How does one get a loan when lenders are reluctant to make them? While the lending market remains sluggish, loans are being made, albeit in limited quantity to qualified borrowers.

John Graziano, CFP, CPA with Future Financial Planners, Inc., in Hazlet, New Jersey, advises restaurant operators to take basic steps to help increase their chances of an approval. “Lenders know this is a cash business. The first thing is to get your books in order,” advises Graziano. “Sloppy bookkeeping will only hurt your chances. Records must show that your business can cover the debt service. Having an experienced and stable management team also helps.”

“Commercial lenders look for reasons not to lend,” says Christopher Alberta, a quick-service restaurant (QSR) turnaround and restructuring adviser at consultancy firm Conway MacKenzie Inc. in New York City. “Commercial banks have significantly retracted from restaurant lending.” Banks now seek to tie loans to hard assets, but most small-restaurant loans are “cash-flow” loans, i.e., without collateral.

Lenders like to see a performance record of same-store sales growth, not a restaurant that’s in decline. “When you really need the money is almost always the time when no one will lend it,” says Graziano. “It can often pay to get a credit line in place long before you need it.”

A credit line can help meet operating capital short falls. Usually provided by a bank, the borrower can annually take, at his or her own discretion and in predetermined increments, a certain amount of capital. Credit lines are often for less than $200,000 and based on accounts receivable and current inventory. It’s not advisable to rely on one for long-term investments or major purchases because line of credit interest rates and late fees can rapidly compound.

“We needed a stove,” recalls Teresa Gagliardi, proprietor of Mama Rosa’s Cucina Pizzeria in Bayonne, New Jersey.  In 2005, long before the credit crunch, Gagliardi applied for a loan from the local bank with which she did her regular business, but was turned down. “We were in business for five years at the time. The bank wasn’t satisfied with that and didn’t look carefully at our records.” With time running out, Gagliardi used a home-equity loan to buy her oven. Her situation is not unique.

“My line of credit was cancelled in 2007 for no reason and without warning,” says Vincent Leo of Crosby Pizza Stop in New York City. In business for more than 20 years, the line had been furnished by a local bank with which he did his personal and business banking. What does he do without it? “I order things on a C.O.D. basis. Other times I just don’t buy things.” In 1995, when he expanded his store, Leo used a home-equity loan.

While banks are more comfortable once they can attach real estate to a loan, the borrower takes significant risk. The funds made available from a home-equity loan can be used for nearly anything – from taking a vacation to expanding a business. Despite the promises of safety and access to cash, there can be more than meets the eye with this type of deal.

“Borrowing against one’s home is almost never advisable,” says Mark Snyder, an independent financial adviser in Medford, New York. “People really need to understand what they may be getting into.” The Restaurant Finance & Development Conference (www.restfinance.com) helps restaurant owners and executives meet with banks, finance companies, brokerage firms, real estate developers, investment bankers and other financial intermediaries, i.e. alternative lenders. While franchisees typically have approved lenders they can approach, they are often better served going out of network, says Alberta.

Nick Matsas, a co-proprietor of Illiano’s Trattoria in New London, Connecticut, has used suppliers for credit. In business for 22 years at the same location, Matsas says bank offers arrive “all the time,” but he declines them. “Suppliers give us three-month terms. Otherwise we pay as we go and keep borrowing to a minimum.” Suppliers may have an interest in lending to you — it will help keep you as a customer, and if you cannot make the payments, they’ll most likely repossess the equipment. The drawback with supplier financing is that such loans are generally only for use when purchasing their product(s).

Traditionally lenders rely on the “four C’s” before deciding whether to grant a loan:

• Cash — how much you’ve got.
• Collateral – any hard assets i.e., real estate.
• Credit – your bill-paying history; do you make your mortgage, taxes and other payments on time?
• Character – are you a worthy risk? This is where personal references come into play.

If a potential borrower can satisfy three of the four C’s, chances are good at obtaining a loan. If your credit record is poor, speak with a credit-repair specialist about fixing it before submitting a loan application. The better one’s credit profile, the better the rate.

Considering tapping family or friends? If so, it pays to formalize the agreement by putting it in writing so each party understands its responsibilities. There are online legal companies that, for as little as $100 or less, will set up a family loan, including all the terms. Many small businesses have gone this route, and getting it in writing can only help.

The most common  small-business loans:

1. Business Acquisition Loans –
Provided specifically for the purchase of an established business.
2. Debt Financing – Normally done through a bank or traditional lender, such loans are limited by the amount of personal assets that the business owner has available to use as security against default.
3. Franchise Start-Up Loans – These apply to the acquiring of capital necessary for purchasing a franchise, specifically a nationally recognized one.
4. Line of Credit – Designed to ease cash-flow pain, lines of credit are based on accounts receivable and current inventory and often have a high interest rate and late fees.
5. Long-Term Loans/Business Expansion Loans – Used for business expansion, improvement, or acquisition of major equipment or real estate.
6. Micro-loans – Up to $35,000, these are administered through either not-for-profit or non-profit organizations and are approved by the Small Business Administration (SBA) with a lot of stipulations. They generally come in 6-year terms or less.
7. Revolving or Open-End Credit – Prearranged and for specific amounts, special checks must be written and repayments made over a specified time period. Finance charges are normally based on the amount of credit used, plus any outstanding balance.
8. SBA Commercial Loans – Loans made by private-sector lenders (banks, etc.) to small businesses. The Small Business Administration (SBA) guarantees repayment, making them difficult to secure.
9. Secured Working-Capital Loans – Collateral gets the capital. Should you default, that’s what the lender will seize.
10. Short-Term Loans – Used for accounts payable, inventory and working capital. They usually require less collateral and have a smaller interest rate.
11. Start-Up Loans – Providing capital to new entrepreneurs.
12. Unsecured Working Capital (Cash-Flow) Loans – Unsecured loans provided strictly as working capital.

Joseph Finora is a freelance writer in Laurel, New York.