“A bank is a place that will lend you money if you can prove that you don’t need it...”

Borrowing money, whether it be for a new stove, a restaurant expansion or just some short-term cash flow, is a daunting task at best. Most restaurateurs would rather peel potatoes with a rubber spoon than fill out the mini-mountains of forms that go along with a loan application. Lending institutions seem to regard loaning restaurants money as being about as attractive as writing an Enron business development loan. Many banks won’t touch restaurants at all, and those that do are conservative and finicky in their approach. As Bob Hope once said, “A bank is a place that will lend you money if you can prove that you don’t need it.”

This is where “alternative” lenders come in. They will loan to restaurants and despite significantly higher interest rates (or euphemistically styled “costs”), they are a simpler and faster way of realizing capital for short term needs.

What do restaurants mainly borrow money for?
According to a survey carried out by Rewards Network, based on 382 restaurants who responded:

In 2006, financing was used for:
Paying vendors (48%)
Marketing expenses (36%)
Taxes (35%)
Payroll (33%)

For 2007 projected uses look very different:
Remodeling (40%)
Purchasing Equipment (38%)
Expanding (36%)

I wonder if the more strategic spending that is planned for 2007 is due to a boom in the market, or is it just optimistic thinking that will wind up reverting to the same traditional uses as 2006?

There is little or no federal regulation in this market sector, so it really is a case of buyer beware. Once you move away from the tightly controlled conventional banking sector, you are on your own. The help of your financial advisor is definitely required before making a commitment to take on a loan. To avoid getting tangled up in a very expensive arrangement, you have to carefully choose an organization that is upfront about costs and has a proven track record in the restaurant business. Then try and check their claims with other restaurateurs. It’s amazing that chefs applying for a job expect to have their references checked, but not a lender!

Restaurant owners are a proud bunch of folks. Many will never admit that they need money and they will borrow from anyone who will discreetly send them cash, no matter how high the interest rate or how aggressive the repayment terms. This is in part why restaurant loans are seen as such high risk. Restaurateurs who need money are probably not in the best shape to make repayments. We’re back to Bob Hope then?

Not quite. There are ways of raising capital without selling your children into slavery or risking the health of your kneecaps. They all depend on carefully choosing reputable companies that are used to working with the special needs of the hospitality industry.

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