Given a lending spigot that can’t be budged, restaurateurs are turning on the creativity when it comes to funding future growth.
20-25% Required down payment for restaurateurs before loan considerations by most lendersSOURCE: MORNINGSTAR RETAIL & RESTAURANT ANALYSTS
Credit unions, private investors, the sale of assets and innovative financing structures increasingly are filling the void left by the continuing shortage of traditional loans.
Although it has been nearly two years since the financial world began its rocky ride, the nation’s biggest banks are still cutting back on lending to small businesses. According to a U.S. Treasury report in early February, average loan balances fell by about 1 percent to $2.766 trillion in December at the 11 top banks that received government capital injections under the Troubled Asset Relief Program. The drop marked the eighth consecutive month of declines for the banks, including small business lender Wells Fargo.
“Banks have become much more restrictive, with recent lending reflecting higher credit spreads, stricter covenants, shorter maturities and higher transaction fees,” said a group of Morningstar retail and restaurant analysts in a January report. “Cash injection requirements are at an all-time high, with most lenders requiring a 20 percent to 25 percent down payment before even considering a new loan in the restaurant space.”
Despite the lack of funding from traditional banks, there are some opportunities for restaurants, particularly those with strong balance sheets. Taco Bell franchisee, Taco Bill Inc., for example, recently secured a multi-million dollar credit facility from GE Capital’s Franchise Finance division to buy seven new units in the Baltimore area. The division, which provides financing solely to franchise companies, had previously worked with Taco Bill and its affiliate company.
Many other companies, particularly those with fewer locations and lesser-known names, have had to look elsewhere for financing.
Cooper’s Hawk Winery & Restaurants announced this month it is partnering with private investment firm KarpReilly LLC to fund new restaurant growth in the Midwest.
“We hit it off and we had been looking for alternative methods of funding with banks being closed to little guys like us,” said Cooper’s Hawk founder Tim McEnery.
McEnery said he had been proactively looking for financing for 10 to 12 months before making the deal with KarpReilly. The company, which currently operates four locations, plans to use the financing to open one to two new locations in 2010 and two to three locations in 2011.
Credit unions have also emerged as a viable alternative to banks for small restaurants looking for loans. Credit unions have historically focused more on lending to consumers through auto loans, home loans and the like. But these days, with consumers restricting their spending on big-ticket items such as cars, credit unions have been more interested in lending to small businesses, including restaurants.
“Credit union business lending has been rising faster than any other type of lending they do,” said Steve Rick, senior economist at the Credit Union National Association. “They’re stepping into the void that’s been left by the banking industry.”
Credit unions, though, likely won’t be able to fill the entire void. A restaurant must be a member of the credit union to access its resources and the loans tend to be smaller. Credit unions currently must abide by federal limits on the share of a credit union’s resources that can be used for lending to businesses.
For restaurants looking for cash to fill gaps in the operating budget, real estate has become a possible safety net. Morningstar restaurant analyst R.J. Hottovy said some companies are looking to sell off real estate assets in order to obtain cash. To do so, many restaurants have been attempting to ascertain the value of those assets. Retail Valuation Services, a company that performs appraisals for restaurants, has seen more restaurant companies ask for an assessment in order to dispose of assets.
“A lot of what we’re doing…is determining the value of their real estate for disposition purposes,” said Brian Garrison, executive vice president at Retail Valuation Services.
Still other companies are restructuring their operating models to allow for growth. The owner of Shane’s Rib Shack, for example, is testing an “owner/operator” model that allows prospective new owners a way into the business without having to secure hard-to-get financing.
Under this model, Petrus Brands Inc. would technically own any new restaurants while a franchisee would be an operating partner with a salary and a cut of the profits. In order to become an operator, an applicant would need only to invest $10,000, rather than the typical $400,000 to $700,000 in store development costs.