Money makes the world — and the restaurant industry — go 'round. Whether you're starting your first restaurant, remodeling a dining room, moving into a larger location or adding a new unit, you'll need money. And unless you happen to have the cash on hand, you'll need to ask others to help finance your project.

Obtaining financing can be challenging for restaurateurs. "It's tough, because this isn't an industry that the banking world loves," says Rod Guinn, executive director for the Restaurant Banking Group of FleetBoston Financial. "Be prepared for some rejection." But funding is available for those who persevere. Restaurants USA put together this financing guide to help you harvest the funds you need.

Show me the money!

For starters, you'll want to explore different financing options. What works for one restaurateur won't necessarily work for another. Factors such as your experience, the size of your business and the amount of funds needed determine what type of financing is most appropriate. Here are some financing options to explore.

Commercial bank loans. First-time restaurateurs often find it difficult to get a commercial bank loan, but it could still be worth a try. Whether you succeed in securing a loan depends on the bank and your ability to prove that you're a low-risk loan. "We do not shun restaurants," says John Lane, president and CEO of ColomboBank, a community bank based in Bethesda, Maryland, with a second location in Baltimore. "We have had good successes with them." He notes, though, that the bank closely scrutinizes restaurant applications. "My responsibility is to protect the assets of the institution and to protect the needs of clients," he says. If the applicant doesn't convince him that he or she can make a go of the business, Lane has no choice but to reject the application.

However, just because one bank says no, doesn't mean another one won't say yes. Ralph Brennan, whose family owns several restaurants in New Orleans, purchased Mr. B's Bistro from his family in 1986. When the bank his family had dealt with for years turned him down for a loan, Brennan moved on to another bank, where he was successful in getting financing. Today he owns four restaurants in New Orleans and is expected to open his fifth, Jazz Kitchen, this month at Disneyland in Anaheim, California. "[Now], the old bank courts us and would love to do business with us," says Brennan.

Once you have one or two successful restaurants, your chances of receiving a bank loan increase. "Raising money for restaurant number two is easier — now you have a restaurant to show people and a track record," says financial consultant and accountant Brad Saltz, director of hospitality for Cleveland-based SS&G Financial Services and former chief financial officer for Phoenix-based Houston's Restaurants. "A bank loan makes perfect sense at that point," he says, noting that that's how Houston's financed all of its units.

Whether a bank loan is appropriate for you also depends on how you like to do business. "A bank loan is riskier on the front end," says Brennan. "If the restaurant doesn't work out well, you still have to pay back the loan." Whereas, if investors purchase equity in your business, they receive a financial return only if the business does well. Nonetheless, Brennan says he would rather get bank financing and retain total ownership of his business. Once he pays off the loan, he doesn't have any financial obligations.

If you're not able to get a loan on your own, one option is to get someone else to guaranty it, says Saltz. For example, investors may be willing to do this. In return, you may need to compensate them with equity in your business. The federal government, through the Small Business Administration (SBA), also guarantees loans.

SBA loans. An alternative to getting a traditional commercial bank loan is to secure an SBA loan, with the most popular being the 7(a) Loan Guaranty Program. In fiscal year 2000, the 7(a) program granted almost 44,000 loans for a total of $10.5 billion, according to Mike Stamler, an SBA spokesperson. Through the program, private-sector lenders grant loans, and the SBA guaranties that up to 85 percent of the principal will be repaid. About 5,000 U.S. lenders grant SBA loans. In fact, the same bank that turns down a restaurant for a traditional loan may be able to approve an SBA loan, so be sure to ask if that's an option.

A 7(a) loan can be used for most business purposes. It is offered at market interest rates and usually is financed over seven or eight years — slightly longer than a traditional loan. The extended financing means lower monthly payments, says Stamler. On the other hand, you will pay more interest over time.

To qualify for a 7(a) loan, you must first be rejected for a traditional loan, and you must operate a small business — a category that encompasses more than 99 percent of companies, says Stamler. Individual franchisees of large corporations also may be considered small businesses, he notes. The SBA also looks for detailed evidence that you'll be able to repay the loan.

