What’s the best kind of financing for buying a restaurant? Any kind you can get in today’s lending market. That being said, there are both pros and cons to each method of financing for buying a restaurant. Here they are.
Owner financing is the tried and true method for buying a restaurant and has lots of benefits for the new operator. First and foremost, the seller believes enough in his pricing and the earnings that he’s willing to put his money at risk. That’s powerful for a buyer. Secondly, a seller with “skin in the game” is sure to be more responsive if issues surface after the closing since he or she is dependent on your success for his earnings. Lastly, interest rates and up-front fees associated with financing a restaurant purchase are usually much lower when the owner is the bank. There are no loan “origination fees” or “points” like a conventional bank loan and interest rates are also generally below market rate.
The cons of owner financing are that it is usually for a short period of time (typically under three years) so the cash flow will be reduced while you pay off the initial debt. You will also probably be on the hook for a personal guarantee as well as securing the loan with the assets of the business but this is comparable to bank lending as well.
SBA Bank Lending:
SBA secured bank lending is definitely on the rise and can be a good source of funding for buying a restaurant especially for higher priced offerings. The upside to this option is that banks will amortize a payment over ten years giving most buyers a comfortable repayment schedule that maximizes cash flow. In addition, the bank and the SBA will scrutinize the books, records and tax returns of the business so once they sign off, you can feel much more secure that what you’re buying is providing a solid return.
The down side to bank lending with SBA involvement is the long lead time involved in obtaining the financing and high costs to obtain (both in origination fees and interest rate). The lender will also require a personal guarantee in addition to additional collateral for the loan.
Another option for those with 401K funds available is a 401K conversion using a firm like Guidant. This is a tax free way to roll your 401K over into funds available for the purchase of a restaurant. The pros are that you have no one else involved in the transaction and it can be accomplished in a very short period of time (two weeks or so). In addition, the pay back is to your own 401K so you set the rate of repayment based on your own terms.
The risk to a 401K conversion is that you are placing part of your future savings at risk for today’s acquisition, something you and your family should fully consider.
Which is the best kind of financing for buying a restaurant? The one that works for you. Buyers should weigh their cash flow needs, costs and other pros and cons of each method.