“Financing Necessary Improvements”		«BACK
	by Dennis L. Monroe
	from Financing Necessary Improvements, September 2001 issue

The following are suggestions on how a food service owner can effectively finance both equipment and leasehold improvements:

1. Niche equipment leasing companies. These companies are not necessarily the large leasing companies but small, specialized local leasing companies that can be found by contacting your accountant, attorney or banker. These companies will charge a higher rate than banks because their investors are financial institutions interested in a higher yield.

The term "equipment leasing" can be broadly defined. It maybe possible to include fixtures and leaseholds under an equipment leasing package. In most cases these equipment leases are five-year fully amortized lease arrangement with significant prepayment penalties, personal guaranties and a rate that is 200 to 400 basis points above bank rates. Equipment leasing groups normally do lease packages between $15,000 to $500,000.

There are two types of basic leases:

(a) Financed leases. These leases are strictly treated as financing for the lessee. The restaurant operator receives all of the tax benefits of asset ownership.

(b) Operating leases. In this case the lessor gets the tax benefits under the lease. Usually operating leases are written at a lower effective interest rate.

There are important items to understand in lease arrangements:

(a) Understand the ability to dispose of and substitute new equipment if equipment becomes obsolete or needs to be replaced.

(b) Understand the lease rate. In most cases the rates are proposed in terms of monthly payments versus an interest rate factor.

(c) Understand the prepayment rights.

(d) Understand the buyout options.

(e) Understand the full nature of any personal guaranties.

2. Small niche banks. There are still small local niche banks that loan money to restaurant owners. Even though these types of banks are few and far between, each locality has some banks that have become comfortable with restaurants. These banks normally do not loan the full amount of any equipment purchase or leasehold improvement. These banks are interested in personal guaranties and substantial equity. This equity will be used to lower the leverage on the assets being acquired.

3. Small Business Administration ("SBA"). The SBA is still actively involved in helping small restaurant businesses. One of the SBA's primary areas is the franchise industry and has a designated list of concepts the SBA has approved. The SBA offers guarantied loans with an 80% advance rate for the assets being acquired. In most cases these loans are personally guarantied and may require outside collateral (such as a second mortgage on a personal residence or other significant personal assets). The SBA process has been streamlined. A designated bank or certified lender will shorten the SBA loan process. Also, outside consultants called "SBA packagers" can help package SBA loans, and again, streamline the process.

4. Vendors. Even though the restaurant industry list of national lenders is shrinking, there are still many vendors that provide various financing programs. These vendors may include leaseholds and other assets related to the equipment in the financing package. Check with suppliers and vendors to see what kind of financing is available.

5. Landlords. If the restaurant is leased, the landlord is interested in a viable business. Many times a landlord will provide financing for equipment and other improvements that will benefit both the business and its leasehold interest. Approach the landlord reasonably. A landlord probably will probably charge a slightly higher interest rate because the landlord will most likely be borrowing the money.

In general, there are still ways to finance equipment and leasehold improvements to provide the necessary resources to renovate and upgrade restaurant properties.