Are you planning to finance a restaurant purchase?  If so, the restaurant broker's recap of the "Five C's" may be a helpful prelude to SBA lending. Being aware of these five factors can help you determine if you are ready for lending before buying a restaurant. . What are the Five C's? These are the items lenders use as a determination of risk.   For bank lending, it’s all a matter of risk versus return.  Here are the five C’s and the restaurant broker’s  brief review of these important item.  Be prepared before you ask for that loan.

The first C is Capital! 

How much money will you bring to the table to finance the deal?  Unlike houses, the restaurant brokers have never seen anything like a "no money down"  or 3% down scenario for buying a restaurant.  Prepare to have at least 20% of the purchase price in the bank before you ask for a loan.  Otherwise, you will risk an almost automatic turndown.  What about more?  Always better!  Why?  This takes the pressure off the business to meet the SBA lending cash flow requirements and gives you some "breathing room" once you take over the business.  

Credit:

What is your personal credit score?  No discussion of the "C's" would be complete without a full discussion of credit.  After all, your past performance in paying your bills is a predictor of your future performance.  As we discuss in our book, Appetite for Acquisition, you should never go shopping to buy a restaurant and start due diligence until you've done some due diligence on yourself.   Before you buy a restaurant, please pull your credit score.  Make sure no one has lifted your identity or that unknown to you, a spouse has racked up a lot of debt that affects the number.  A minimum score of 650 by both a spouse and applicant are required on an SBA loan but that's on the low side.  Banks will look hard at that credit score.  If it's a little on the "soft side”, that can be overcome with careful documentation and notes to the bank. 

Capacity:

Capacity refers to the repayment ability of the business or the cash flow.  The SBA lending requirement is that a business will have sufficient cash flow to BOTH cover the principle and interest (and buyer's financial needs) along with a cushion of 25%. Any restaurant broker worth their salt would have already made sure the "capacity" part of the equation is satisfied before listing the business.

Character:

The next "C" in lending is a character.  This refers to your business experience.  If you are buying a franchise restaurant, having experience isn't always required as the process, systems and way to operate are part of what you are acquiring.  If you come from the airline industry however and are looking to start running a full service white tablecloth business with no background, this one could get dicey.  There are ways to overcome an "experience" or character issue.  Bringing on a family member or partner with experience will fulfill this requirement as would putting a pause on your plans while you gain the relevant experience in the industry would help.

Collateral:

The last of the five "C's" in lending are collateral.  What are the assets you have to guarantee the loan?  Aside from the assets of the business which will always be pledged, the bank will request that you collateralize the loan as well.  This is often with a second mortgage on your home or other property you may own.  For some restaurant buyers, this is a sticking point, so making sure you and your family are on board with what you are willing to risk is important before going forward with SBA lending.

That’s it.  Spend some time making sure you are prepared to address these five C’s with lenders and your loan will see easy approval.  Concerned about one of these items?  Contact the restaurant brokers personally to discuss your situation and see how we can help you with our SBA lending resources.  Remember, these are guidelines, not absolutes and every deal is different.  Ready to prequalify and talk to our resources?  We can help with that as well.  

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.