restaurant financing

Start-Up Financing

SBA loan brokerIs This Your First Venture?

We have money available for you! Most banks view bars and restaurants as high-risk ventures but we understand the business and broker exclusively to bars and restaurants. 

 

 

What is SBA Lending for Financing a Restaurant?

 

SBA 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 and guaranteeing as much as 80% or 90% of their risk.

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 restaurant brokers as “Pre-Qualified for SBA lending” or stating “Excellent Books and Records” is a candidate for financing a restaurant with a bank.

 

Benefits of SBA financing for purchasing a restaurant

 

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).  We 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 we see any down payment lower than 20% and that’s an improvement we’ve observed 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.

 

Disadvantages of SBA Financing for Buying a Restaurant

 

High upfront costs in the form of origination and other bank fees. 

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 10% Down SBA 504 Loan

The Small Business Administration developed the 504 loan program to assist small businesses in obtaining financing for hard assets (land, building, and equipment with a useful life of ten years or more). Some soft costs — such as interim interest, accounting, legal, appraisal, architectural, and engineering fees — are also eligible. Under the program, a private sector lender lends the applicant up to 50% of the eligible project cost. The small business contributes at least 10% of the project cost (start-up businesses must contribute an additional 5%, and single purpose facilities must contribute an additional 5%). The borrower obtains the remaining 30% to 40% from the SBA. The interest rate on the SBA loan is fixed for the term of the loan, and depending on the collateral, the borrower has a choice of ten or twenty years for the term. The SBA requires the private sector lender to make its loan for at least ten years with no balloon payments. However, that lender may adjust its interest rate on a periodic basis. The borrower has two loans: one with the bank and one with the SBA. The private sector lender is secured with a first lien against the collateral, and the SBA is secured with a second lien against the collateral. The 504 program requires that for every $65,000 that the SBA lends, the small business must create or save one full-time job or the equivalent.

The minimum amount for an SBA 504 loan is $25,000, and the maximum amount is $5,500,000. In no case can the SBA 504 loan exceed 40% of the project cost.

The SBA 504 loan program is available throughout the State of Georgia through the Georgia Small Business Lender (GSBL).

On February 28, 2011, the U.S. Small Business Administration began to allow the 504 loan program to be used to refinance existing debt

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. 

SBA 504 Loan Forms

504 CHECKLIST

Loan application checklist

 

AUTHORIZATION TO RELEASE INFORMATION

STATEMENT OF PERSONAL HISTORY

Statement of Personal History

PERSONAL FINANCIAL STATEMENT

Personal Financial Statement

 

504 APPLICATION

504 Application

 

 Restaurant fnancing

401K Conversion for Financing a Restaurant

 

The Bank of You is also known as your own 401K savings. Restaurant buyers often overlook these funds as a source of capital for financing a restaurant purchase without realizing there are multiple ways to use 401K funds without facing a large tax bill from your Uncle Sam.

 

The easiest approach is to borrow against your 401K. In this option, you are able to simply use your own money as the security or collateral for a loan. The advantages of this option are:

 

Quick and Easy.

 

Credit Scores can be marginal as long as appropriate security is in place.

 

The second and most frequent approach the we see used by restaurant buyers is the 401K conversion method. In this option, your 401K is actually converted to capital for the investment using the Internal Revenue Service guidelines and is tax free. In this case, your new 401K is made up of your restaurant purchase.

 

Benefits of 401K Conversion for purchasing a restaurant

 

Short Time Frame. A 401K conversion can be completed in as few as 30 days, a standard amount of time in a closing of a restaurant for sale.

 

Simple to execute. As long as you use a knowledgeable group like Culinary Concepts & Consulting, the effort on your part is minimal. A top class firm like CCC will process all of the paperwork, do the legal and accounting effort to keep you in compliance with the IRS and transfer the money in time for you to buy a restaurant.

 

No Tax Consequences

 

Since you are only borrowing against the securities in your 401K account, there is no “cash out” that would trigger a tax event with the Internal Revenue Service.

 

Restaurant loans

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