Economic turbulence reshuffles the deck for restaurant financing

Lexington, KY – Ask most bankers what are their least favorite types of collateral are and they will likely include used restaurant equipment on the list. Obtaining financing for restaurant ventures is always a challenge, and the current economic and credit environment does not make it any easier. Deals are still getting done and loans are being made, but the landscape has changed.

Restaurant financing is important because the restaurant and related industries are important components of the economy, both regionally and nationally. Nationally, there were nearly a million restaurants with total sales approximating $566 billion in 2008 (per the National Restaurant Association). The industry is one of the largest private sector employers, and more than two out of every five adults have worked in the industry sometime in their lives. It is also often an important entry level rung on the employment ladder for many people.

The restaurant industry is here, it’s big, it’s important and it will always be here. One can argue it’s relatively more important for Lexington, since the area ranks 22nd in the nation in restaurant sales per capita. I review all this to underscore why financing of restaurant ventures is essential.

Restaurateurs need financing for a wide variety of reasons, including the following:

1. New concept start-up ventures

2. Franchise restaurant openings

3. Acquisitions of operating restaurants

4. Major remodels of existing operations

5. Franchisor-required major image enhancements and/or equipment upgrades

6. Working capital, for seasonal variations and other reasons

7. Conversion of restaurants from one concept to another

8. Restaurant chain expansion

9. Strategic opportunities to acquire real estate at a good location

10. Partner buyouts

The financing solution for these scenarios can vary depending the individual, her/his financial capability and their industry expertise. With the change in the credit environment, the options mix may be different. Lenders have adjusted their underwriting requirement in general and sometimes specifically for certain industries. I always prepare a business plan before seeking financing, and not just because most lenders will expect it. The value of a business plan is as much in the process of writing it as the final product, because it forces you to get out of comfort zones and think holistically about what you are doing. Having completed the process will also give you more confidence when seeking financing. For novices to this, a great resource is the Kentucky Small Business Development Center office, with locations across the state ( The office here in Lexington has a fine staff.

Here are some of the current shifts in restaurant financing, of which those in the restaurant industry might want to take note:

Human asset evaluation

The restaurant business is one of the most competitive industries around. In highly competitive situations, the asset that can make the difference between failing and succeeding is the human asset. Many lenders are taking a closer look at non-quantitative factors like the person’s relevant industry experience when assessing loan applications. That is why that aspect should be addressed in a business plan.

Financing a la carte

Often the total financing package for a restaurant deal will have multiple components and that may increase. Some banks and commercial lenders are shifting toward just financing the “brick and mortar” part of a restaurant and shifting away from financing FF&E (furniture, fixtures and equipment). However, there are established companies that specialize just in equipment financing and they are seeing a noticeable increase in their deal flow.

Lenders tighten up

If the financing is for a restaurant business acquisition, there have been several shifts in the last few months, and there may be continued changes. Some lenders are requiring a larger down payment and a higher coverage ratio of cash flow to debt service. Additionally, sometimes they will want (and maybe require) the seller to provide some partial financing in the form of a note subordinate to the banks. This note may be an interest-only note for the first two or three years. This lessens the lender’s exposure and keeps some of the seller’s skin in the game post closing. It can also benefit the seller, since the gain from the sale may get deferred. Seller financing can also be important if the loan is from the Small Business Administration, or SBA ( There have been some changes and proposed changes (under review) that may influence or limit the amount of goodwill the SBA will finance in a business transaction. Businesses are normally sold based on a multiple (or present value) of cash flow and nontangible assets. The more limits that are placed on financing the goodwill (or nontangible asset) component of a business, the more of that financing burden will have to be borne by the buyer, seller or other sources.

In summary, the lending environment is changing for restaurateurs, but if there is ever a group of entrepreneurs that are used to adapting to change, it’s that group. Their best approach, as always, is to prepare, plan and look at various financing options to determine the right mix for them.

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