SELECTING A BANK AND BANKER
Money, Money, Money
SELECTING A BANK & BANKER
Selecting a commercial bank or credit union is one of the most important decisions you will make in the restaurant business, as more than likely this will be a long-term relationship.
Commercial Banks are “for profit” corporations with committees, policies, procedures and high government and legal regulations.
Credit Unions are registered as “non-profit” and made up of owner/members whose funds are pooled to provide loans and other benefits to members. As Credit Unions are not subject to pay corporate income tax, they are able to offer lower rates and other benefits to their members.
NOTE: It pays to interview several different bank and credit union loan officers prior to seeking funds to:
- Understand how each does business
- Assess their willingness to loan to restaurants.
- Compare loan rates and terms
- Get Application requirements
- Compare Decision making timelines
- Obtain discrete client references
- Assess the “chemistry” and fit between you and each loan officer
APPLYING FOR A LOAN: Before applying for a loan, you will need a complete and comprehensive business plan with one page summary, full description, marketing plan, financial plan with projections and supporting documents (See Business Plan template also in Module 1 of the Academy).
Make an appointment with each loan officer, dress conservatively and professionally (suit recommended) and be well-versed and knowledgable of every aspect of your potential business, your competition, the industry and each page of your business plan.
It helps greatly to have several years of experience working in a variety of restaurants, especially at management levels.
Loan committees meet bi-monthly or even once a month in smaller communities, so Expect several weeks before receiving an answer and possibly several more meetings with other institution committee members.
NEGOTIATION: Unless you have owned restaurants before, have excellent credit history with larger loans repaid, have extensive industry experience and other loans with this bank, it is rare to be able to negotiate a lower rate or terms with an approving bank.
If you are a stellar credit risk and several banks are eager to fund your deal, you are in an excellent position to negotiate a lower rate and terms so do so if this is you.
RATES: Any financial institution’s rates are based on the “Prime Rate or Federal Loan Rate”, which is the overnight rate that banks lend to each other, all governed by the Federal Funds Rate (The Federal Reserve Department of the U.S. Government). This is the starting point and your loan rate will be “Prime Plus (+) a to be determined Percent”. That percent is the banks profit.
DOWN PAYMENT: In my experience, you can expect to pledge a 20% minimum down payment of the total loan investment up front before the bank will release any loan funds to you.
Each institution’s terms will also vary depending on:
- your experience
- history with this bank
- credit score
- collateral and down payment
- risk factor associated with your chosen location
- whether new construction/ owning the real estate or
- starting from scratch in a leased space
- or buying a thriving restaurant with history of strong cash flow and success.
Terms can be but not limited to:
- Length of the loan
- Term before maturity
- Escalation clauses due to the rise in Prime Rate and other factors
- Interest only for a month or two before your restaurant opens
- Interest only with a “balloon” payment due at term end
- Principal and Interest (P & I) only
- Pledged assets and guarantees
Certain terms may or may not be negotiable, but it never hurts to ask if it improves your position.
NOTE: As restaurant’s are statistically very risky and many banks are restaurant-averse, certain terms may be absolute requirements such as signing personal guarantees, pledging investments and/or real-estate to the bank, etc. in addition to your down payment…
If things go south, the bank legally can attach any and all assets pledged with your personal guarantee.
In my experience, when I opened my first place in a lease space, I had to pledge certain liquid investments. Later, when I purchased land and built a larger restaurant, I had to sign a personal guarantee and pledge my house in addition to the real estate and equipment of my new restaurant.
Only after operating successfully for many years and paying down the note significantly was the personal guarantee suspended.
CONSTRUCTION MONITOR: If you are building a new building or have a particularly large and expensive renovation to your space, a bank will not simply write you a big check when your loan is approved.
Certain timelines and progress must be met first by your contractor(s) which will in turn have to be physically inspected on-site by a bank appointed construction monitor.
After each inspection, the monitor will review and hopefully approve each contractor invoice before it is submitted to the bank for payment.
NOTE: Most contractors strongly dislike dealing with a go-between that inspects both their work and invoices and keeps them waiting for their money, but this will be necessary in most cases. It is wise to discuss this fact with your selected contractor(s) in advance so there are no surprises that affect the quality and timeliness of the work to be performed.
REFINANCING: After meeting certain milestones and building a successful business, you may be in a position to negotiate a lower loan rate, especially if the Prime Rate falls. After several years in business with a successful track record, its also possible to shop your loan around to competing banks for a “best rate”, especially if you are indifferent to your bank’s service or loan officer.
LONGEVITY: When I borrowed money to start my first restaurant, I went with the largest regional bank in New England and it turned out that I then had a revolving door of loan officers. They were either getting promoted, fired or quitting and every few months, I got a new banker to deal with. This got old pretty quickly, as I never developed a relationship with any of them.
It wasn’t until I shopped my loan around two years later after I had created success in my business, that I found an excellent loan officer and friend (V.P. of Commercial Lending) with a progressive and growing state bank. This bank, loan officer and I went on to do many more projects together. They funded purchase of land and new construction of my larger restaurant, bought out my existing loan years later and financed numerous other restaurant renovations, commercial real estate projects and several home mortgages.
This last banking relationship with the same personal banker lasted 18 years and it was bittersweet for both of us when I sold my restaurants and moved across the country. This is the type of banking relationship you should seek out.