Question:
I have been searching for about 6 months for a business. I have looked at some deli / cafes and restaurants, but have found that banks do not want to finance these types of businesses. Some of these businesses are long standing and reputable. Why is it so hard to find financing? What type of businesses do banks like to finance?
Answer:
Banks do a wonderful job of promoting themselves as “small business friendly”. Their ads give the impression that their vaults are open for entrepreneurs. This is definitely not the case when it comes to small business acquisitions. Yes, they will lend you money, as long as you can fully collateralize it with hard, personal assets (not the business).
This is especially true as it relates to restaurants and cafes for several reasons: first, these businesses typically have lots of unreported income and so there are no financials available to substantiate the seller’s representation of what the business generates in sales or profits.
It’s also the reason why restaurants typically sell at lower multiples. It’s nearly impossible to find this type of business where it’s all on the tax returns. Second, the failure rate in restaurants and cafes is enormous. It’s been estimated to be as high as 90% in the first year. Banks don’t fund risk, and these are very risky businesses.
What do banks like to finance you ask? Generally, they want businesses that are asset rich. But, even with those, when it comes to small businesses they want their funding collateralized by the owner and not just the business’ assets. This even holds true for SBA backed loans. Their standards are very rigid in this regard as well.