The days of easy money may be over, but funds are still available for operators acquainted with and ready to play by the new rules of the game.
Despite the abysmal lending environment, operators with concrete plans, collateral, industry experience, a proven track record and a willingness to put their own money on the line continue to close deals, lenders said.
“Have a strategy as to how you expect to play offense or defense,” said Cheryl Carner, national director of retail finance at CapitalSource Inc., a middle-market commercial lender. “It’s important for a lender to really understand an operator’s strategy for pulling those dollars out of a consumer’s wallet.”
Carner said that even with the restaurant segment’s poor performance during this recession, lenders understand that the segment plays a vital role in consumers’ lifestyles. People still eat out and increasingly spend more money on food purchases away from home, versus at home, she said.
“Just because of this economy, I don’t see a fundamental change in that,” Carner said. “Peoples’ lifestyles won’t accommodate that. So how do you as an operator plan on catching those dollars?”
Carner said she is still spending a lot of time working on restaurant deals. Those able to obtain financing tend to have certain advantages, including a history of strong financial performance, a business that operates in a stronger sector, like quick service, and an operation that requires few capital expenditures.
“Lenders want their money back,” she said. “You don’t have that cash flow to service debt with a lot of ‘CapEx,’ so that’s a red flag.”
When it comes to operators looking for Small Business Administration loans, moves from the federal government to un-freeze lending should be beneficial for the restaurant industry, sources said.
When applying for an SBA loan, restaurateurs should manage expectations, said Christine Reilly, president at CIT Small Business Lending.
Lenders are looking for operators with experience and those who can provide a solid financial history.
“Stick to what you know, stick to your knitting,” she said. “Lenders will take a very hard look at experience. Now is not the time to open a string of dry cleaners if you’ve been selling hot dogs.
“As far as equity goes, be prepared to have skin in the game,” she said. “The days of 100-percent financing are over.”
Others dealing with personal investors also should be prepared to face some changes.
Chipp Sandground, a lawyer at Kalbian Hagerty LLP, a Washington, D.C.-based law firm who has worked with many chef-owners in obtaining financing for new ventures, said that money is available today, but that it may take more investors to fill the pot.
Instead of raising $1 million with 10 to 15 investors, he explained, raising $1 million today may take between 15 and 20 investors. In addition, he said smaller deals with lower price tags seem to be popular, rather than the larger deals of the past.
“Everybody’s sights are set on lower figures right now,” Sandground said.
He said he is about to reach out to investors on two deals, both with celebrity chefs that are looking to expand and need about $1 million each.
“It will be interesting to see how people feel about risk these days,” he said. “Whether they feel something more tangible, like a restaurant and a well-known chef, is less risky than the stock market.
“The people willing to take risks now, they will find there are great deals to be had,” he said. “I think the money will be out there, deals will be happening still, it just is not as frenzied as it once was.”
