How to Get a Business Loan For a Restaurant

Securing loans for restaurant businesses can pose a challenge due to the perceived volatility of the industry by lenders. Nevertheless, there are numerous lending institutions that provide loans supported by the Small Business Administration (SBA). These loans are specifically designed to assist in purchasing an established restaurant, opening a new location, or acquiring working capital. 

With competitive interest rates ranging from 5% to 8% and generous repayment periods of up to 25 years, SBA loans offer a viable financing option. In this article, we will outline the five essential steps required to obtain an SBA restaurant loan, along with potential alternatives for those who may not meet the qualifying criteria.

e) Commercial Real Estate: If you are purchasing commercial real estate, it must be utilized for at least 51% owner occupancy.

By thoroughly evaluating these eligibility criteria, you can determine your qualification status for an SBA loan and take appropriate steps to proceed with your funding application.

Assess Your Eligibility 

In order to secure funding through an SBA loan, it is crucial to meet the qualification criteria set by both the Small Business Administration and your chosen lender. While specific lender requirements may vary, the following are the fundamental qualifications typically needed to qualify for an SBA loan: 

a) Time in Business: Lenders generally prefer restaurants that have been operational for a minimum of two years. However, startups led by individuals with relevant industry experience may still qualify.

b) Personal Credit: Most lenders will seek a credit score of at least 680 for eligibility. However, if your business possesses substantial capital, there may be a possibility of qualifying with a lower score. The SBA mandates that borrowers must not have recent bankruptcies, outstanding debt delinquencies, or repossessions. Additionally, any defaults on debt obligations to the United States, including student loans, can affect eligibility. 

c) Collateral: SBA loans typically do not require full collateralization. However, many lenders will expect you to provide collateral if it is available. Moreover, SBA loans often require the borrower to provide a personal guarantee, allowing the lender to pursue personal assets in the event of a loan default. 

d) Down Payment: The SBA mandates a minimum down payment of 10%. However, individual lenders may request up to 30% of the total project cost as a down payment.

Develop an Effective Business Plan 

Once you have determined your eligibility for SBA financing, the next vital step is to craft a comprehensive business plan to present to potential lenders. A well-structured business plan is crucial, as it provides a strategic blueprint for the successful operation of your restaurant. By investing time in research and planning, you can identify and address key aspects of your restaurant's operations that may have otherwise been overlooked.

A strong business plan should encompass essential elements such as thorough market research, a well-defined sales strategy, comprehensive background information about both yourself and your restaurant, a detailed outline of the required financing amount, a clear breakdown of how the funds will be allocated, and a three-year financial projection for your restaurant.

By including these vital components in your business plan, you can effectively communicate your vision and demonstrate a solid understanding of your restaurant's potential to lenders, increasing your chances of securing the necessary financing for your venture.

Compile Essential Documentation 

In addition to your well-crafted business plan, SBA loan applications typically require various documents. It is important to gather the following documentation when submitting your application:

a) Three years of business and personal tax returns for all owners with a 20% or higher ownership stake 

b) Personal financial statements for each owner 

c) Year-to-date (YTD) balance sheet detailing your current financial standing. 

d) YTD profit-and-loss statement illustrating your restaurant's financial performance. 

e) Proof of business ownership, verifying your legal ownership of the restaurant. 

f) All relevant business licenses required for your restaurant's operation. 

g) Resumes of each owner, highlighting their qualifications and experience.

Furthermore, it is important to note that lenders may have additional requirements during the underwriting process. For instance, if a portion of the loan will be allocated towards the purchase of restaurant equipment, your lender may request a detailed description of the equipment.

By proactively organizing and having your loan documentation ready in advance, you convey your commitment to your restaurant's growth and obtaining the necessary funding. Providing comprehensive and accurate details during the application process can streamline the underwriting process, facilitating the evaluation of your loan application.

Given that the SBA loan process can be complex for both lenders and borrowers, it is advisable to collaborate with a lender that has a proven track record of providing SBA loans. 

Locate a Suitable Lender 

SBA loans, are commonly offered by a diverse range of financial institutions, including larger banks and online lenders. While these lenders must adhere to the minimum qualification standards set by the SBA, they also have their own specific criteria for financing.

It is important to understand that SBA loans, are not directly originated by the SBA itself but are financed by partnering banks. The SBA guarantees the loan and will cover the lender's losses if the restaurant fails. Given that your loan application undergoes review by both the lender and the SBA before funding, the application process can be time-consuming.

Before applying for an SBA restaurant loan, it is essential to ask potential lenders the following questions:

a) What are the fees associated with loan origination and closing?

b) What does the application process involve? 

c) How long does it typically take to receive a decision? 

d) What additional paperwork is required along with the application? 

e) Are there any prepayment penalties?

Working with an SBA preferred lender offers two advantages.

Firstly, the approval and funding process may be expedited because preferred lenders have more authority delegated to them by the SBA. This reduces the back-and-forth communication between the SBA and the lender. 

Secondly, preferred lenders have extensive experience in processing SBA loans and possess a better understanding of the SBA's expectations regarding loan applications.

Finalize and Submit Your SBA Loan Application 

After diligently gathering all the necessary documentation and preparing your comprehensive business plan, it is time to submit your SBA loan application to your selected lender. The processing time for each lender may differ, but it is important to note that SBA loans typically undergo a thorough evaluation process that can take approximately three to four months before receiving full approval and the funds being disbursed.

By ensuring that your application is complete and well-prepared, you enhance your chances of a smooth and efficient review process. It is advisable to maintain open communication with your lender throughout this stage, staying informed about any additional requirements or updates regarding your application.

Although the timeline for SBA loan approval may require patience, taking the necessary steps to submit a strong application sets you on the path toward securing the desired funding for your restaurant venture.

Exploring Alternatives to SBA Financing 

In the event that you do not qualify for an SBA loan, there are alternative options available to consider. While these alternatives may have less stringent qualification criteria, it's important to note that they may come with higher interest rates. Here are some common alternatives worth exploring:

In conclusion, obtaining a restaurant loan can be challenging without proper guidance or familiarity with the application process. While an SBA loan is an excellent option for restaurants with good credit, adequate collateral, and the willingness to undergo a review process, it's crucial to explore alternative financing options. Keep in mind that SBA loans generally offer more favorable terms and lower interest rates compared to other forms of financing.