February 24, 2020 Finance makes the world a new place

Appetite for Debt – Why Loans is Good for You!

Appetite for Debt - Why Loans is Good for You!

Starting and growing a restaurant can be a money intensive proposition. Buying or renting space, kitchen equipment, and furniture is only the beginning. Add to this the utility, salary and inventory, and it’s no surprise that so many restaurant owners struggle to make ends meet.

However, there are many sources of capital available to business owners who understand, and perhaps nothing is so important to the health of a restaurant that grows rather than debt. Loans, rent, credit cards, mortgages, and personal records of all kinds can make a new restaurant take off, or help a thriving restaurant grow.

No Money Down

Jimmy Kavopovis, 42, is the proud owner of Steele Creek Caf ?, a fast food-friendly place in an office park environment. This is the third restaurant business. The restaurant industry is currently very challenging, Kavopovis said, and finding loans for growth is part of the challenge. “In the past you could place equipment for collateral, but times have changed,” he complained. “Banks don’t lend money to restaurants that often.”

Nevertheless, Kavopovis has succeeded in developing a thriving business through the use of creative credit – both traditional and other. He built and owns the building where Steele Creek Caf is? operates, and owns another building – formerly the home of his first pizza restaurant.

Balancing effort

“Restaurants are very capital intensive,” said Lesley Kohn, principal at Nextaurant, Inc. San Francisco. “So there are some extraordinary ways to increase debt.” Nextaurant works with chefs and owner-operators on budgeting, fundraising, and operations.  She has no lack of ideas and advice about using loans.

“Look at it holistically; too many companies are underleveraged,” Kohn says, referring to debt’s ability to multiply an owner’s profits without additional out-of-pocket cash. A holistic view of the business includes forecasting the budget for three to five years, understanding your personal income needs, and balancing the amount of debt with other factors, including cash flow and equity capital invested.

One weakness that Kohn most often sees among restaurant owners? “There aren’t enough people in the restaurant business to manage their numbers,” he said. “You must have a good budget to know what you are looking for.”

If the business owner knows how much money is needed in the long run, and how much profit (or cash) is left to make loan payments, then getting a loan will be much easier. Kohn said he had helped secure debt from various sources, but the basics were the same – to be able to borrow money, you had to be able to show how you would repay it.

Where to Look

When it comes to finding lenders, it helps to think broadly “We’ve dealt with banks, as well as a ton of private sources, ranging from [commercial finance] institutions, the SBA, friends, family, angel investors, and other high net worth individuals,” says Kohn.

Each source of capital has its own advantages and disadvantages.  Banks and commercial finance lenders tend to have higher rates of interest, while individual investors may …

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Always Use Protection! In Business Finance

Always Use Protection! In Business Finance

“We might be able to arrange arrangements for your repayment. Can you bring at least one payment by Friday?” In a two-sentence discussion with the borrower, the employee serving your loan may have just planted the borrower’s litigation seed.

“They said they would work with me.” If you institutionalize the foreclosure action later, the borrower can state that they are “in negotiations” with your company to prepare a payment plan. Such claims can lead to other arguments in muddy areas that seize collateral.

From the borrower’s point of view, when does the loan officer’s actions cross the line between normal daily communication and the actual agreement to modify the loan agreement or delay the collection action? The answer to this question can be very subjective.

What is the solution?

Enter – Pre-Exercise Agreement.

With the Pre-Training Agreement, the borrower and lender agree that there is no training agreement, there is no postponement of billing actions by the lender / service provider, and there is no modification of the terms of the loan agreement or lenders’ rights, unless the agreement is made in writing and implemented by all parties.

Actually, the term “Protocol Agreement” should be used, rather than “Pre-Training Agreement.” It might be wise to avoid using the term exercise altogether. Their use, either orally or in writing, can enable borrowers to claim that they rely on representation that some arrangements or modifications will be made.

WHEN and HOW to use the “protocol” agreement:

Strengths of Procedure:

Where the borrower has entered into a protocol agreement, you have a clear protection element. But what about bad borrowers who haven’t, or won’t, implement a protocol agreement?

In this complex field, which is clearly stated, written procedures and protocol letters can help avoid misunderstandings and reduce responsibility.

Procedure:

Written policies and procedures for loan service staff, (or anyone who interacts with your borrower) can prove to be helpful when defending against borrower claims. In making the procedure, you might want to consider dividing all loan officer / borrower conversations into two different categories:

Basic conversation, pure information:

“Where do I send payment?” “When will you send us your April 1 payment?” Strangely, there is little that can be said by borrowers without stepping into the field of negotiations and agreements. Decisions must be made about the extent to which the conversation can proceed without the steps outlined below.

Arrangement or negotiation conversation:

If the borrower shows that they will bring the April 1 payment and May 1 payment on May 9, they have just proposed a loan exercise. When the person serving your loan recognizes this arrangement, you have just signed an unwritten loan training agreement. Even though this is an extreme example, it shows how easily you can step into negotiations and modifications. It may be necessary to empower your staff to make certain limited payment arrangements. With written procedures, you have the opportunity to explain clearly what, if there is a variation of the payment that is required by contract …

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