In addition, the SBA offers the 504 Certified Development Company (CDC) Loan Program. This program provides long-term, fixed-rate financing for major fixed assets, such as purchasing land or buildings, renovating existing facilities, or purchasing long-term machinery and equipment. The 504 program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing. A Certified Development Company is a nonprofit corporation established to contribute to the economic development of the community. CDCs work with the SBA and private-sector lenders to provide financing. In fiscal year 2000, the program granted more than 4,500 loans for a total of $1.8 billion.

Magdalena Torrez, who owns Ranchito Mexican restaurant in Worland, Wyoming, is among the many businesspeople who have received an SBA loan. About four years ago, she sought financing to purchase a new building for her restaurant, which had outgrown its 30-seat capacity. After going from bank to bank and receiving rejection notices, Torrez finally struck gold at the fourth bank that she tried. The banker suggested applying for an SBA loan. "The process was very easy, because I had already been looking into loans. They kept asking me for projections and profiles, and I had all the paperwork ready," she says. Within a month, Torrez received a positive response. With a little help from the SBA, Ranchito now seats 105 people in its new location. "If the SBA had turned us down," says Torrez, "we were going to shut down."

Investors. With the right contacts and the ability to prove yourself, you could gain substantial financial backing from investors. Take the case of chef Timothy Dean, who in 1995 at age 25 tried to get investors to back a restaurant. Unsuccessful in that endeavor, Dean tried again four years later after honing his culinary and management skills. By then he was executive chef of Palladin restaurant in New York City.

Deciding that the time was ripe to open his own restaurant in his hometown of Washington DC, Dean contacted his attorney for advice on getting investors. "He suggested that I pack a cooler and come down and cook for a few people he knew," he says. Dean cooked up a gourmet dinner, describing each course to a group of 12 potential investors. His laptop computer in tow, he showed attendees projected food and labor costs as well as projected revenue. "It was sort of like a show I had to put on," he says. Apparently, the audience loved his performance. By the end of the evening — over cognac, dessert and cigars — attendees were writing him checks. "Within that one night we raised $75,000."

Throughout the next few months, Dean traveled to Washington several times to put on his "show" for potential investors — serving up dinners of foie gras, micro-green salads and pan-seared fish, including the popular John Dory variety. "They could see I had experience [running a restaurant], so why not do it for myself?" he asks. In total he raised about $275,000. In May 2000, Dean's dream of owning a restaurant became a reality with the opening of Timothy Dean Restaurant and Bar at the St. Regis Hotel in Washington DC.

Attracting investors for your first restaurant can be challenging, but restaurateurs say it gets easier for subsequent operations. For example, Christine Keff, chef/owner of Seattle's Flying Fish restaurant, struggled to get investors for the restaurant — her first — which opened in 1995. Determined to get investors, Keff offered a sweet deal: $14,000 of every $15,000 invested was considered a loan to be paid back at 14 percent interest; the other $1,000 was equity in the restaurant. "Don't hesitate to do what you have to do [to get investors]," says Keff. "People are taking a huge risk, and you have to give them something [in return]."

Five years later, Keff has proven herself as a restaurateur. The result: Investors were eager to fund her second restaurant, Fandango, which opened in 2000. This time, investors received equity only, which means no loans to repay. "They share in your profits and your losses," says Keff.

Restaurateurs tend to prefer that investors provide equity instead of debt, says Saltz. "Straight equity makes more sense. The restaurateur doesn't need the obligation to pay interest." Saltz also advises that rookie restaurateurs seek several investors to contribute smaller amounts, rather than struggling to find one or two major investors. "Raise $20,000 or $25,000 at a time," he says, noting that if they have less to lose, investors will be more willing to finance your business.

Family, friends, accountants and attorneys often can help introduce you to potential investors, he says. Established restaurants might also go to an investment bank for help in getting equity. Ideally, you'll structure the business so that you retain control even if others have equity, says Saltz. "But sometimes if they put the money in, they're going to call the shots, regardless of what any document says."

