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When It's Time to Expand, Money Matters

When It's Time to Expand, Money Matters

You may already be feeling it in your business. After a long period of less-than-robust growth, the economy is showing signs that it's ready to climb out of a three-year recession. To some restaurant owners, an improving economy and new faces at the tables spark thoughts of expansion, an additional profit center, even the acquisition of a competitor.

If you've been thinking about expanding your operation, you already know that the first hurdle to overcome is finding the money. That often turns out to be a tough job for small business owners.

“It can be especially difficult to get a loan for a restaurant startup,” says Isidore Kharasch, president, Hospitality Works, Skokie, IL, “but it gets easier as an owner progresses successfully and has a track record to show potential lenders.”

Ted Makris, owner of the Oak Lane Diner in Philadelphia, believes that it's much harder for a restaurant owner or buyer to get funding today than it was 25 or 30 years ago. “When I bought the diner,” he says, “I didn't have any money left to pay my vendors. Back then, all the purveyors were small business people themselves. If they knew you and you had a good reputation, they'd lend you the money or give you credit. That's how they built loyalty. The egg man, the meat man, the produce man—they all knew me from working in the diner. They carried me. For the first six months, I didn't have to pay them a dime. I couldn't have made a go of it without their credit.”

Makris says that will no longer happen. “Today, you have to go to the bank. With a few exceptions, all the purveyors are big corporations. The delivery people are just employees.”

Still, for those in the know, enough options are available to make the job of finding money a little easier. If you're looking for expansion financing, here are some choices along with hints on how to improve your chances of coming away with the money you need.

Banks. “I feel that a commercial loan from a bank is the best choice for a restaurateur looking for expansion money,” says Kharasch. Most industry experts agree.

But many small business owners become frustrated when banks turn down their loan applications. Most bankers agree that this is usually because the owner has failed to come prepared with the information a lender needs to make a positive decision.

“How to find the money to finance an expansion or acquisition is the last thing that many business owners think about when they plan a project,” says James G. Marshall, vice president with Premier Bank, Abington, PA. “It's best to have a team lined up behind you when you begin to plan a major financial move—and your bank should be a member of that team.”

How should you prepare for a meeting with a bank loan officer? Marshall suggests that you come armed with the following:

  • financial statements for your existing business
  • accountant-prepared financial projections and cash flow analysis
  • a marketing feasibility study for the project
  • your personal financial statements and tax returns
  • information on the owners' background and experience

With this information, says Marshall, the bank can give proper consideration to your loan application.

When your best efforts fall on deaf ears at your local banks, all is not lost. Some alternate sources of business financing may meet your needs.

State government programs. Most states have loan programs designed to provide small business financing. “Some of these programs provide loans at lowerthan-market interest ratesñprovided the business will create jobs in the state,” says Donna A. Holmes, director of the Small Business Development Center, Pennsylvania State University. “Some state programs will take a subordinate position to the bank, giving the bank a better collateral position. This gives the bank an incentive to make a loan that they may have otherwise rejected.”

For information on small business financing programs in your state, contact the office of your state representative or state senator.

Federal government programs. The federal government also has loan programs available to assist small business owners. The most popular of these is the Small Business Administration's guaranteed loan program, which guarantees as much as 80 percent of the loan principal. “This program gives the bank an incentive to lend to a borrower who does not otherwise meet the bank's lending guidelines,” says Holmes.

Among a number of other SBA loan programs for small business owners is the 504 Loan Program. Established in 1980, this program provides long-term, fixedrate financing for major fixed assets, such as real estate, facilities construction or expansion, or other fixed-asset needs.

If you decide to seek an SBA loan, your best bet is to work through a certified or preferred lender. The SBA's guaranteed loan process is complex, so you want a lender who has experience working with the association. To find certified or preferred lenders, visit the SBA website or call your local SBA office for guidance.

The SBA has local and regional offices in every state. You'll find the phone number in the federal government section of your local phone directory. Or, for detailed information on all SBA programs, log on to

Small Business Investment Companies (SBICs). These are private investment firms licensed by the SBA to provide investment financing and long-term loans to small businesses. Some SBICs make only equity loans, others provide debt loans and some provide both. As a rule, SBICs will require the same level of collateral and credit ratings as banks.

For information on how to contact an SBIC, check with your local SBA office or log on to

Local economic development organizations. “Your local chambers of commerce or other business group may have some revolving loan funds available to businesses specific to your community,” says Holmes. “Generally, these funds come from a variety of local resources and have specific guidelines for their use.”

Holmes recommends that you begin by contacting the director of your local chamber of commerce to see what help might be available for the specific purpose you have in mind.

Angel investors. When the more conventional financing options seem out of reach, many small business owners have had success seeking out individuals willing and able to invest in a business expansion, either by taking an equity position in the company or by acting like a bank. When you find an “angel” investor, you'll probably find that this option is more flexible than a bank loan or government program. If you don't know anyone personally with the economic firepower to fund your expansion, don't give up. There is an entire industry made up of professional investors looking for opportunities to invest in growing small businesses. For more information on how to match up with an investor who might be interested in your situation, visit and click on the “Raising Money” heading on the left column. Be advised, though, that unless you're willing to give up an equity position in your business, working with a professional investor is not for you.

“If you go to a group of private investors for a loan, you should still prepare a solid business plan that includes the investment required and the potential payoff,” says Kharasch. “Most owners who go to private investors do so without a comprehensive business plan. This is a mistake both in planning as well as presentation.”

When all else fails. Depending on the size and economic health of your restaurant operation, the only source of expansion money available to you may be what you can dig up on your own. Be advised, though, that each of these money sources carries special risks.

Friends and family members: If you have a friend or family member able to help finance your expansion, you may find this to be the easiest type of loan to obtain. However, mixing business and personal relationships can lead to serious problems in both your business and personal life. If you take a loan from a friend or family member, make sure that all details are carefully spelled out in a written contract.

Home equity financing: If you have enough equity in your home, a second mortgage may provide all the money you need. While the interest rate on this type of loan may be among the most favorable, it also puts you at risk of losing your home if your business falters.

Credit card financing: You may have credit cards with lines of credit substantial enough to fund all or part of your expansion plans. While it can be tempting simply to charge everything, this is arguably the riskiest and least desirable of all financing methods. The burdensome interest rates charged by credit card issuers can become impossible to meet if your business hits even a minor bump in the road. The result could be a severely damaged credit rating—or even the loss of your business.

Most experts agree that when you need to raise money for your business, a thorough and detailed business plan is the key to the safest and most desirable types of financing. While nonconventional sources of money may seem the easiest to find, they are seldom the wisest choice.

William J. Lynott is a former management consultant and corporate executive who writes about business and finance for a variety of consumer and trade publications. His website is

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