Bank loan assistance and state payroll taxes
Michael Rasmussen provides valuable tips about bank loans and payroll tax breaks.
How can I obtain a loan to purchase equipment and for costs to be incurred for leasehold improvements at a new location for my restaurant?
We have been flooded with these requests lately. First, understand that most lending institutions or bankers do not understand your operations to the degree that you do. Therefore, time needs to be spent on clearly stating your loan intentions (i.e., exactly what you plan to spend the money on and how you will repay the bank). Ask your accountant, or do some research yourself, to find out about the average commercial loan rates available, and create what’s called an amortization schedule of loan repayment. Most banks will have a standard set of terms or loan covenants that will be required for your new loan with which you must comply.
Next, determine if your entity’s cash flow can handle the new debt that will be added to your operations. Banks today look at what they call EBITDA (earnings before interest, taxes, depreciation and amortization) to determine if your restaurant has the ability to pay back the amount borrowed. Basically, you or your accountant can assist the bank in understanding your cash flow by ensuring it follows this formula. Your profit and loss statements should clearly identify interest, taxes, depreciation and amortization so that the bank can add back these expenses to your net income to arrive at a modified cash flow from your operations. Sounds confusing, but this is where your advisor needs to assist the bankers to understand your cash flow and ability to repay the loan.
The bank will also require copies of your restaurant’s prior and current years’ financial statements and tax returns—usually from one to three years prior—and, if you’re applying for a loan midyear, bankers will want a current one that reflects the last three months’ operations. For the quickest delivery of these documents, ask your accountant if he has an electronic way to deliver them securely over the Internet so that you can direct the bank representative to a secured website to download them at his leisure. I have found that providing documents easily and securely expedites the loan process, as well as adds credibility to the operator’s organization and character assessed by the lender.
Finally, banks lend money based on character and capacity. Capacity is the ability to repay the loan as discussed. Character is a subjective way of determining organization, reputation, credit score, community involvement, experience in the trade, professional advisor associations, and reputation as a restaurateur. Do not underestimate this assessment when applying for monies at a bank or any lending institution. Take the time to put your best foot forward when having any interactions with the bank, including source document gathering and personal interviews with the lenders.
Why do I pay extra payroll taxes in the first part of the year?
Most states have an unemployment insurance contribution system that is usually applied to the first amount of wages for each employee up to a maximum in a year. For example, the California Unemployment Contribution rate is 1.5% to 6.2% on the first $7,000 of wages earned for each employee. Therefore, in the first quarter of the tax year, you will have increased employer payroll taxes that are due and payable, and that are not withheld from the employee paychecks but are contributed from the employer’s side. This can be a shock if all of a sudden your quarterly payroll taxes are due and these amounts have not been budgeted or accounted for in the cash flow.
There are methods of reducing these rates—primarily by controlling your hiring and firing practices. Employee retention is costly, and this unemployment insurance mandated by most states is a direct effect of having excessive turnover in your restaurant. First, contact your accountant or payroll service provider to determine the employment insurance rates in your state, and then start inquiring about how to reduce the rate. Find out how other restaurant owners are managing their employment practices to keep this rate down. Finally, have a national payroll service provider provide a quote on processing your payroll, and inquire about best practices for restaurants to manage this rate.