Nation's Restaurant News
July 28, 2003

Loan sweet loan: Operator's guide to working with a lender

by Michael L. Moskowitz, CPA
President, Equity Now

A New York restaurant owner, trying to make it in these tough times, was recently denied an unsecured loan. The bank's reason? His business did not follow "normal" profit and loss patterns. "Banks shun people who can't disclose everything and present tax returns or W-2s to verify income," said the owner.

The restaurant was doing well until September 11, but then, like many restaurants, lost business. The owner, who needed a cash influx to maintain cash flow, heard a radio ad for a New York-based direct mortgage lender. A company loan officer reviewed the owner's application and approved a loan for $315,000. The owner paid off both first and second mortgages and ended up with $35,000 cash out to put into the business. The business is now doing well again.

The owner of another restaurant in an older building, needing major renovations, managed to borrow $400,000, enough to finance the construction project. The benefits also included paying off a tax lien of $80,000 and $90,000 cash out.

In Florida, a couple from the Northeast bought a going restaurant business and a new home. They also kept a second home on Long Island worth more than $1 million on today's market. The restaurant was not doing well and needed an infusion of cash.

With their money tied up in two homes and a business, the couple started talking to lenders.

There was a difficulty in borrowing against the equity in their Florida home because its mortgage was restricted by a large prepayment penalty. A direct lender was able to loan $400,000 on the Long Island home to provide needed financing to the business, with enough money left to pay off the existing mortgage of more than $200,000. The restaurant owners even had enough cash to buy out a family member wanting to exit the business.

While these restaurant owners were fortunate, many colleagues are rejected or stonewalled by banks and other lenders who do not understand the restaurant business, its depreciation and tax situations. Banks tend to focus on full income check loans and credit scoring -- not good news for restaurant owners who are in a cash business with cyclical ups and downs. Also, banks take a long time approving loans.

As a result, some restaurant owners take what they think is the next best option. They call a mortgage broker who appears to be offering low rates and fast action. Such a choice often has a disastrous ending. The borrower learns to his consternation that brokers are middlemen with no ability to make lending decisions or lend money. They are agents trying to place your loan with a lender. Many times, the applicant ends up paying high fees and rates.

The restaurant owners in this article obtained loans because they accessed a specialty banker known as a direct lender. These lenders differ from banks and brokers in several distinct ways. Unlike brokers, direct lenders make lending decisions and actually make loans. And, unlike banks, direct lenders are not snarled in bureaucratic procedures.

Many direct lenders specialize in borrowers who are good risks but have unverifiable income and possibly blemishes on their credit records. In these times, many restaurant owners find themselves in these circumstances.

Advice for the Prudent Borrower
Whether you take my advice and seek out a direct lender or settle on a mainstream bank or broker, I would advise you to be methodical and prudent in your decision-making. After all, borrowing money on your house or your second home or investment home is one of the most important financial decisions you will ever make.

Preferably, get a referral from somebody you trust. If not, advertisements in respectable media are one place to start. Read and listen to advertisements carefully. Many ads mislead about rates and credit eligibility. Beware of companies advertising unusually low rates. Low rates either mean high points or that a bait and switch is taking place. For example, if the general market for a 30-year fixed rate loan is 5.50% with no points and you see an ad for a 30-year fixed at 4.75%, and learn that the rate requires four points be paid --- that's just a plain old come-on. True low rates are usually reserved for people with absolutely perfect credit and full income verification.

In making a decision, choose your lender wisely, keeping in mind distinctions between banks, direct lenders and brokers. Big banks can take up to six weeks to approve a loan. Large, old-line finance companies may overcharge on good credit, larger loans. For people with less than perfect credit, direct lenders may be the right choice because many are experts in this area.

Once you have selected your lender, make sure he or she provides you with all of the information in writing.

Ask your lender for at least three references--borrowers in the same situation as you, credit-wise, income-wise and loan-size-wise-- who can attest to the lender's ability to deliver as promised. If your lender cannot do this, you should seriously reconsider doing business with them.

Know what you're paying for! Know the closing costs in advance. If you use a mortgage broker, you need to know that the size of the broker's fee will affect your payment for the next 15 or 30 years. Insist that the broker give you in writing on letterhead, in advance, the fee as a percentage of the loan amount including any monies paid by the lender under the table to the broker. That way, the broker can be held responsible.

Know how long each step of the process will take and get it in writing! If timing is important to you -- and it often is to a restaurant owner working to meet expenses in tough economic times -- you'd better know up front when you will receive your money. A lender can get a borrower on the hook, have him pay for an appraisal, and then keep him or her waiting for weeks, only to reveal late in the process that the loan has been denied or that the terms have taken an unfavorable turn.

Some lenders approve loans themselves in-house and make fast decisions. But others must send the loan applications out to a third party, a process that can take weeks before you receive an answer. Make sure the lender you work with approves in house.

Watch for "bait and switch" practices! If an offer is too good to be true, then it is probably not true. Make sure all costs are accounted for and confirmed in writing. You don't want to be promised a low rate, then at closing have a dishonest person trying to explain why you are being charged more. This problem can be avoided by making sure you are working with a reputable lender, one verified by the Better Business Bureau and the State Banking Department.

Getting low cost funds on one's home, as our restaurant owners found, can be a satisfying process. But to achieve your desired goal, you need to deal with the right lender. Choosing the wrong one will get you into deeper trouble than when you started. The steps are not difficult but they must be followed if you and your business are to benefit from the equity in your home.