Restaurant business loans are tough to qualify for because lenders perceive the restaurant industry as volatile. Loans backed by the Small Business Administration (SBA) make it so lenders are more willing to issue these loans to buy a restaurant, open a new location or obtain working capital. SBA loans have rates between 5 percent to 10 percent and repayment terms of up to 25 years.
The four steps to getting an SBA loan for a restaurant business are:
1. Determine Your Eligibility
In order to get funded for an SBA loan, you’ll need to meet the qualification requirements of both the SBA and your lender. The exact requirements of your lender will vary but, generally, you’ll be able to qualify for an SBA loan if you can meet these basic qualifications:
Time in Business
The business needs to have been operational for two or more years, but startups could potentially qualify as well. To learn more read our article about SBA loans for startups.
Personal Credit Score
A score of 680 or higher is needed to qualify, but many lenders will require a credit score of at least 700 (check your credit score for free).
SBA loans don’t have to be fully collateralized, but most lenders will require you to put up collateral if you have it. Additionally, SBA loans are typically personally guaranteed by the borrower, which means they can go after your personal assets in case of default. For more information on collateral, you can read our article on the collateral coverage ratio.
The SBA requires more than 10 percent, but startup restaurants or borrowers without collateral to pledge could be required to put up as much as 25 percent to 30 percent.
Commercial Real Estate
Any commercial real estate you purchase will need to be 51 percent or higher owner-occupied.
You can’t have any recent bankruptcies, debt delinquencies or repossessions. You also can’t have any defaults on debt obligations to the United States, including student loans. Plus, your business needs to be profitable and trending in the right direction.
The SBA also has some basic requirements you must meet before you can get approved for a loan. These requirements include the fact that you’re a U.S.-based business looking to do business in the country, and you meet the qualifications to be considered a small business.
2. Find the Right Loan Provider
SBA loans are typically offered by large approved lenders like banks. These lenders are required to adhere to the SBA’s minimum qualification standards but are also required to maintain their own in-house standards. This means the SBA application process can be very time-consuming, and it’s important you find the right lender before you spend a lot of energy with one that won’t approve you.
The best SBA lenders typically originate many SBA loans every year and are familiar with the restaurant industry. You can find the best SBA lenders in the country by reading our article on the top 100 SBA lenders, which ranks them by the amount of SBA funding each provides. Keep in mind that SBA loans can take from 45 to 120 or more days before you’re funded.
At FitSmallBusiness, we worked on more than one SBA loan application before we were approved. This happened because we were unable to find the right lender from the beginning. However, when we worked with SmartBiz, an SBA loan broker, it was able to find the right lender for our business, and we were approved and funded quickly.
We recommend SmartBiz as the best SBA loan provider because it can simplify the complicated SBA loan process for you and help you get funded quickly. It will help you get financing up to $5 million and can get you funded in as soon as 30 days.
3. Prepare the Required Documentation
SBA loans require a lot of standard paperwork to verify your business financials and to solidify your lender’s confidence in your ability to repay the loan. Each lender might also have specific documentation requirements during its underwriting process that are unique to its own process, but all of them will require the documents listed below.
Regardless of your lender, the required documentation for an SBA loan typically includes:
- Business tax returns (three years)
- Personal tax returns (three years)
- YTD balance sheet
- YTD P&L statement
- Proof of business ownership
- Personal financial statement of each owner
- Owner resumes
- All business licenses
- Projected business financials for three years
- Business plan
Having your loan paperwork ready in advance shows the lender you’re serious about your restaurant’s growth and about getting funded. Plus, it helps to move things along in the application process.
4. Submit Your SBA Loan Application
Once you’ve collected all of your documentation, you can fill out the necessary SBA forms and submit your application. The time each lender takes to process your application will vary, but SBA loans routinely take from 45 to 120 days or more before you’re fully approved and funded. To learn more about the SBA loan process, read our article on applying for an SBA loan.
