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How to Create a More Effective Relationship with Your Bank

During the first wave of the Paycheck Protection Program (PPP), approximately 33,000 full-service restaurants borrowed more than $9 billion in funding. It was supposed to be a lifeline, but access to the funding was hit-or-miss.

Brand new startup owners are not likely to get institutional loans without personally guaranteed collateral. That said, once the owners have a track record of success, bankers tend to warm up to them. Particularly when cash flow is tight, your local banker can help you sail more smoothly into the next quarter.

A number of national franchisees sailed through the application and approval process, while smaller independents waited for approval. The PPP underscored the importance of having a good relationship with banks, which can help you through the tough times. The best time to start that relationship is before you need assistance. Fortunately, there are a series of steps that all operators can work through to create a more effective relationship with their bank.

Brand new startup owners are not likely to get institutional loans without personally guaranteed collateral. That said, once the owners have a track record of success, bankers tend to warm up to them. Particularly when cash flow is tight, your local banker can help you sail more smoothly into the next quarter.

Institutional loans can provide operators with cash flow during slow seasons and provide capital for purchasing or repairing assets. That said, banks can also steer customers to products and terms that are right for their needs. For example, sophisticated operators know you don't use long-term loans for short-term financing; however, less financially savvy restaurateurs often need the experience and guidance of a professional to avoid costly errors.

Jim Pendergast is senior vice president at altLINE, a division of The Southern Bank Company, which offers specialty financing to clients in the restaurant industry, among others. "The right banks will walk you through the best loans without trying to sell you on options that will give them more money."

Some banks also offer financial literacy tools that help their customers better understand business finance topics. Other services you might be able to access include opening a business credit card or securing a line of credit. A bank who knows your business well can offer advice that's tailored toward your goals or help your restaurant business access capital on favorable loan terms.

Some [larger banks] won't even sit down and talk with everyone and a small bank's going to sit down and listen to you, try to understand your story, and give you suggestions on how you can bank with them.

Services like invoice factoring and asset-based lending can be useful during cash flow crunches, Pendergast explains. Restaurants are cash businesses. Even with most transactions via credit cards, payments are processed quickly. Compare this to businesses that invoice customers and have significant accounts receivables. That said, for many restaurants, revenue is cyclical. Best practices include creating cash flow projections to help anticipate when you will be able to pay it back.

Says Pendergast, "Though most businesses receive payments right away, there may be instances where you need to invoice customers for services rendered." This might include banquet or catered events, such as weddings. "If your invoice allows for 30 days or more, it can be challenging to get your money on time, so your local bank can buy the invoices from you to give you cash immediately. You can also place your as- sets on loan to get some cash when in a pinch," he says.

Building a better relationship ahead of time reduces the mystery around obtaining a loan. Rather than apply for a loan from a bank or online lender where you're anonymous and afraid of being judged, you'll be working with a banker you know and trust, someone who is there as a resource if you have questions along the way and who truly wants to help your business.

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"People tend to view the banks as a black box," says Mark Wasilefsky, who heads the Restaurant Franchise Finance Group at TD Bank. From the borrower's perspective, things can seem mysterious, but Wasilefsky believes that "banks are fairly consistent about how they underwrite, [although] some are more liberal and some have different risk tolerance."

Community Spirit

Independent restaurants often find community banks friendlier than local branches of national institutions. In fact, some independent operators were happy to learn their local banks helped them move closer to the head of the line for PPP funding.

Michelle Freed, senior vice president at First Missouri Bank, believes that restaurant operators will find it easier to develop a relationship with a small bank because "we can be a little nimbler, we're a lot more accessible, and we want to know what's going on with our customers." Freed explains that she takes the time to sit down with new clients and get to know them and their business. If a client is new and doesn't have much in the way of equity, there's usually a conversation about collateral, or assets that can be used to secure the loan.

"Banks and regulators need to know what you have to support the request," says Freed, who suggests looking at home equity, personal finances, investment accounts, or "the bank of friends and family" to identify collateral that could secure the loan. She also recommends putting together a business plan with projected financials to help tell the business story.

Small banks make this process easier due to the level of personal support they provide clients. As Freed says, "Some [larger banks] won't even sit down and talk with everyone and a small bank's going to sit down and listen to you, try to understand your story, and give you suggestions on how you can bank with them." Freed recalls times she's helped new business owners work through the initial stages of operation until they're "bankable," meaning that they've got positive cash flow and collateral to pledge for the loan.

By approaching a bank in the early stages of operation, business owners can have a supportive ally in their corner while they get the business up to speed, iron out operations, and start to generate a profit. By the time the new business owner is ready to apply for a loan, they've already fostered a connection with a supportive banker who wants to see them succeed and already knows a bit of their story. Providing financial statements, which Freed likes to see on a monthly basis, can help to establish confidence and get the loan approved.

