Securing a bank loan
Financial guru Suze Orman explains how to prepare for a business loan meeting.
In today’s economic climate, banks are reluctant to take chances—so it’s more important than ever to know how to best prepare for approaching a bank about a loan. To find out, we went to one of the top experts in the field, Suze Orman (suzeorman.com), an internationally acclaimed personal finance expert, who was more than happy to lend advice about the current financial outlook for pizzeria operators and how to best prepare for that all-important meeting with your loan officer.
Orman has always had a passion for restaurants, working as a waitress for seven years at the Buttercup Bakery in Berkeley, California, before becoming a stockbroker. She’s even opened a few restaurants of her own, and admits that she has never worked so hard in her life. “My dream was that I was always going to be in restaurants,” she says. “The people I had been serving at Buttercup Bakery loaned me $50,000 to open my own place, but when the broker who was helping me ripped me off, I decided to become a broker myself.”
What’s the biggest mistake most pizzeria operators make when trying to get a loan?
Most people attempt to get a loan without having any idea if they even qualify for a loan—meaning they don’t know their FICO score, they don’t have a profit and loss statement or a business plan, and they think simply because they want to open up a pizzeria that all they have to do is go in and say, “I need this much money,” without actually presenting to the bank why they need that much money, how they’re going to spend the money, what type of income they’re going to have to be able to pay back the loan, etc. So, for most people, the biggest mistake they make is that they are ill-prepared to apply for a loan because they don’t even know what it means. They set themselves up for failure or rejection before they even walk in the door.
What are your top three tips in preparing to apply for a business loan?
Even before you decide how much money you want, first decide what your expenses are going to be and where you are going to open your pizzeria. How much is it going to cost you to buy the equipment, buy the inventory, pay for help, pay for health insurance if you have to, etc.? What are the absolute costs of running this? How much are you going to put into this yourself? Where is your money going to come from? Know your own situation. Know your FICO score. If it’s not 720 or above, don’t even bother applying.
Number two, you need to plan for the worst and hope for the best. You have to plan for the possibilities; if you thought 75 people would come in each day and only 25 people come in, how will you get more people to come in? Present an accurate picture, with a worst-case scenario of what it’s going to cost to run this business and how you plan to pay the loan back. For a restaurant, you need to have working capital for at least a year and be prepared to work 20 hours a day, seven days a week.
Three, when you’re doing all this, don’t count yourself out of the equation—don’t forget to pay yourself!
Above all, when you go to apply for a loan, act like a businessperson. Walk into that bank, or wherever you’re going to get your loan, as if you are already a business owner, with your own personal finances, past-year tax returns and business plan in hand. Arrive with everything you would expect them to want to see. Show them what you will use as security on the loan, as well.
How can someone bring up a FICO score that’s less than 720?
It depends on how far below you are. It could take a few months or a few years. There’s no fast way to bring the score up; just continue to pay your bills on time and continue to pay off your debts. Do not use your credit cards for at least two months before applying for a FICO score, and then you’ll get a true picture of your score. Especially if you’re going to apply for a loan, do not use those credit cards for at least two months.
Is it usually more difficult to get a loan for a restaurant than for other businesses?
The overhead needed to run a restaurant is higher than most other businesses. There are food spoilage and liability concerns involved. There are many, many liabilities when it comes to running a restaurant, as well as heavy refrigeration, heavy electrical usage, heavy-duty equipment, etc. It would be very difficult to open a restaurant with a small infusion of a business loan.
Is it harder to get approved for a loan today than it was five years ago?
Yes, I think it’s tremendously hard to get approved today because banks are holding on to their money. And this isn’t just the case for business loans, but for all types of loans—credit cards, home mortgages, etc. Everything has become far harder to get when it comes to credit. Your FICO scores have to be higher now, you have to have more security, you have to have more money and business savvy, etc. They are not going to give you money just because you’re good-looking. And this is because of the depression that we went through. I know people call it a recession, but in 2007, 2008, 2009, the credit fabric of the United States was totally destroyed. It’s just that simple.
What’s the best way to determine how much of a loan you need?
When you compile your business plan and profit and loss statement, this will help you determine how much money you need. Figure that for a good year you’re going to have extra expenses, whether it’s advertising, etc. And you have to plan for the possibility that if no one walks through your door for six months, you have to have the money to carry you. So do a realistic projection. If you’re going to rent a place, it’s not just renting a place. How much is your electricity, insurance, water, garbage, etc.? How many employees will you be paying? All of this needs to be accurate. A profit and loss statement, month by month, will help you determine this and show you exactly how much money you currently have and how much money you need to borrow.
Do you favor banks over credit unions?
No; I favor whoever will give you the best rate with the most favorable terms.
Are there alternatives to banks for pizzeria owners?
Obviously, the Small Business Association (SBA), but it depends on, really, how much money you need. I mean, the best loan of all, if you could do it, would be to put everything on a credit card and see if you could finance it that way. It just depends how much you need and your situation. If you’re not credit-worthy, then what are you going to do? Can you get a personal loan from someone? If you work in a restaurant, maybe people who’ve been your customers for the past 10 years will each pitch in $1,000 for you to open your own pizzeria. You never know what people will do. You have to be resourceful.