As lending channels dry up, restaurateurs bank on established relationships, government loans

As lending channels dry up, restaurateurs bank on established relationships, government loans

With the nation’s credit in a deep freeze, first-time restaurateurs and smaller operators in need of funds are finding help from two disparate sources: banks where they have long-time relationships and the not-so-familiar government.

Given the miles of red-tape-bound paperwork, restaurant operators long have looked to the U.S. Small Business Administration as a lender of last resort after family, friends and banks have said no. But with all of those parties watching their money more guardedly, the SBA is taking steps to be more accommodating.

Last month, the administration, which works by backing loans approved by banks, said it would ask lending partners to defer SBA-guaranteed loan payments by up to three months for qualified borrowers and that it would work to improve its own liquidity so that access to capital for small businesses increases.

“The sky isn’t falling like you keep hearing,” said Chris Hurn, president and chief executive of Mercantile Capital in Altamonte Springs, Fla., a firm that regularly funds restaurant startups using the SBA’s 504 loan. “[Restaurant operators have to] just go talk to the right people to get it, and they need to use the right loans.”

Still, the number of SBA loans also is shrinking. According to SBA data released late last month, loans approved under the SBA’s most popular program, or the 7(a) program for borrowers with insufficient collateral, declined by 30 percent from a year ago to just more than 69,000 in 2008, and the aggregate loan amount fell 11 percent to $12.7 billion. In the SBA’s 504 program, in which banks take a 50-percent position in mortgages for building purchases, loan approvals fell by 17 percent to nearly 9,000 in 2008, and the dollar amount declined by 16 percent to $5.3 billion.

When asked whether the SBA had changed any of its rules for lending, a spokesman said partner banks, not the government, decided on each borrower’s credit-worthiness. Given the meltdown in the financial sector this year, banks have been hard-pressed to keep lending transactions rolling as in the past, and while sources say capital is still available, that is true only for proven restaurant operators and those with substantial equity.

In the current climate, even a long track record does not guarantee that finding funds will be easy. In late 2007, when Neal Gilder sought a loan to open Arbor Ridge Vine & Grill in Crestwood, Ky., he had a prepared business plan and 25 years of industry experience. At that time, he was approved. But after exceeding his budget in June 2008, he returned to the bank for operating cash late this summer. The coffers were closed this time around.

“They told us we couldn’t have any more funds,” Gilder said. “We wanted to exercise some of the credit we already had to fund other areas, but they said no on that, too.”

Gilder is not alone. According to an October survey from Discover Financial Services, 38 percent of small-business owners say they have experienced cash flow issues over the past 90 days. Gilder’s solution is to use more of his and his wife’s cash.

“We’re drawing on our savings now more than we’d planned,” he said.

Rick Dissell had a strong track record when he sought funds to open The Blackstone Grille in Prospect, Ky., this spring. For more than 20 years, he’d owned, operated and then sold two restaurants, which gained him a favorable reception at most banks.

“But even with our history,” Dissell said, “most banks wanted some additional security, more than they required in the past.”

In the end, he got a loan from a banker he’d established a history with.

“I’d feel sorry for someone trying to get going right now without clout with a bank or lending institute,” he said. “You need to go where you’re known and trusted, or be ready to put up your firstborn at this point.”