By Craig Calafati
Pizza is a favorite whenever friends and family gather. So it follows that pizza entrepreneurs possess an optimistic outlook when they launch and when they expand. Unfortunately, a positive attitude isn’t always accompanied by enough capital to fulfill growth plans. That’s because too often business plan projections aren’t realistic if they’re led by the heart and not the head.
Having a packed place on opening day isn’t an indicator that this will be what happens every day. It takes time to convert the first-time customer into a frequent and loyal one, and it’s during this waiting period that pizzeria owners and operators will find themselves with a shortfall of cash. SBA loans are an excellent way to secure capital since they’re designed to empower entrepreneurs through the lending process. Planning ahead and borrowing enough working capital before you open the doors will ensure that your new pizza shop will have the funds to get you through the early lean times.
Below is a breakdown of how SBA loans differ from traditional bank loans and some tips on how to persevere in this type of lending to advance your business’s launch and growth.
Related: This pizzeria claimed $25,000 in grant money. Could yours be next?
No. 1 Difference: SBA-approved lenders aren’t the same as conventional commercial banks. The underlying philosophical foundation of the SBA program is what is known as “credit elsewhere.” In a nutshell, it means that if a business can qualify for a standard, conventional business loan they probably aren’t a candidate for an SBA-backed loan. The SBA program is designed to help lenders overcome certain shortfalls in a credit request. Be it collateral, lack of down payment or injection, lack of business history or some other perceived increase in risk, the SBA-provided guaranty of a portion of the loan amount is designed to create a cushion for the risk that the lender is contemplating.
Everyone also needs to understand that the SBA doesn’t actually lend the money itself in most cases. Their role is in being a guarantor to SBA-approved lender financial institutions. As a result, new and expanding pizza business owners have an easier way to secure funding, especially given the very real increased risk associated with the proposed or existing business. For example, for first-timers in the industry, many banks have policies that don’t permit lending to new businesses, especially new restaurants. But when a lender has a government-backed guaranty on the loan, it mitigates the increased risk the lender is contemplating by provided a mitigant to future potential losses.
No. 1 Pizzeria Owner Tip: Don’t panic if you find yourself with risk factors that may lead a lender to decline your loan. A shortfall in collateral, the need for a longer repayment term, or limited cash available for a down payment are just a few of the possibilities. All of these might be overcome when the lender is provided an SBA guaranty of up to 75% of the loan amount.
No. 2 Difference: SBA loans aren’t the same as investor capital. The long-running reality TV show Shark Tank has given us a window into what happens when entrepreneurs pitch their business concepts seeking capital for a percentage of their business. Not so when you secure funding from an SBA-approved lender. Aspiring restaurant owners don’t have to give up any part of their company.
No. 2 Pizzeria Owner Tip: If you’re looking for a partner or investor-mentor, then you may need to consider giving up an ownership percentage (equity) and a certain amount of control. And while an SBA loan may be just about “getting the money,” it’ll require you taking on the responsibility for repaying it all (debt), which needs to be factored into both your personality and projections.
No. 3 Difference: SBA loans require the same extensive paperwork but smaller down payments. SBA loan terms are much more entrepreneur-friendly than banks. They are always fully amortized and will never have a balloon payment. Additionally, down payments are usually significantly lower—dropping to 10% in many cases versus 20% or 30% required by conventional lenders. Just as important, entrepreneurs will never be turned down solely for lack of collateral. However, the amount of paperwork is the same, so be prepared to fill out the application and submit all the required documentation.
No. 3 Pizzeria Owner Tip: There are no shortcuts regardless of the lender. To show you are a serious pizza entrepreneur, be prepared with a professionally written and well-researched business plan with realistic projections. This means you need to show documentation mapping out the next one to three years, itemizing the expected as well as the unexpected. You should also include competitor info, business references and past tax returns of at least three years. And if you fell behind on your tax filings, that won’t disqualify you as long as you’re current on your IRS pay-back plan.
When pizza places open in communities they often become popular gathering places that everyone can enjoy. Lack of customer enthusiasm is rarely why entrepreneurs struggle. The main reason they go out of business or are unable to expand is due to a shortfall of capital. That’s because it takes a lot of money to keep businesses going, especially during slow times, when restaurateurs need to continue paying for operating costs—like payroll, food inventory costs, equipment and building leases, mortgage payments, and more.
Pizza restaurant entrepreneurs have options. Keep in mind that, through an SBA 7A lender, it’s also possible to apply for working capital in your initial loan request to get immediate access to capital when it’s needed rather than struggling each week. Needing more money is an ongoing part of the restaurant business, whether in the first phase of opening or the next phase of expanding.
Don’t let a lack of capital take a bite out of your goals! Be proactive because money is available. The time is now!
Craig Calafati is Executive Vice President and Director of Lending for Arkansas Capital Corporation (ACC), a multifaceted Community Development Financial Institution (CDFI) that was recently chosen by SBA to receive one of the three new SBLC licenses, the first expansion of the SBLC program in 40 years, allowing ACC to expand SBA 7a lending services nationwide. Arkansas Capital Corporation is a private, non-profit, CDFI lending corporation dedicated to empowering entrepreneurs across the U.S., including new and expanding restaurant and pizza business owners, to meet their individual capital needs with a commitment to revitalizing communities in Arkansas and beyond.
