LAS VEGAS Leading restaurant industry lenders GE Capital, Irwin Franchise Capital, Wells Fargo Foothill and Trinity Capital agree that while the rules of the game have changed, operators still can find financing in the new year.
Speaking at the Restaurant Finance & Development Conference here in November, an event produced by Franchise Times, executives from these leading firms told operators to diversify lending sources, shore up their operations and disclose as soon as possible any problems that could create a default.
“This industry clearly has a reason to exist,” said Richard Kritsch, a senior vice president and managing director at Wells Fargo Foothill. “The best loans will be those closed today, not the ones given two years ago.”
During 2008, a year that included a market meltdown and credit freeze, many operators struggled to secure new financing for growth and some met their match with lenders that increased prices, charged fees or restructured whole credit facilities because of covenant breaks. The messy year came on the heels of unprecedented growth in the restaurant space, as traditional lenders and other deep-pocketed investors like private-equity firms and hedge funds offered a tremendous amount of capital at low rates.
Today, competition to secure financing is tight.
“The restaurant industry will have to compete with other industries for capital now,” said Kevin Burke, managing director at Trinity Capital LLC. “Lenders will tighten and be more selective ... it is unrealistic to expect the same criteria.”
To play by the new rules, operators must first look in-house prior to approaching a lender. The business plan must be detailed, accurate and showcase a history of sales and profit gains. Vendor contracts should be up to date and bills should have been paid on time. When there are problems, specific reasons for a downturn in sales or a missed payment should be readied so that lenders can see the entire picture.
“A lot of firms are not well prepared in terms of capital, marketing, purchasing,” Burke said. “There are ‘haves’ and ‘have nots.’”
Burke said that lenders are looking to finance concepts that have a reason to exist, provide value to the customer and showcase consumer relevancy. Already there has been an increase in industry failures with bankruptcies and mass closures, and lenders will be wary of risky propositions, he said.
“The industry knows how to work hard,” said Sharon Soltero, marketing vice president for franchisor relations at Irwin Franchise Capital. “Return to that focus, get involved in day-to-day operations.”
Soltero also suggested that operators look to various sources of funding, including regional and local banks, as well as the major national players. Different lenders may be more open to financing a specific part of the business, like real estate or equipment, for example. In addition, many local and regional banks haven’t been as affected by the financial industry changes as national banks have.
For operators that are struggling to maintain compliance on existing lending terms, sources said transparency and communication are paramount. While an increase in pricing is the most likely result of any breach, keeping a lender in the loop at all times can grease the wheels during negotiations.
With all of the changes and challenges, lenders said they would indeed be providing capital to the best operations.
“What I’ve learned is that this is a durable market,” said Trey Brown, senior managing director at GE Capital Solutions, Franchise Finance. “There are reasons, to be sure, for this industry to be around.”
