Securing a bank loan

In today’s economic climate, banks arereluctant to take chances—so it’s moreimportant than ever to know how to bestprepare for approaching a bank about aloan. To find out, we went to one of thetop experts in the field, Suze Orman(suzeorman.com), an internationally acclaimedpersonal finance expert, who wasmore than happy to lend advice aboutthe current financial outlook for pizzeriaoperators and how to best preparefor that all-important meeting with yourloan officer.

Orman has always had a passion forrestaurants, working as a waitress forseven years at the Buttercup Bakery inBerkeley, California, before becominga stockbroker. She’s even opened a fewrestaurants of her own, and admits thatshe has never worked so hard in her life.“My dream was that I was always goingto be in restaurants,” she says. “Thepeople I had been serving at ButtercupBakery loaned me $50,000 to open myown place, but when the broker who washelping me ripped me off, I decided to becomea broker myself.”

What’s the biggest mistake mostpizzeria operators make when tryingto get a loan?

Most people attempt to get a loanwithout having any idea if they evenqualify for a loan—meaning they don’tknow their FICO score, they don’t havea profit and loss statement or a businessplan, and they think simply because theywant to open up a pizzeria that all theyhave to do is go in and say, “I need thismuch money,” without actually presentingto the bank why they need that muchmoney, how they’re going to spend themoney, what type of income they’regoing to have to be able to pay back theloan, etc. So, for most people, the biggestmistake they make is that they are ill-preparedto apply for a loan because theydon’t even know what it means. Theyset themselves up for failure or rejectionbefore they even walk in the door.

What are your top three tips in preparingto apply for a business loan?

Even before you decide how much moneyyou want, first decide what your expensesare going to be and where you are goingto open your pizzeria. How much is itgoing to cost you to buy the equipment,buy the inventory, pay for help, pay forhealth insurance if you have to, etc.?What are the absolute costs of runningthis? How much are you going to put intothis yourself? Where is your money goingto come from? Know your own situation.Know your FICO score. If it’s not 720 orabove, don’t even bother applying.

Number two, you need to plan for theworst and hope for the best. You have toplan for the possibilities; if you thought75 people would come in each day andonly 25 people come in, how will youget more people to come in? Presentan accurate picture, with a worst-casescenario of what it’s going to cost to runthis business and how you plan to paythe loan back. For a restaurant, you needto have working capital for at least a yearand 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 fora loan, act like a businessperson. Walkinto that bank, or wherever you’re goingto get your loan, as if you are already abusiness owner, with your own personalfinances, past-year tax returns and businessplan in hand. Arrive with everythingyou would expect them to want to see.Show them what you will use as securityon the loan, as well.

How can someone bring up a FICOscore that’s less than 720?

It depends on how far below you are. Itcould 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 timeand continue to pay off your debts. Donot use your credit cards for at least twomonths before applying for a FICO score,and then you’ll get a true picture of yourscore. Especially if you’re going to applyfor a loan, do not use those credit cardsfor at least two months.

Is it usually more difficult to geta loan for a restaurant than forother businesses?

The overhead needed to run a restaurantis higher than most other businesses.There are food spoilage andliability concerns involved. There aremany, many liabilities when it comes torunning a restaurant, as well as heavyrefrigeration, heavy electrical usage,heavy-duty equipment, etc. It would bevery difficult to open a restaurant with asmall infusion of a business loan.

Is it harder to get approved for a loantoday than it was five years ago?

Yes, I think it’s tremendously hard toget approved today because banks areholding on to their money. And this isn’tjust the case for business loans, but forall types of loans—credit cards, homemortgages, etc. Everything has becomefar harder to get when it comes to credit.Your FICO scores have to be higher now,you have to have more security, youhave to have more money and businesssavvy, etc. They are not going to give youmoney just because you’re good-looking.And this is because of the depressionthat we went through. I know people callit a recession, but in 2007, 2008, 2009,the credit fabric of the United States wastotally destroyed. It’s just that simple.

What’s the best way to determine howmuch of a loan you need?

When you compile your business planand profit and loss statement, this willhelp you determine how much money youneed. Figure that for a good year you’regoing to have extra expenses, whetherit’s advertising, etc. And you have to planfor the possibility that if no one walksthrough your door for six months, youhave to have the money to carry you. Sodo a realistic projection. If you’re going torent a place, it’s not just renting a place.How much is your electricity, insurance,water, garbage, etc.? How many employeeswill you be paying? All of this needs tobe accurate. A profit and loss statement,month by month, will help you determinethis and show you exactly how muchmoney you currently have and how muchmoney you need to borrow.

Do you favor banks over credit unions?

No; I favor whoever will give you thebest rate with the most favorable terms.

Are there alternatives to banks forpizzeria 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 creditcard and see if you could finance it thatway. It just depends how much youneed and your situation. If you’re notcredit-worthy, then what are you goingto do? Can you get a personal loan fromsomeone? If you work in a restaurant,maybe people who’ve been your customersfor the past 10 years will each pitchin $1,000 for you to open your own pizzeria.You never know what people willdo. You have to be resourceful.

Liz Barrett is PMQ’s editor-in-chief.