Five Ways to Build a More Effective Relationship with Your Bank

Act like a business. "Banks want to know that they are making a good investment, and restaurants are risky," says Pendergast, who notes the importance of a good credit score in obtaining loan approval. Paying your bills on time and keeping current with any loan payments will help you look like a good bet to banks.

Wasilefsky echoes the importance of "having your ducks in a row," particularly when it comes to quality financial statements. Banks used to focus on a restaurant's cash flow generation, but Wasilefsky suggests that now lenders are taking a harder look at balance sheets and leverage. For this reason, Wasilefsky recommends socking away some rainy-day funds before seeking a loan.

These are good habits to adopt regardless of whether you're seeking a loan, but they can help you secure one. Lenders tend to look favorably on applicants that have strong credit scores, a demonstrated history of timely debt payment, and assets or cash reserves.

Get to know your banker and share your business goals. The right time to cultivate a relationship with a bank is ASAP, Pendergast and Wasilefsky say. "The more your bank knows about your plans, the more likely they are to help you, especially if you're looking for a lot of professional help. Though banks are ultimately businesses, bank professionals are there to help you, so you can develop a deeper connection with them by consulting them often," adds Pendergast.

Once you've let your banker know about your goals, both short-term and long-range, keep them informed on your progress on a regular basis. Whether you check in on a monthly basis or through more frequent, informal visits, this will help your banker understand your business goals and your position so they can offer targeted advice. As Freed says, "If we get financials every month, we talk to each other and we know the story [of what's going on with the restaurant], it's so much better not to be surprised. When a banker gets surprised, then we worry."

For aspiring operators who may not have chosen a bank, Pendergast recommends looking for a bank "that takes time for you" and suggests operators remember that "developing a relationship with your bank is a two-way street." Freed recommends the personal angle and face-to-face communication that a smaller bank can provide. Wasilefsky suggests that operators "find a specialty group that specializes in hospitality or restaurants," as he believes these bankers will have the knowledge and experience to understand the risks and market. "There's nothing wrong with going with a small bank or credit union if you want to open a store or two, "adds Wasilefsky, particularly for operators that are in smaller markets. However, he thinks that operators who have dreams of expanding their concept to five or more units might prefer a bank with industry specialists.

Prepare early and ask questions. Shopping for loans is stressful for restaurant operators, but by planning ahead, you can reduce the stress and improve the odds of a better outcome. "Many restaurant owners estimate how much they'll need for a loan instead of researching," says Pendergast. This can backfire when estimates don't stand up to actual costs. "Thoroughly research how much it will cost to get your loan, and even overestimate the cost. Banks are more likely to give loans to people with solid plans," he recommends. Consider variables like needed equipment, renovation costs and time frame, and real estate valuation, for instance, to show the banker that you've really thought about what you need -- and what you can afford to borrow.

Your banker can be a resource during the planning phase. When they understand what your goals are, they can ensure the financing structure of a loan makes sense for you. Wasilefsky illustrates his point with an example. When an operator comes to his bank inquiring about a loan to expand the business, the banker will ask questions about their plans to understand how big they want to grow and what their future expenses might be. The banker can then structure the deals so they borrow what they need to expand today while making sure they have the capacity down the road to pay for things they need later.

"I've seen a lot of borrowers get very liberal credit terms. While they may not be in financial trouble, they have trouble making the goals they have set because they haven't structured the repayment properly," Wasilefsky adds. When you are clear on your current and long-term goals, share your plans with your banker and take their advice, you are more likely to end up with a deal that is sized right for your needs and circumstances.

As you are formulating your plan, check whether you prequalify for a loan. This helps you understand any potential red flags in your application, such as a less-than-ideal credit score, so you can improve it (and potentially lower the interest rate) before you officially apply.

When it comes time to review your loan terms, "don't just focus on the money," says Wasilefsky, who adds that "a lot of people get the money, grab it and run." Instead, he recommends that you walk through the entire loan agreement with your lawyer, banker or CPA to understand what you are agreeing to when you sign.

When you do this ahead of time, you'll be able to honor the terms of the agreement, which not only keeps the relationship positive but helps you build an effective and strong partnership. "You're going to have the opportunity to be in good standing and be in the best position to borrow more money from the bank," Wasilefsky explains.

Be honest when times are tough. While you might feel tempted to hide bad news from your banker, Wasilefsky doesn't recommend it. Banks want their clients to be successful, so they can grow their business and borrow more money. "If you're having troubles, call your banker, let them know, we are there to help," he says.

How Banks Can Help You Navigate the Current Environment

There are challenges in the current environment for operators who are seeking loans. By understanding the current environment, you can factor these challenges into your plan and how you are prepared to meet them. You can also make smart decisions about the direction and timeline of business growth.

