Growing a business often requires a significant infusion of capital for improving facilities, acquiring or building out new properties, or even funding initial operations. Though a daunting prospect for many entrepreneurs, with strategic planning and the right financing partner, achieving expansion goals without the borrower or lender taking on excessive financial risk is possible.
Enact Partners recently worked with a business owner who was looking to grow his restaurant chain to include multiple venues in California. Let’s explore how he leveraged debt and used his existing restaurants as collateral and equity to secure financing.
First, let’s define a few key terms:
Debt Financing: This refers to borrowing money to fund business activities. Debt financing can come from various sources, including banks, financial institutions, or private lenders like Enact Partners. The borrowed funds must be repaid with interest over a specified period, usually short-term.
Collateral: This is any asset a borrower pledges to a lender as security for a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recoup losses. In the case of the restaurant owner, the existing restaurants served as collateral for the loan used to fund the new venture and operations.
Loan-to-Value Ratio (LTV): The loan-to-value ratio is a financial metric used by lenders to assess the risk of a loan. We’ve written about it before in a previous blog, Loan-To-Value: A Simple Equation with Complicated Implications. LTV is calculated by dividing the amount of the loan by the appraised value of the collateral. A lower LTV ratio indicates a lower risk for the lender, as there is more equity in the collateral to cover the loan amount.
Building Upon Success to Kickstart Operations
The entrepreneur in this case approached Enact Partners because he wanted to expand his restaurant business by purchasing a new property, improving it, and getting the venue up and running. He’d already successfully owned and operated restaurants for nearly 10 years, experiencing positive cash flow. His plan was to use personal savings to acquire and renovate the new restaurant.
What he needed from Enact Partners was an experienced commercial real estate private lender who could help leverage the money he’d already invested in the new space (and the resulting equity) into the capital necessary to start operations there. After a careful review of his financials and business plan, determination of a low LTV ratio, plus an assessment of his experience, prior success, and commitment to see the project through, Enact Partners co-created a strategy with him to use the existing restaurants as collateral.
Demonstrating Success to Secure Long-Term Financing
The owner’s goal was to build up operations at the new restaurant in order to show income and meet small business loan requirements for refinancing a longer-term bank loan. Based on experience, the owner understood that it takes time to establish a new restaurant and generate the revenue needed to demonstrate the ability to repay such a loan. By carefully managing cash flow and operating expenses, he knew he would be better able to position himself for success.
His first step was to leverage the equity he’d already built up in his existing restaurants to secure financing through Enact Partners for the capital needed to open the new restaurant. This not only minimized the lending risk for us, but also gave him the ability to begin hiring staff, invest in necessary equipment, and open the restaurant as soon as possible.
The owner knew that banks would be more likely to extend credit to a business with a track record of profitability and sound financial management. By working with Enact Partners to get up and running sooner rather than later so he could showcase the success of his new restaurant, he was able to secure the necessary long-term small business loan.
Business Growth through Borrowing
With the foresight to leverage debt and collateral to fuel his growth goals and operations, this restaurant owner was able to open and operate his restaurant successfully without taking on excessive financial risk. With careful planning, patience, and a focus on operational success, Enact Partners was able to help this entrepreneur succeed in the very competitive restaurant industry.
Enact Partners lends on commercial real estate projects with solid fundamentals, offering a reliable, flexible, and stable alternative to banks. Contact us to explore how we can help you achieve your business goals.
(760) 516-7776 | [email protected] | www.enactpartners.com