SmartBiz speeds up this process by helping you fill out forms and collect documentation. It then utilizes its industry partners to connect you with the right lender to approve your loan, helping push you toward funding in as quick as 30 days. SmartBiz is the fastest SBA loan provider we’ve found in the industry.
How to Improve Your SBA Loan Approval Odds
While an SBA loan can give your restaurant a flexible financing option with low rates and long terms, it can be difficult to qualify for and the process can take a few months. Anything you can do in advance of applying for an SBA loan to improve your qualification chances or to speed up your funding time will be well worth it as you go through the process.
To improve your chances of getting approved for an SBA loan, consider following these three tips:
1. Work With an SBA Preferred Lender
There are two advantages to working with an SBA preferred lender. First, application and funding happen much more quickly because the SBA delegates more authority to a preferred lender. The result is less back and forth between the SBA and the lender and faster funding times.
Second, preferred lenders have processed numerous SBA loans and understand the process much better than a lender that is new to SBA lending. The SBA loan process can be confusing for both lender and borrower, so it’s best to work with a lender that has a solid record of providing SBA loans. Read our article on the best 100 SBA lenders to learn more about which one you should work with.
2. Improve Your Debt-service Coverage Ratio
The more money your restaurant generates and the less outstanding debt it has, the easier it is to qualify for an SBA loan. Sometimes, solid revenues and profits can even make up for a borderline credit score or less collateral.
Lenders will check your debt-service coverage ratio (DSCR) when you apply. DSCR is your restaurant’s net operating income divided by its debt and interest payments. Ideally, your DSCR should be 1.25 or higher. A DSCR below 1.00 tells the lender your restaurant is not generating enough income to repay debt.
If your DSCR is on the low end, increasing your profitability and decreasing your existing debt are superb ways to make it higher. Restaurants have an average profit margin of 2 percent to 6 percent, with full-service restaurants on the low end and limited-service restaurants on the high end. If possible, consider raising menu prices, implementing cost-cutting measures and paying down as much existing business debt as possible to increase your profit margin and DSCR.
3. Gather as Much Collateral as You Can
You aren’t required to come up with a specific level of collateral, but if you have some available then the SBA lender will want you to pledge what you have. While the collateral requirements for SBA loans are less stringent than for most traditional loans, your chances of getting approved are much better if you provide plenty of collateral.
Collateral can be a mix of business and personal assets. Restaurant owners who own their space can pledge their commercial real estate as collateral. You can also pledge restaurant appliances and equipment, which might be quite valuable. Personal assets that are acceptable to lenders include your home, vehicle or investments.
When deciding what to pledge as collateral, keep in mind that SBA loans require a personal guarantee from anyone who owns at least 20 percent of the business. So, even if you don’t pledge personal assets as collateral, the personal guarantee puts your personal assets on the line if the business can’t afford to pay back the loan.
Lenders “discount” collateral when determining its value. Real estate usually gets discounted to 80 percent of its value, equipment to 60 percent, and other collateral may be discounted to even lower values. This means, for example, if you’re pledging your home worth $400,000, the lender may value it as $320,000 for purposes of collateral. This will impact how much money you can borrow with your SBA loan.
Why SBA Loans Are the Best Restaurant Business Loan
The affordable rates and long repayment terms make SBA loans a great option for restaurant businesses. In fact, more business owners borrow SBA loans for restaurants than any other industry. This means that from 2006 to 2015, full-service restaurant owners received more than 22,000 SBA loans.
However, even though SBA restaurant business loans have some of the lowest interest and longest repayment terms available to restaurants, it doesn’t mean that they’re the only option. In fact, there are as many as six alternative business loan options for restaurant owners, including POS financing, which might be the best short-term alternative available for restaurants that accept credit cards from their customers.
