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Small Business Loans

The word in 1994 is growth. Restaurants are growing and expanding faster than industry leaders have estimated, while consumption patterns by the public are on the rise.

There are three major reasons for the resurgence of the restaurant industry:

• The recession is over and those consumers who have been cooped up for four years are eager to get out and to start spending again.
• The overall growth in the economy has increased employment levels and, thus, increased disposable income in terms of overall expenditures.
• The weaker restaurants have closed and the stronger ones survived, ultimately reducing the number of seats in the marketplace and increasing the demand per seat.

There are, however, other reasons for growth. The most notable of which is that as a result of the closures within the industry over the past few years, there is a significant number of restaurants for sale, either in bankruptcy or in difficulty, which can be obtained for a very inexpensive price.

Many restaurants can be obtained simply by taking over a lease without the requirement of putting any money down. Additionally, many currently operating restaurants are available at a low price as several restaurateurs do not have the wherewithal to continue their businesses as their concepts are dull and, they do not know how to revitalize them.

These restaurants can be turned into new concepts quite easily as an operator could simply remodel the interior without having to incur the expense of purchasing kitchen equipment, cash systems, air exchange units, air conditioning systems, bathrooms and so forth.

Coupled with this opportunity is the availability of a new government-guaranteed Small Business Loan. This loan provides entrepreneurs with capital for leasehold improvements of up to $250,000 without an obligation of matching the loan. In essence, if an operator has sufficient experience, and a reasonable relationship with their bank, they can apply for this loan to either upgrade their present operation or purchase an existing restaurant's leasehold improvements.

In basic terms this loan allows for $250,000 to be used for leasehold improvements only. The maximum allowable interest that the bank can charge is prime plus one and three quarters per cent and it must be guaranteed by the entrepreneur up to a maximum of 25 per cent.

The loan guarantee is to the bank for 10 per cent and the government for 1 per cent. These numbers are the maximum charges only. For example, restaurant operators have been known to obtain this loan with a personal guarantee of as little as 10 per cent of the loan (just covering the banks exposure and with interest rates as low as prime plus one.

Therefore, the opportunity that exists translates to investing up to $250,000 in a restaurant operation by only having to take a $25,000 risk position. This loan, coupled with the multitude of locations which are presently available throughout the province and the increased demand for food away from home, is providing an excellent opportunity for chains to expand and for entrepreneurs to enter the restaurant business.

Banks can only provide this loan on behalf of the government, provided the person applying for the loan meets with their general lending criteria. In all cases the loan will be guaranteed by the government.
Therefore, the bank's primary requirements will be that the loan applicant is a qualified individual with experience in the restaurant industry and has a formal business plan.

The business plan should reflect the following format:

1. An overview of the concept
2. An economic overview
3. Site analysis
4. competitive analysis
5. Marketing plan
6. Floor plan and capital expenditures
7. Financial projections
8. Proposed menus
9. Management biography and related work experience

A bank presentation should be made initially with the submission of the proposal and then time should be allowed for the loans officer to review the plan and make a decision.

Once the decision is made to provide you with the loan, it will only be available to be drawn against after a lease deal is signed with a landlord. At that point the bank will commence advancing the money against invoices for services and cancelled cheques.

Reprinted from Canadian Hotel & Restaurant Magazine, January 1992.

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