SBA Lending – Financing a Restaurant with Uncle Sam’s Help (2nd in Series)

Looking for help financing a restaurant? This is the second in our 5-part series titled "Financing a Restaurant, What are My Options?"

One key resource for restaurant financing is an SBA lender, so called because the loans have the backing of the Small Business Administration or SBA. While the SBA does not ISSUE loans (a common misconception) they do GUARANTEE loans. That makes banks more willing to accept risk since the government is standing behind the deal.

With terms as long as 25 years, low monthly payments and fixed rate options, SBA backed loans are the type of loans that work in large restaurant acquisitions. The only caveat – the restaurant for sale must have a track history of results and multiple years of tax returns to qualify. Anything advertised by the restaurant brokers as “Pre-Qualified for SBA lending” or stating “Excellent Books and Records” is a candidate for financing a restaurant with a bank.

Here are a few of the benefits of an SBA loan:

Payments are fixed and fully amortized meaning there are no balloon arrangements. That’s a benefit over owner financing where it is more typical to see balloon payments (a large single payment at the end of a series of smaller monthly payments). The restaurant brokers also typically see lower monthly payments that are easily reached through the cash flow of the business since this is part of the lender’s analysis before granting the loan.
Down payments range from 10 – 30% according to many lenders. It is rare however, that the restaurant brokers see any down payment lower than 20% and that’s an improvement we’ve observered in the past year or so. In '08,'09 and '10 on the heels of the recession, it was typical to see banks request as much as 35% down.
Terms can be as long as 25 years though it’s much more typical to see them at 10 years. In general, the term of the loan must match to the length of the franchise and the length of the lease. You can’t have a loan on a business for 10 years with a lease that’s for 8 years or a franchise for five years. The good news on a ten year term is that there are no prepayment penalties on loans under 15 years which means you can pay off early with no additional costs.
Fixed rate options are the standard on an SBA backed loan. That gives you security as a buyer of what your payments will be over the term of the loan unlike a variable rate.

With the good comes the bad and the downside to an SBA lender program can be:

High upfront costs in the form of origination and other bank fees. This is one area restaurant buyers should carefully check. Be sure to compare fees since they will vary dramatically from lender to lender.
Another drawback on an SBA loan can be the sheer amount of paperwork. If you aren’t good at keeping up with your tax records, financial statements and filling out forms, this might not be the right course for financing a restaurant.
Lastly, the government is very inflexible on certain key points. If the loan exceeds $350,000, they will not budge on a requirement that your personal residence service as additional collateral on the loan. That can be off-putting if you’re financing a restaurant purchase and want to leave your personal residence off the table. They also require that your spouse be part of the personal guarantee on the loan.

If you’re doing a franchise start up, SBA lenders are also ready to lend, particularly if the franchise has been listed on the Franchise Registry. This is the program for lenders where franchises submit their financials up front for their open and operating stores making the construction loan a simple process.

The Small Business Administration is a great resource for financing a restaurant as long as you are aware of the work and costs associated with this path. You can find multiple lenders that process these loans online at sba.gov or ask a professional restaurant broker for advice on lenders he or she has worked with in the past.

Our next article in this series on Financing a Restaurant – What are My Options is titled, “Owner Financing When Buying a Restaurant – the Good, Bad & Ugly.” The restaurant brokers will publish the next installment in the series next week.

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Our 5-part series on financing a restaurant includes: