How to Get an SBA Restaurant Business Loan in 5 Steps
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing.
Restaurant business loans can be difficult to obtain because lenders perceive the industry as volatile. However, many lenders offer loans backed by the Small Business Administration (SBA) that can be used to buy an existing restaurant, open a new location, or obtain working capital. SBA loans have rates between 5% and 8% and repayment terms up to 25 years. This article outlines the five steps you’ll need to take to get an SBA restaurant loan as well as possible alternatives in case you do not qualify.
1. Determine Your Eligibility
To get funded for an SBA loan, you’ll need to meet the qualification requirements of both the SBA and your lender. The lenders’ exact requirements will vary but, generally, you’ll be able to qualify for an SBA loan if you can meet these basic qualifications:
- Time in business: Typically, lenders will want the restaurant to be in operation for at least two years. However, startups owned by individuals with relevant industry experience may qualify.
- Personal credit: Lenders will normally require a score of 680 to qualify. However, a well-capitalized business may be able to qualify with a lower score. The SBA requires that borrowers don’t have any recent bankruptcies, debt delinquencies, or repossessions. Also, you can’t have any defaults on debt obligations to the United States, including student loans.
- Collateral: SBA loans don’t have to be fully collateralized, but most lenders will require you to put up collateral if you have it. Furthermore, SBA loans are typically guaranteed by the borrower personally, which means the lender can go after your personal assets in case of default.
- Down payment: The SBA will require at least 10%. However, lenders can ask you to put as much as 30% of the total project cost in as a down payment.
- Commercial real estate: Any commercial real estate you purchase will need to be at least 51% owner-occupied.
A lender will also look at your general profitability by utilizing a metric called the debt service coverage ratio (DSCR). The DSCR is defined as your business’ net operating income divided by its debt and interest payments. Ideally, your DSCR should be 1.25 or higher. If the DSCR is below 1.25, you may be asked by the lender to increase your down payment to lower the monthly loan payment.
2. Create a Business Plan
Once you determine if you are eligible for SBA financing, the next step is to create a business plan for a lender. A business plan is critical because it provides a strategic framework for how your business will operate. Taking the time to do research forces you to focus on areas of your restaurant operations that you may have otherwise overlooked.
A good business plan contains information on market research, your sales strategy, background on you and your restaurant, the amount of financing you need, how you will spend that financing, and three years of financial projections for the restaurant. We have more detailed information on how to create a business plan, along with a template to assist you.
3. Gather Documentation
SBA loan applications have other document requirements in addition to your business plan. At a minimum, the following documentation will be needed at the time of application:
- Three years of business and personal tax returns for all owners with 20% or more ownership
- Personal financial statement of each owner
- Year-to-date (YTD) balance sheet
- YTD profit-and-loss statement
- Proof of business ownership
- All business licenses
- Resumes of each owner
Lenders may have additional requirements during their underwriting process. For instance, if you are using part of the loan proceeds to purchase restaurant equipment, your lender will likely ask for a description of that equipment.
Having your loan paperwork ready in advance shows the lender you’re serious about your restaurant’s growth and about getting funded. The more detail you provide when you apply, the easier the underwriting process may be.
4. Find a Lender
SBA loans are commonly offered by a mix of larger banks and online lenders. These institutions are required to adhere to the SBA’s minimum qualification standards but will also finance based on their own criteria. It’s important to note that SBA loans are not originated by the SBA but are financed by the banks. The SBA guarantees your loan and will pay the lender if your restaurant fails. Since your loan application is reviewed not only by the lender but by the SBA before funding, the application process can be very time-consuming.
Some questions you should ask potential lenders before you apply for an SBA restaurant loan are:
- What fees are involved with originating and closing on the loan?
- What does your application process entail?
- How long does it take to get a decision?
- What additional paperwork is required with the application?
- Is there a prepayment penalty?
There are two advantages to working with an SBA preferred lender. First, approval and funding may be quicker because the SBA delegates more authority to a preferred lender. The result is less back-and-forth between the SBA and the lender. Second, preferred lenders have processed a large number of SBA loans and better understand what the SBA is looking for in a loan application.
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.
One of the lenders we recommend is SmartBiz, as they help simplify the complicated SBA loan process for you and help you get funded quickly. Qualified borrowers can get an SBA Express loan of up to $350,000, with fast approval in as soon as 30 days.
5. Submit Your SBA Loan Application
Once you’ve collected all of your documentation and written your business plan, submit your application to the lender of your choice. The time each lender takes to process your application will vary, but SBA loans can take three to four months before they’re fully approved and funded. To learn more about the SBA loan process, you can read our article about applying for an SBA loan.
Alternatives to SBA Financing
There are several options available should you not qualify for an SBA loan. Some of these options will have easier qualifying standards but come with higher interest rates. Some of the most common options include:
- Business credit cards: Getting a business credit card makes sense if you need a small amount of working capital or have recurring costs that you can pay consistently.
- Business line of credit: If you need a larger amount of working capital or need financing to help with cash flow, a business line of credit is a smart choice.
- Equipment financing: Many lenders offer various types of equipment financing to help restaurants get new equipment.
- Short-term loans: A restaurant that needs financing in a hurry can take advantage of several fast business loan options where funding may be obtained within a matter of days.
- Rollover for business startups (ROBS): Even if your restaurant is established, a ROBS plan is worth considering if you have sufficient retirement assets that you can utilize to provide needed capital.
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 is an excellent option for your restaurant if you have good credit, sufficient collateral, and are willing to wait while your loan application is reviewed. SBA loans will provide a better interest rate and more favorable terms than other forms of financing.
