With interest rates rising and every dollar precious in the hyper-competitive restaurant business, companies need to carefully consider their financing options.
Credit appetites and capital markets options in this industry are healthy, given regular remodel and refresh efforts, new construction, brand consolidation and percolating merger-and-acquisition activity. Shawn Janko, senior credit products manager for restaurants at Bank of America Merrill Lynch, says restaurant companies of all sizes — from franchisors and the largest operating companies to franchisees with five or fewer stores — have multiple financing alternatives they should consider.
Among those typically most appropriate for restaurant operating companies and franchisors are: pro rata senior credit facilities (bank debt), consisting of bank term loans, a traditional credit option that tends to work best for permanent capital and acquisitions, and working capital revolving lines of credit used to meet daily cash flow needs; syndicated institutional debt options such as syndicated term loan b and/or second lien term loans; as well as other debt capital markets solutions (e.g., private placements, high yield notes and securitizations).
Franchisees can take advantage of many of these same financing options, as well as development lines of credit, which work well for organic growth initiatives, development of new stores and remodels.
To avoid the high rates of alternative lenders and secure more favorable terms, franchisees ineligible for conventional financing — including most operators with fewer than four stores — should talk to banks about these options available through Small Business Administration (SBA) loan programs:
General purpose 7(a) loans
7(a) loans are often used to acquire new units, with or without the real estate, as well as to finance remodels. Prepayment penalties drop from 5% in year 1, to 3% in year 2, to 1% in year 3 — and disappear altogether after that. In addition, 7(a) loans require down payments as low as 10%, compared to 20% to 25% for conventional loans, and offer extended terms up to 7 to 10 years.
Certified Development Company (CDC)/504 loans
504 loans finance the purchase of real estate and equipment — fixed assets. They are often used to support “ground-up” construction. As with 7(a) loans, 504 down payment requirements are as low as 10%. 504 loans also provide longer-term financing: With the backing of the SBA, banks are willing to go out longer on the yield curve, sometimes 20 to 25 years.
SBA Express loans
A working capital product that provides financing of up to $350,000, an SBA Express loan can be used alone or as a companion product with other SBA loans to provide a cash flow cushion.
“Even a larger franchisee with, say 10 stores, should at least take a look at the SBA loan options because of the smaller down payment requirements and greater flexibility in structure,” advises Kale Gaston, head of SBA Lending at Bank of America Merrill Lynch, a top 3 lender for SBA 504 loans1 and a fast riser among 7(a) lenders2.
Gaston points out that SBA loans are limited in the amount of financing they can offer — typically no more than $5 million.
The right solution and structure
The right financing solution for any particular restaurant company will depend on its size and leverage, Janko says, adding: “Depending on the size, breadth, scale and scope of the company, Bank of America Merrill Lynch can provide various types of financial solutions.”
Bank of America Merrill Lynch has a 40-year track record of consistently financing restaurants — and sticking with clients through business cycles, Janko notes. “We’ve been in the business for a long time, we understand the needs of restaurant clients, and we’re willing to be creative with structure.”
1 Eagle Compliance, LLC, with data provided by the U.S. Small Business Administration, Third Party Lender Gross Loan Approval Stats, as of September 30, 2016. These numbers represent SBA “authorizations” and do not necessarily reflect booked loans.
2 U.S. Small Business Administration, “100 Most Active SBA 7(a) Lenders in the United States by lending volume, through December 31, 2016.”
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- Restaurant owner/operators of all sizes have a broad range of financing options, despite rising interest rates
- Choosing a loan vehicle that meets your goals is critical, whether it’s for new stores, remodels or brand consolidation
- SBA loans’ smaller down payments and structural flexibility offer advantages for franchises with up to 10 stores