MRM EXCLUSIVE: Your Restaurant Is a Small Business, Fund it Like One

Do you want to open a new restaurant? Is your dining room or kitchen in need of renovation? Maybe you want to start a food truck on the side?  

How are you going to pay for it?

Seventy percent of American restaurants are single-unit operations, the majority of which have fewer than 50 employees.  Restaurants are associated with fun and hospitality but at their core, each is a business venture and according to the Small Business Administration, full-service restaurants with annual incomes less than $7.5 million and quick-service restaurants that take in less than $11 million are categorized as small businesses.  

Relying on maxed-out credit cards and nest egg savings puts unnecessary strain on personal finances. Consider this instead: Take a cue from other small businesses and fund your next venture through a small business loan. Here are the steps to take when embarking on this process.

Assess Your Credit Needs

First and foremost, decide how much money you actually you need. Make your purchase plan as detailed as possible and price out every item. This will help you avoid borrowing more (or less) than you need, and will present your new potential financier the clearest possible picture of what you plan to do.  

Research Lending Options

Once you know what you need, start researching your options for lenders. Big banks are great if you have solid credit and a strong business background, but they tend to have more fixed rates and non-negotiable penalties.

Trust companies are traditionally owned by larger banks, but offer more flexibility where it comes to lending. You may pay higher fees for this flexibility, though, so it’s best to double check the fine print.

Credit unions operate on a non-profit status and are member-owned. This means your success is seen as more of an investment to the members of the union, and they may be more open to assisting you with financial planning.

Also check if your restaurant point of sale (POS) or credit card processor has a special offer available. This may be limited to items related to your service, but it’s worth contacting them to find out.        

Know Your Credit Score

If you are looking into a line of credit from a traditional financial institution, be aware that available funds are competitive and require you have a good personal credit score (above 650) and a solid business credit score (above 80). It’s a good idea to check you score ahead of time, especially if you plan on using a larger institution, which will place greater emphasis on your personal credit score.  

Local banks and credit unions are often more business-oriented and prepared to make the distinction between personal finances and those of the restaurant. Depending on your situation, if your credit score is particularly low or you have pre-existing blemishes, such as a prior bankruptcy, you may want to acquire a separate tax ID from the IRS by incorporating into a limited liability corporation. This may be possible even if you do not want to incorporate into an LLC, but have a micro-operation, such as a food truck, and plan to act as the sole proprietor. If your credit is less than optimal, you may still have a chance to acquire a small business loan if you are willing to secure your financing with collateral through personal equity in your home.

Prepare for Meeting with the Loan Officer

Once you’ve decided how much you need and who you’d like to work with, it’s time to set a meeting with your lender’s loan officer. To help you prepare, here’s a list of items the Small Business Administration recommends having on hand to ensure a smooth and timely process.

Resume: Many financial institutions want to see prior business or managerial experience before they’ll feel comfortable extending you a line of credit.

Business plan: A strong business plan is essential for any new loan. The SBA recommends “a complete set of projected financial statements, including profit and loss, cash flow and a balance sheet.”

Collateral: Of all the items listed, collateral is the most case-specific item. Many institutions do not require any kind of collateral while others will require collateral if they deem your venture to be high risk. You can downplay this risk by having your ducks in a row and presenting a picture of confidence.

Personal credit report: A credit report will be generated by your lender but it is still a good idea to check your report ahead of time for inaccuracies, which should be addressed before you ever set foot in a bank.

Business credit report: Like your personal credit report, your institution will obtain a copy, but it’s a good idea to know what’s on it ahead of time.

Bank statements: On average, expect one year of personal and business-related statements.

Financial statements: Any investor with greater than a 20-percent stake in your restaurant may need to furnish signed personal and projected financial statements.

Income tax returns: Most loan programs require applicants to submit personal and business income tax returns for the previous three years.

Legal documents: The following documents are institution-specific but can’t hurt to have on hand:

• Business licenses and registrations required for you to conduct business
• Articles of incorporation
• Copies of contracts you have with any third parties
• Franchise agreements, if applicable
• A copy of your commercial lease, if applicable

Personal background info: At the very least, you’ll be required to fill out basic information, such as current, past and business address; phone numbers; education history and any criminal history.      

Once you have these documents in order, expect to be asked how the funds will be used. A loan officer may ask about the equipment you intend to purchase and who will supply it, the names of anyone else holding leadership roles in the company, or information about any other debt owed.

By taking a methodical approach to your restaurant’s financial needs, you’ll be better prepared to obtain the funding you need for your restaurant. Adopting the mindset of a small business owner can help lay a solid foundation that will ultimately allow restaurateurs to focus on what really counts — incredible food and exceptional hospitality that keeps your guests coming back for more.