Financing from the seller. If you're purchasing an established restaurant, one option is to ask the seller to finance the sale. That's what Joe Stevens did when he opened his restaurant during the 1970s in San Diego. Today Stevens is a volunteer counselor for the Service Corps of Retired Executives — a Washington DC-based organization that is funded by the SBA and provides free business advice to small businesses. Stevens recommends that his clients try to get financing through the seller. There are two benefits to seller-based financing, he explains. First, it's a good alternative when other financing sources are unavailable. Second, it bodes well for the business's potential. "If the seller is willing to finance the buyer, it shows faith in the continued success of the operation," he explains.

Partnerships. Another way to increase your capital is to pool your resources with a partner. Take the case of Ronald Tapley, who is co-owner of a Mazzio's pizza franchise in Wynne, Arkansas. The Tulsa, Oklahoma-based company has 224 units nationwide. Tapley purchased one-third of the Wynne franchise in 1995 — shortly after he started working there — and planned eventually to buy the remainder. But finding the needed funds was difficult. Enter Bill Wood, a former colleague from their days managing a McDonald's franchise in West Memphis, Arkansas. The two decided to go into business together, with Wood investing additional funds. With a substantial equity investment, Tapley and Wood were able to get an SBA loan for the remainder of the funds.

Partners can provide a good source of funds, but sometimes too many cooks spoil the broth. "The fewer partners you have, the better," says Stevens. Furthermore, partners should be fully aware of what they're getting into — to prevent problems down the line. "They should be people who realize it's a risky investment."

Personal finances. If you're unable to get a commercial loan, you might consider applying for a personal loan, such as a home-equity loan. Both Lane and Stevens say that they've seen businesses started this way. Even if you can get a traditional commercial loan, a home-equity loan can provide supplemental funding. Lane notes that lenders wish to see an investment of the businessperson's own money. A home-equity loan can help to provide this capital.

Venture capital. Once you have several restaurants under your belt, new financing options arise, says Saltz. If you have a hot concept that you expect will grow rapidly, one possibility is to obtain venture capital. Professional venture-capital firms invest significant funds in fledgling companies in which they foresee major expansion. Compared with other investors, venture-capital firms usually want a "much greater partnership and to have far more say," says Saltz, noting that they'll want to help determine your company's direction. In return, they usually expect to see a large return within three to seven years.

Combi-deals. Many restaurateurs depend on a combination of financing sources. For example, Dean got an SBA loan for $150,000 in addition to the $275,000 he raised from investors. Lane notes that he's seen many restaurateurs use investors to supplement a bank loan. "The investors provide the equity" — something banks want, he says. "It may be a good idea to locate an investor if you don't have adequate personal funds."

Raising the dough

Lenders and investors want to know one thing, says Stevens. "They want to know how you're going to pay them back. They don't want your house; they don't want your car. They want to give you money and for you to use that money to generate capital and pay them back with interest." To demonstrate that you're a low-risk investment, you'll need to show them the following:

Business plans. Restaurateurs seeking financing should come armed with a comprehensive business plan that convinces potential lenders and investors "that you know what your goal is and how to get there," says Stevens. "The plan has to show that you've done a lot of research, that you not only have an idea, but that you've gone out and researched the market, and that you have facts and figures."

Include information about the concept and the need for it, the location and area demographics, food costs, fixed costs, and expected revenue. "It's important to have either an accounting knowledge or background, or to have a good accountant to verify figures," says Stevens. If you're taking over an existing restaurant or looking to expand your business, you have the benefit of being able to include past profit-and-loss statements, in addition to projections.

It doesn't take an investor or lender long to determine whether the numbers pan out. "The first thing they look at is the executive summary to see if that makes any sense," says Stevens, who used to serve on the loan committee of a bank. For example: Do the projected sales figures realistically match the number of seats in the restaurant?

Saltz agrees on the importance of a solid business plan. "[Investors and lenders] want to know who you are and what it is you're planning to do. . . . Show them a financial scenario that is logical."

Past performance. Expect investors to study your company's past performance. "We look at the strength of the management group and the consistency of its performance," says Fleet's Guinn. "We want to see how their margins compare to some of their peers, how they manage their staff and what their turnover is — the lower the turnover, the more consistent their service is and the more consistently satisfied their customers are.

