Do the terms “small business loan” and “buying a restaurant” belong in the same sentence? Yes, if you use an expert restaurant broker that does his work up front.

In the last three years there has been less access to capital than ever before for acquiring a small business like a restaurant for sale.  There are still options however and one source is the SBA loan program. The SBA is an independent federal agency created by congress in 1953.  They are mandated by Congress to aid growth and expansion of small business.  One element of that charter is the SBA loan program.  The SBA does not actually lend money itself. Instead, it insures against risk for banks in the event of a default.  They guarantee as much as 90% of a loan’s value for the lender. 

Here are a few of the items you should be aware of when it comes to an SBA secured loan. Most of this can be found online at www.sba.org.  If the following conditions can be met, the loan for buying a restaurant has a strong possibility of being funded.

The SBA program requires a restaurant have no less than three years, thirty-six consecutive months, of profitable operation.

The minimum books and records required will include both the tax returns and profit and loss statements.

Restaurant buyer requirements for SBA secured programs include all of the following:

1. The SBA will not approve any loan unless the owner is committed to finance at least 10% of the purchase price. 

2. The SBA program requires that a restaurant buyer secure the loan with a second mortgage on your home. This is not negotiable in any circumstances we have seen. If you refuse to pledge your home for collateral on your business acquisition, don’t try this route for borrowing.

3. The SBA program also requires that they lien the furniture, fixtures, and equipment of the restaurant you are buying.

4. The SBA program requires a minimum amount of business experience.

6. The SBA requires that that net profit per month with add-backs divided by the loan payment per month must be 1.25 or higher.

7. Key person life insurance is usually required. This can take up to six weeks to obtain.

8. 9. Both the spouse and the applicant’s credit history will factor into the loan approval.

10. Lenders insist on the seller and buyer both signing IRS Form 4506-T to protect against fraud. Both the seller and buyer face IRS trouble if the tax forms are false.

11. A business plan will be required by the lender as part of the SBA process.

12. The applicant for the loan must be a legal resident of the United States.

13. The credit score of the applicant must normally be above 650 and the restaurant buyer cannot have an arrest record.

14. The applicant for the loan must have direct management experience to be approved in most instances.

The bad news is that the requirements for restaurant SBA lending are stringent.  The good news is that if an expert restaurant broker has already submitted the business for pre-approval, it’s almost a sure thing to get the loan as long as you meet the restaurant buyer’s criteria listed above.  Once you submit your paperwork to the bank, it’s a fast track to closing.

In short, when restaurant brokers advertises that a restaurant has already been pre-approved for lending you can be assured that it is an A+ listing with excellent records and profitability.  The “pre-approval” portion of the lender work will wean out any restaurants for sale that don’t meet strict financial criteria.

Read also, Buying a Restaurant with SBA Lending - What the Lender Needs and Financing a Restaurant with Unsecured Lending.

Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.