Want a Loan to Open a Restaurant? Good Luck

Question: I would like to start a small business in the food industry and am currently working on a proposal to present to a lender. What challenges do I face in obtaining this small business loan? Any tips on how I can improve my chances?

Answer: Trying to get a loan to start a new company is definitely a challenge.

“Start-up businesses have no historical income. Traditional bank lenders rely on historical (tax-return verified) income in order to assess credit risk,” Tom Swenson, Bank of Montana founder and chief executive officer, wrote in an e-mail. “If you are proposing a start-up business, you are de facto proposing something that doesn’t meet typical bank underwriting standards.”

The fact that it’s a food-related business doesn’t help: Bankers know that food and restaurant loans have high rates of default. And you’ll probably invest heavily in inventory and equipment—items that lose value quickly and are tough for lenders to resell in the event that your startup goes under and you can’t pay back what you owe.

So, how do startup companies like yours open their doors? Surveys show that almost all—about 80 percent—rely partly or completely on the founder’s savings. Close to one-third of startups get money from friends and family or charge startup expenses to credit cards. About 20 percent get funding by bringing in a business partner.

Of the 40 percent or so that do get bank loans, most are backed by personal guarantees and personal property, such as equity in a home. If that’s an option for you, include it in your proposal. Or—if your existing household income is high enough to support debt repayment—make sure the lender knows you are committed to retaining your job while you’re starting the business, or that you will rely on your spouse or partner’s income to make the payments.

If you have a strong business plan and previous experience successfully starting and running similar food businesses, you might suggest a Small Business Administration guarantee on the loan. The SBA guarantees close to $30 billion annually in loans made through traditional lenders. The maximum loan amount in the SBA’s main 7(a) loan program is $5 million; the average loan amount in fiscal year 2012 was $337,730. Microloans of up to $50,000 are also made by SBA through nonprofit organizations such as Accion. “This isn’t a direct substitute for the lack of historical income, but it can reduce the overall perceived credit risk and turn the request into a yes from a maybe or a soft no,” Swenson writes.

Some other possibilities: Lease the large, expensive fixtures and equipment you need to start the business. Put the rest of the startup expenses on credit cards, request a smaller bank loan, or borrow from friends and family. You might ask your existing customers or foodie fans to chip in, as many well-known chefs do when opening new restaurants.

“In the last few weeks, my bank financed a restaurant where a wealthy benefactor actually gave us a first lien on his home to ensure the restaurateurs’ access to our loan funds, which they desperately needed,” Swenson writes. “He asked for nothing in exchange, except the ability to eat their food and to have fun doing it.”

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