Securing small business loans in a melting economy

The scoop on financing a chain of Dairy Queens

Sid, Atlanta
My partner and I have owned more than 10 Dairy Queens over the past 20 years. We’ve never lost any locations. Each is incorporated separately. We’ve been trying to capture another location in Alabama. They’re asking $625,000 and we’re ready to put 20 to 25 percent down. It seems hard to get a loan these days. Is it because the market is falling? Do you think we might face a problem securing the loan?

By Shara Rutberg, Fortune Small Business Contributor
Dear Sid: Ten Dairy Queens! Not only is that a lot of Blizzards and banana splits, it’s a lot of experience that should help you you apply for a loan. Over the past two decades, you’ve “likely gained tremendous experience in the franchise business,” says Alfred Luhr III, senior vice president, business banking at Buffalo-based M & T Bank. “That experience should be put to use when applying for a new loan. Prepare an updated financial plan that shows projected revenues, expenditures and cash flows, as well as year-over-year same-store sales statistics, location analysis, management structure and background, franchise contracts, etc. The better prepared the borrower, and the better the communication between borrower and banker, the easier the decision for the bank."

A more positive flavor within the ice cream business might have more of an impact on your potential to get a loan than the overall economic climate that seems to be melting profits across the country. “Keep in mind that your business’s ability to borrow in this economy will depend on how the downturn is affecting your particular business and perhaps your industry more broadly,” says Jim Cole, a spokesman for San Francisco-based Bank of the West. Consider working with a bank that understands your business and has experience lending in your industry.

You can still get a loan, agree Cole and Luhr, but you just might have to work harder for it. “Your best bet is to develop a strong, deep relationship with a conservative, well-capitalized bank that is focused on serving businesses in your community,” says Luhr. “Banks today are even more interested in your deposits than in your loans, so consider moving as much of your banking business as possible – both commercial and personal – to that bank that provides you with credit. With that kind of relationship, your bank is far more likely to give you the help you need when you need it most.”

In today’s economy, some lenders may prefer to lend via the Small Business Administration’s 7(a) program that shares some of the credit risk with the lender. Another advantage to SBA financing is that they often come with “a longer term, which means lower payments. Lower payments enable you to retain more working capital to grow your business,” says Cole.

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