Question: I need a loan to purchase equipment and for cost to be incurred for leasehold improvements at a new location for my restaurant.
Answer: We have been flooded with these requests lately and here is what we have found to greatly assist in the process.
First, understand that most lending institutions or bankers do not understand your operations to the degree that you do. Therefore time needs to be spent on clearly stating your loan intentions meaning exactly what you plan to spend the money on and how you will repay the bank.
Ask your accountant or do some due diligence yourself in finding out about the average commercial loan rates available and create what they call an amortization schedule of loan repayment. Most banks will have a standard set of terms or loan covenants that will be required for your new loan which you must comply.
Next, determine if your entities cash flow can handle the new debt that will be added to your operations. Banks today look at what they call “EBITDA or (Earnings before Interest Taxes Deprecation Amortization)” to determine if your restaurant has the ability to pay back the monies borrowed. Basically you or your accountant can assist the bank to understand your cash flow by ensuring they follow this formula. Your profit and loss statements should clearly identify interest, taxes, depreciation and amortization so that the bank can add back these expenses to your net income to arrive at a modified cash flow from your operations. Sounds confusing but this are where your advisor needs to assist the bankers to understand your cash flow and ability to repay the loan.
Second, the banks will require copies of your restaurants prior and current year’s financial statements and tax returns. Usually anywhere from one to three years prior and if your applying for a loan midyear they will want a current one that reflects the last three months operations. For your quickest delivery of these documents ask your accountant if they have an online electronic way to deliver them securely over the Internet so that you can direct the bank to a secured website to download them at their leisure. I have found that providing documents easily and securely expedites the loan process as well as adds credibility to the operator’s organization and character assessed by the lenders.
Finally, here is a note on “Character” of the operator in the eyes of the bank. Banks lend monies based on Character and Capacity. Capacity is the ability to repay the monies as discussed. Character is a subjective way of determining organization, reputation, credit score, community involvement, and experience in the trade, professional advisor associations, and reputation as a restaurateur. Do not underestimate this assessment when applying for monies at a bank or any lending institution. Take the time to put your best foot forward when having any interactions with the bank including source document gathering and personal interviews with the lenders.
Question: Why do I pay extra payroll taxes in the first part of the year?
Answer: Most states have an unemployment insurance contribution system that is applied usually to the first amount of wages for each employee up to a maximum in a year. For example, the California Unemployment Contribution rate is 1.5% to 6.2% on the first $7,000 of wages earned for each employee. Therefore in the first quarter of the tax year you will have increased employer payroll taxes that are due and payable that is not withheld from the employee paychecks but are contributed out of the employer’s side. This can be a shock if all of a sudden your quarterly payroll taxes are due and these amounts have not been budgeted or accounted for in the cash flow.
There are methods of reducing these rates primarily by controlling your hiring and firing employee practices. Employee retention is costly and this unemployment insurance mandated by most states is a direct effect of having excessive turnover in your restaurant. First, contact your accountant or payroll service provider to determine the employment insurance rates in your state and then start inquiring how to reduce the rate. Find out how other restaurant owners are managing their employment practices to keep this rate down. Actually have a national payroll service provider provide a quote on processing your payroll and inquire about best practices for restaurants to manage this rate.