Common Restaurant Financing Options and How to Qualify
When it comes to Buying a Restaurant, there are a variety of methods for obtaining restaurant financing. Before you choose the method for buying a restaurant, it is important to understand what qualifications must be met for each method.
Types of Restaurant Lending
While there are a variety of ways to obtain capital for purchasing a restaurant business, two popular methods of restaurant financing are unsecured lending and SBA Loans. Here is what you need to know about each of these options.
Unsecured Lending. For buyers hoping to acquire a restaurant business without putting their home or other business on the line, unsecured lenders are a common option. An unsecured line of credit may be attractive for a first-time business owner, as this form of financing does not require the applicant to have prior business experience or profit & loss statements to qualify. Instead, the unsecured lender will ask for a credit score of at least 680, no previous bankruptcy filings, a 30% debt-to-credit ratio, and no excessive credit inquiries. The process altogether takes about 15 days, making this method of restaurant financing much quicker than SBA lending.
We Sell Restaurants works closely with our trusted lenders to help inquiring buyers fund their investment.
Save these important details about our unsecured lender:
- 12-18 months of 0% APR (prevailing rates after introductory APR)
- Monthly Payments average 2% of the balance (after introductory APR)
- NO prepayment penalty
- Minimum 680 credit score
SBA Loans. SBA lending refers to loans backed by the Small Business Administration. To qualify for this form of restaurant financing, there are requirements that the buyer and the business must meet first. Taking this path to restaurant ownership requires all parties to cooperate and meet the minimum qualifications. Completing the process fully and accurately the first time is key to keeping a deal on track, as a hiccup in the SBA lending process could cause some delays.
On the business side of the deal, the following requirements must be met:
- Three consecutive years of profitable business operations
- Two years of tax returns
- Current year balance sheet & income statement
On the other side of the deal, the buyer must be prepared to meet the following requirements:
- Be able to provide at least 10% down on the purchase
- Be able to collateralize the purchase
- Have previous business management experience
- Do not have any bankruptcy or felony conviction in the last 7 years
One way to ensure this process is handled properly and timely is to work with a restaurant broker who knows the process and knows a Preferred Lender Program bank. We Sell Restaurants, for example, only works with Preferred Lender Program (PLP) banks. Any bank in the United States can participate in SBA lending, however, the process can take longer through non-PLP banks. PLP banks package, underwrite, and process the loan decision all under the same roof. Contrarily, non-PLP banks must send the package to the SBA for processing, which is where you may see time added to the deal. For reference, an SBA 7(a) loan can already take 60-90 days to be approved. The process altogether could take longer by adding a non-PLP bank as a middle-man for the loan.
Knowing the the basics of SBA lending is an important first step towards recognizing if this restaurant financing method will work for you. However, the Restaurant Brokers at We Sell Restaurants are familiar with how to properly guide buyers and sellers through the SBA process to finance a restaurant purchase. If you do not want to put your house up as collateral, then you may want to look at unsecured lending again. However, if you are looking for funds to cover the purchase price and more, then you many want to stay the SBA route.
Determining Which Restaurant Financing Methods are Available
Once you you know which financing methods you will use to purchase your restaurant, the next part of finding the right restaurant for sale is determining if your preferred financing methods are available. The restaurant broker will usually state in the listing details which restaurant financing types of financing are available. Different scenarios determine which finance methods are available for a restaurant purchase. For example, SBA loans are not available for asset sales—restaurants that aren't making money—because the business would not meet the requirement to show profitability. On the other hand, some restaurant for sale may entertain other forms of financing, like Owner Financing, which could be more helpful to your situation than an unsecured line of credit or SBA loan.
If, after reading this, you determine that unsecured lending or SBA loans will not work for your goals, then consider others options that we outline on our restaurant financing page. To learn more about alternative methods of financing your restaurant purchase, check out our guide to financing a restaurant. There, you can learn about restaurant financing options beyond our lenders, including business partners, 401K, and more.
Browse hundreds of restaurants for sale on our website to take the next step towards your dream of restaurant ownership!
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.