Independent restaurants often find community banks friendlier than their local branches of national institutions.In fact, some independent operators were happy to learn their local banks helped them move closer to the head of the line for PPP funding.

The pandemic has altered the commercial real estate market. The retail sector was decimated, and this affected the strip malls and shopping plazas where many independent restaurants found space. The shift toward remote work changed the attractiveness of certain neighborhoods, such that concepts that were located near prime downtown office space and catered to the office breakfast and lunch crowd suddenly found themselves without their primary market.

What operators wanted in real estate changed as well: the shift to outdoor dining, curbside and delivery meant that outdoor spaces with drive-through setups trumped big dining rooms. If you are in the market for real estate, Wasilefsky recommends paying close attention to valuations, which are down across the board. Loan proceeds have dropped to match. Being conservative with estimations or scaling down ambitions to match the lowered valuations can help you get approved for a loan.

Freed cautions that restaurant equipment tends to be difficult to finance because its resale value tends to be low in a liquidation scenario. She encourages operators who intend to use a loan to purchase equipment to collaborate with their landlord on tenant improvements to sweeten the deal to lenders who may be reluctant.

There are new tax considerations within the current environment, as attorneys Brian Morrissey and Lisa Stuckey report in Real Estate Business Online. Many state and local governments have seen their operating costs increase through 2020 while sales tax revenue for the same period declined due to lowered consumer spending. While last year's real estate taxes were assessed before the pandemic, there are many property owners who have appealed their 2021 taxes based on lowered valuations. This sets up a fight between property owners, who don't believe they should be taxed highly given the drop in valuations, and municipalities who may be counting on property tax income to make up for the drop in sales tax revenue. Real estate taxes also impact the loan-to-value ratio of real estate loans, putting smaller banks in a tight spot.

Learn to Speak Your Banker's Language

Some operators are concerned that lenders are backing out of the restaurant industry due to the combination of low-profit margins and current circumstances. Wasilefsky suggests these fears are overblown and encourages operators who worry about lenders backing off of the industry to learn more about capital structure, which is the combination of debt and equity used to finance business operations. Restaurants that carry high levels of debt relative to their equity are riskier for lenders while those that have greater equity built up seem like safer bets. By changing up the mix of debt and equity, the business can make itself more attractive to lenders.

Banks tend to have a particular capital structure they're looking for when they approve loans. "It might be that they're becoming a little more conservative and that means the mix between debt and equity might change," Wasilefsky says. Improving equity, whether that's by bringing on another partner or investing more of your own money into the business, can make the business seem more attractive to a lender.

At the very least, understanding how capital structure works empowers you in the loan application process and beyond. If you aren't approved for the loan you want, you'll have a better idea of why, and of steps you can take to make your business more attractive to lenders.

Increasing your financial literacy, improving business financials, and prioritizing trust and communication not only build stronger relationships with banks, they make your business better, so you can have a more profitable concept and bring those business goals within reach.

If finance is "not your thing", you need to quickly get past that thinking in the current market. A basic finance course offered by a community college can help you get your head around basic financial concepts.

OVERCOMING CHALLENGES FACED BY BIPOC AND WOMEN OPERATORS

New business owners aren't the only ones who face hurdles accessing financing. Women and BIPOC-owned businesses often experience additional difficulties working with banks. When white business owners apply for bank loans, 80 percent receive at least some of the requested capital, compared to 77.1 percent of Asian business owners, 69.5 percent of Hispanic business owners, and 60.9 percent of Black business owners, according to Federal Reserve Bank data. Similar racial disparities exist when it comes to getting approval from online lenders, which tend to be small-business friendly because their underwriting criteria is less strict.

Bank size can affect the likelihood of getting a loan approved, but the advantage seems to be slight. Federal Reserve Bank data indicates that two-thirds of Black applicants encountered challenges at large banks while 34 percent sailed through the process at small banks. The percentages of white applicants who reported no challenges were 53.5 for large banks and 63 percent for small banks.

BIPOC-owned businesses tend to be offered fewer resources during the loan application process and are often asked for more supplementary materials such as financial statements, personal asset inventory, credit card debt, or income tax returns, according to a blog by Fundera.

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COVID-19 Takes Heavy Toll on Commercial Property Values
https://rebusinessonline.com/?s=COVID-19+Takes+Heavy+Toll+on+Commercial+Property+Values

Black Business Owners Are Shut Out from Capital Due to Racial Funding Gap
https://www.fundera.com/blog/racial-funding-gap

Financing Patterns and Credit Market Experiences: A Comparison by Race and Ethnicity for U.S. Employer Firms
https://advocacy.sba.gov/2018/02/01/financing-patterns-and-credit-market-experiences-a-comparison-by-race-and-ethnicity-for-u-s-employer-firms/