"We look at how they've grown, whether it's been in a controlled fashion. We look at their past history, how often have they had to reinvent their concept?" It's a positive sign if a company can adapt to consumer demand, he says. "If sales are up and down, it could mean that they're taking too long to react."

Site location. Lenders also take into account the restaurant's location, says Lane. He looks for evidence that the location is one that can support the restaurant — or its proposed expansion. Often he'll even visit the site to determine factors such as its accessibility. He's seen restaurants fail partly because they're hard to access off of a busy street.

He also looks to see if other restaurants have failed in that location. Previous failures are sometimes because of poor management on the part of the other restaurateurs, but "if there's been a half a dozen restaurants that have failed in a location, a bank may not believe you're the person that's going to be exempt," he says.

The lease terms are another important factor, says Lane. Sometimes the location is great, but the lease is too costly for the business to survive, he says. "Many times the rental payments erode any opportunity for profit. I recommend having an attorney negotiate the best terms possible." He also prefers leases with an assignment clause. Being able to assign the lease provides other options in the event you decide to move or have an opportunity to sell your operation.

Equity investment. Lenders usually want to see that you're putting your own money on the line. By investing your own capital, your application will appeal to lenders for a couple of reasons, explains the SBA's Stamler. First, it lowers the loan amount and second it indicates your commitment to the project. Some restaurateurs shun investors, not wanting to give interest, but sometimes it's the only alternative. "You have to ask yourself, would you rather have 100 percent of nothing or 50 percent of a lot?" asks Lane. "Everything in life is a compromise.

"Equity gives the bank comfort to know you have a vested interest in this," he says. "You have an investment in the restaurant, so you can't just close the door and walk away." In other words, you're more likely to pay back your loan.

Personal finances. Lenders also will scrutinize your personal finances. "I cannot emphasize enough the importance of your personal credit rating," says Stevens. Banks look at your past financial history as an indication of your ability to repay the loan, he says. "If you're contemplating going into business, work now to make sure your credit rating is good," he advises.

Persistence pays off

You can expect to face some obstacles on your way toward gathering financing, but don't let that stop you. Financing is available to those who persevere. Ronald Tapley says that he went through an eight-month process to get approval to purchase and finance a franchise of Mazzio's. "I just made up my mind that I was not going to take no for an answer," he says. "Persistence pays."

Hard Facts About Cold Cash Here are some resources on financial information from the National Restaurant Association's Information Service and Library. Books Anatomy of a Business Plan: A Step-by-Step Guide to Starting Smart, Building the Business, and Securing Your Company's Future, written by Linda Pinson and Jerry Jinnett, and published by Dearborn Trade, 1999 Borrowing to Build Your Business: Getting Your Banker to Say "Yes", written by George M. Dawnson and published by Dearborn Trade, 1997 The Ernst & Young Business Plan Guide, written by Eric S. Siegel, Brian R. Ford and Jay M. Bornstein, and published by John Wiley & Sons, 1993 The Complete Book of Business Plans: Simple Steps to Writing a Powerful Business Plan, written by Joseph A. Covello and Brian J. Hazelgren, and published by Sourcebooks Trade, 1994 How to Get a Small Business Loan: A Banker Shows You Exactly What to Do to Get a Loan, written by Bryan E. Milling and published by Sourcebooks Trade, 1998 The Insider's Guide to Small Business Loans, second edition, written by Dan M. Koehler and published by Psi Research-Oasis Press, 2000 Preparing Loan Proposals, written by John S. Wisdom and published by John Wiley & Sons, 1997 The SBA Loan Book, written by Charles H. Green and published by Adams Media Corporation, 1999 The Small Business Start-Up Guide, third edition, written by Robert Sullivan and published by Information International, 2000 Organizations National Business Association, (800) 456-0440. Promotes the growth of small businesses, helps members obtain government, small-business and education loans. National Federation of Independent Business, (800) 634-2669. Represents small and independent businesses at the state and national levels. SCORE (Service Corps of Retired Executives) Association, (800) 634-0245. Retired professionals provide management assistance to those starting a new business venture or expanding their current one. Small Business Administration, (202) 205-7064. U.S. government agency devoted to promoting and assisting small-business development; Web site contains a "Financing Your Business" section.

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