Alternative Restaurant Business Loans
|POS Financing||Businesses that need less than $100,000 and use a merchant processor like Square to process customer payments.|
|Business Credit Card||All restaurant owners who need to cover small working capital expenses or recurring costs.|
|Business Line of Credit||Businesses wanting a recurring credit line that can be used repeatedly.|
|Equipment Financing||Businesses that need financing to purchase a large piece of equipment with a long shelf life.|
|Short-term Loan||Businesses needing short-term capital for quick growth or to overcome short-term cash-flow gaps.|
|ROBS||Borrowers wanting to rollover funds from a tax-deferred retirement account without paying withdrawal fees or taxes instead of borrowing money.|
Point-of-Sale Financing for Your Restaurant
The point-of-sale (POS) provider used to processes your customer credit and debit card payments might be a good financing solution if you’re looking for less than $100,000. It typically works like a merchant cash advance where you receive a lump sum in return for a percentage of your daily credit card sales. These POS loans are a good fit to fund small inventory purchases, new equipment or to help with short-term cash-flow needs.
In order to qualify, however, you must use a payment processor that offers this type of financing. A good example of a POS lender that offers this type of financing is Square Capital. It offers loans up to $100,000 with repayment terms up to 18 months. Since these POS lenders can vary widely, we’ll use Square as our example throughout this section.
What Square Capital Offers
POS financing is a newer financing option for restaurants, but it’s becoming a popular way to fund short-term working capital needs because it’s comparable to alternative loans but more affordable. If Square is your current POS processor, then this might be a good option for you because of its flexibility and quick approval system. In fact, you might be automatically approved based on your historical Square sales.
“Access to capital is a struggle for many small businesses, and any funding they accept needs to meet the needs of their business while helping them grow. Key elements of a loan offer to consider are a flexible repayment method that aligns with your business’s cash flow, the speed at which you can access the funds and affordability and transparency in cost. By applying machine learning, we can address many of these common pain points and deliver a simple, seamless funding experience.”
— Jacqueline Reses, Head of Square Capital
Square Capital Financing Terms
Typical Square Capital terms include:
- Loan size: $500 to $100,000
- Repayment terms: Up to 18 months
- Payment frequency: Daily
- Funding speed: One to three days
Square Capital is similar to a merchant cash advance. You’re charged a flat fee on a lump sum amount, and then repay that amount plus the fee as a percentage of your daily credit card sales processed through Square. This is a terrific option for seasonal restaurants that need to reduce loan payments during down periods.
Square Capital Minimum Qualifications
The minimum qualifications for a loan from Square Capital are:
- Credit score: No requirement
- Time in business: At least one year
- Business revenue: $10,000 or more per month of sales volume processed through Square
- Down payment: None
- Collateral: None
- Other requirements: A strong history of sales volume, customer mix and growth
Square Capital Costs
Square charges you a daily percentage of your transactions processed through its platform and every 60 days you’re required to repay 1/18 of your loan.
- Fee rate: 1 to 1.16 times total loan amount (or 10 percent to 16 percent of the loan in fees)
- Daily percentage payment (“hold rate”): 9 percent to 13 percent of transactions processed through Square
Where to Get POS Financing
Square Capital will typically offer you a loan directly in your Square dashboard if you qualify. You can also log in and request Square Capital to analyze your profile to determine your eligibility. Once you agree to loan terms the funding process can be completed within one day.
The Bottom Line
Getting a restaurant loan can be difficult if you either don’t know where to look or you’re not sure how to navigate the application process. An SBA loan will likely be the best loan for your restaurant, but they’re difficult to qualify for and take a long time to get funded. If an SBA loan doesn’t work for you then you should try an alternative loan like POS financing from a POS provider you currently use, such as Square.
If you’re ready to move forward with an SBA loan, we recommend partnering with SmartBiz. It can help you get funded for an SBA loan up to $5 million if you’ve been in business for at least two years, are profitable and have a personal credit score of at least 680. You can prequalify online within about 10 minutes and get funded in as soon as 30 days.