Food Franchise Business · Money & Financing

Pros and Cons of Commercial Loans

Food Franchise Finance

Does your dream of owning your own restaurant require a loan? Make sure that you know the pros and cons of commercial loans before you apply for one to provide you with financing. Before you decide what type of financing is best for you there are some questions that you need to ask yourself. According to Bev Holister, of Mortgage 101, the following questions can point you in the right direction when it comes to deciding if a commercial loan is your best choice for financing:

• Are you and your business credit worthy? Your personal and business credit ratings will be analyzed.
• What kind of money do you require? Short, long, intermediate term money or equity capital.
• How much money do you need? Present exactly what you need and what it is for.
• Do you have sufficient collateral? Your collateral must equal the loan amount at a minimum.
• What are the lender's rules? Ask about loan-to-value and debt coverage ratios.
• What kinds of limitations will be set by you? Know your comfort level with rate, payment, and term.

When you apply for a commercial loan the lender will need the following information to determine if you are a good or a bad risk. Keep in mind that not all of these points will be applied:

• The past three years of financial statements and income tax statements.
• Your personal finance statements.
• Projected statements of your cash flow for the next year.
• A up to date balance statement of your profits and losses.
• Collateral information.
• Your business plan.
• State and Federal tax data.

As well as some advantages of applying for a commercial loan, there are some disadvantages that you need to take into consideration. The cons of having a commercial loan for the operation of your restaurant include:

• Additional guarantees. Depending on the credit rating of your company, the lender might require additional guarantees. These may be provided by you, your partners or your bank and could affect your personal credit rating or your standing with your bank.
• Collateral. The lender may insist on a pledge of some asset to secure the loan. Under a security agreement (for personal property), if you default on the loan, the lender is able to foreclose upon the asset and sell it to repay the money owed to the lender. If you are required to provide security, try to limit the amount you have to give to secure the loan. And make sure that when the loan is repaid, the lender is obligated to release its mortgage or security interest and is required to make any government filings acknowledging this release
• Defaults. The lender may define a variety of events that will constitute a default on the loan, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the loan documents. Try to negotiate advance written notice of any alleged default, with a reasonable amount of time to cure the default.

Good luck finding the perfect food franchise opportunity!

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