, who is the chief economist for the Credit Union National Association. For information on the loan process, you can check out a recent Entrepreneur’s Journal column entitled “Using an SBA loan to buy your dream business.”

According to Hampel, there are some other things to consider:

Credit unions tend to be careful lenders, so they require full documentation on loans.
About 24% of the nation’s credit unions offer member business loans.
The average loan size is $180,000.
Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website

Hope this helps someone, George Mills

Our experience has been that unless you have current business income or can pledge non-business assets as collateral, neither a bank nor a credit union will lend you money. This is in Texas with a great FICO, a significant owner contribution, and a great business plan. Banks and CUs are in the business of financing expansions (franchises, corporate-stores, existing indies). If you are an indie startup, it is VERY difficult to get them to fund.