Stephen Sheinbaum, CEO of Merchant Cash & Capital, helps you navigate today’s lending market. The big banks may still be slow, but you have other options.
Q: The recession seems to be lifting. Is there money to be had to help me open another store?
The large international chains that are borrowing substantial amounts of money—tens of millions of dollars—are having an easier time securing money than the smaller owner operators. At the franchisee level, credit is still very tight.
We see the economy recovering quickly and consumer spending improving at a much healthier pace than the pace that lenders are opening up their wallets again to business owners. In terms of what potential borrowers need to keep an eye on, lenders are focusing more on credit and credit scores. It’s important for business owners to make sure their business credit and personal credit are as healthy as they can be. They also need to make sure they’re as current as they can be with their vendors, with their landlords, and that they’re caught up with payroll and sales tax. Lenders are looking more at owners’ relationships with vendors, making sure they’re healthy.
This is all because lenders are coming out of a deep funk, and they only want to deal with businesses with sustained profitability. There’s a huge amount of scrutiny on the larger banks because they’ve had the most exposure to the financial crisis. They’re under a much greater pressure than local banks or nontraditional lenders to keep cash reserves for potential losses coming down the road. Community banks have not gotten to that point of regulation yet. They don’t necessarily have to have those huge reserves to deal with potential losses that could spring up.What has opened up somewhat is alternative lending, such as our company, which is in the cash advance industry. Those types of companies advance money and provide working capital to restaurant businesses based on future credit card sales. There is money available in that arena. The restaurateurs who previously got money from traditional lending sources are turning to alternative financing sources like credit card cash advances and equipment leasing.
Traditionally people could go to local, community banks, if big banks weren’t lending. Now, since cash advance companies were the first to tighten in the recession, we’re seeing credit card sales (which is how we get paid back; it’s a top-line revenue source) improving month over month. So we’re lending; it’s just that capital is very hard to come by for the smaller operators.
But we also have factors that are needed to make deals with us go through. Operators need to have been in business for at least one year; they need to have been accepting credit card payment for 3–6 months; they need to not have any bankruptcies, judgments, or liens against them; they need to have at least a year left on their lease; and we look at cash flow. And, of course, they need to be on good terms with their vendors. That’s very important to us.
We see very frequently, especially in this market, operators taking the cash advance, getting back on their feet or opening a second location, and then going to banks and getting more traditional financing once they’re done with us. We’re often used as a bridge.
One interesting point is the private equity market has been much more active than the lending market recently. Part of that is because the people in the private-equity sector have been able to come in and, instead of lending and earning an interest rate on the money, because capital has been so scarce, they’ve been able to inject equity and take chunks of the business at very low valuations. That’s because the businesses are coming out of a poorer time.
So if a business is being valued at a multiple of its net income or earnings, a lot of investors will see that as a good time to buy into an operation because the value will be low. If those businesses are able to weather the storm, it’s more advantageous for them to take on debt than equity. Most astute business owners would be more willing to take on debt than equity, but that’s assuming there’s debt to be had. The credit markets have been so tight, business owners haven’t had the ability to say no to equity investors and then go get credit. As the credit market improves, then people who don’t want to deal with equity investors won’t have to.
Equity partners are not always bad. Having good, smart equity partners is a wonderful thing. When you take on an equity partner, however, they’re in your business. Now you have someone else who has a say in how you’re running your restaurants. If you’re building the value of your business, they’re going to share in that growth with you. On the other hand, if money comes in as equity and not debt, the investor is taking the risk that the business is going to grow.
With products like ours, we’re essentially partnering with a restaurateur for a 6–12 month period. Our company is under the view that it’s better to partner with someone, do a revenue share, and then we’re done and out of the business. From there, the restaurateur continues to own his business 100 percent. And that control issue is why some operators prefer not to take on equity partners and will look at traditional lending or cash advances instead.
Overall, the economy is going to improve a lot more quickly than the larger banks are going to loosen their purse strings. We’re still a good 12 months away from seeing lending institutions opening up their wallets.