Small Business Loans for Restaurants

Whether it's at a small-town cafe, a neighborhood tavern, or a trendy bistro on the busy streets of a metropolitan city, people are always on the lookout for delicious food. Lack of proper financing and adequate working capital are the main reasons restaurateurs are likely to struggle to achieve financial success in the first couple of years.

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Small business loans for restaurants can provide financial assistance for both immediate and future needs. Funds from the small business loan can assist you in expanding your business through the hiring and training of staff, the purchase or enlargement of your commercial building, the purchase of equipment, the repayment of current high-interest debt, to temporarily cover payroll, and much more.

This guide explores several small business loan options available to restaurateurs like you, explains how they work, and discusses the pros and cons of each.

SBA 7(a) Loans

The restaurant industry continues to grow; after all, people are always looking for good food to eat. If you are considering growing your business, the low interest rates and long terms of a Small Business Administration (SBA) loan make it an attractive option.

Known as the “gold standard,” an SBA 7(a) loan provides the lender a guarantee of partial repayment from the SBA should the borrower default. This allows lenders to offer SBA loans at lower costs than other funding options. There are several ways SBA loans can assist restaurant owners, such as providing working capital, debt refinancing, and assistance in buying or refinancing commercial real estate.

Debt Refinancing and Working Capital

SBA loans for debt refinancing and working capital range from $30,000 to $350,000 with a 10-year term are offered through banks that participate in the SmartBiz Loans® marketplace. Refinancing current high-interest debt with an SBA loan can potentially save you hundreds, and in some cases, even thousands of dollars per month. An SBA working capital loan is useful when opening a second location, expanding marketing, buying equipment, hiring additional staff, and more.

Refinancing or Purchasing Commercial Property

For those looking to refinance or purchase commercial property, SBA commercial real estate loans, also offered through banks that participate in the SmartBiz Loans marketplace, range from $500,000 to $5 million and have a 25-year repayment period.

The application process for SBA loans is longer and requires more qualifications than many other types of loans. Good credit scores are a must. Business owners applying for an SBA debt refinance or working capital loan through a SmartBiz® marketplace bank will need a personal credit score of 650 or higher, while 675 or higher is required for an SBA commercial real estate loan. Because the government partially guarantees the loan, requests for additional documentation are not unusual.

When applying for an SBA loan through a SmartBiz marketplace bank, dedicated Relationship Managers at SmartBiz guide you through the process. The fast and efficient loan application process can help you to get funding when you need it.

Curious to know if you're ready to apply for an SBA loan? SmartBiz Advisor® can help. This free online tool helps business owners learn how banks usually evaluate businesses on key financial criteria and provides personalized recommendations for helping them improve their financial health and credit if needed. Having this information can help you determine if you are ready to move forward with the loan application process.

How to Qualify for an SBA Loan

Restaurants are one of the many types of for-profit small businesses to be eligible for SBA loans. Generally, SmartBiz marketplace banks approve businesses with one to 40 employees and annual revenues of $50,000 to $5 million for SBA loans. Many are cash-flow positive and profitable, while all can prove the ability to make the monthly loan payment.

When applying for an SBA 7(a) loan between $30,000 and $350,000 through SmartBiz marketplace banks, the following eligibility requirements must be met:

  • You must have been in business for more than two years.
  • The personal credit score of the business owner needs to be 650 or higher.
  • The business must be based in the U.S.
  • The business must be owned by a lawful permanent resident or U.S. citizen 21 years of age or older.
  • You can not have any outstanding tax liens.
  • You can have no foreclosures or bankruptcies within the last three years.
  • You can have no recent settlements or charge-offs.
  • You must be current on any government-related loans.

When applying for an SBA 7(a) commercial real estate loan between $500,000 and $5 million through SmartBiz marketplace banks, the following eligibility requirements must be met:

  • You must have been in business for more than two years.
  • The personal credit score of the business owner must be 675 or higher.
  • A minimum of 51% of the total square footage of the real estate you are purchasing must be used for and occupied by your business.
  • Sufficient personal and business cash flow to pay all current debt as shown in three years of interim financial data and tax returns.
  • You must have no defaults and/or delinquencies on government loans

How to Improve Your Chances of Getting an SBA Loan

With longer terms, low interest rates, and low monthly payments, an SBA loan is an attractive loan option for restaurant owners. It can be challenging to qualify, though, and the application process can take a significant amount of time. However, there are steps you can take to improve your chances of being approved and decreasing the processing time.

1. Choose an SBA preferred lender to work with.

There are two main advantages to working with an SBA preferred lender. First, due to the high volume of SBA loans preferred lenders process, they have a better understanding of SBA loans. If you work with a lender who is new, this may delay things as they learn to navigate the system. Second, application approval and funding typically occur sooner due to the SBA delegating more authority to preferred lenders. The banks that participate in the SmartBiz marketplace are preferred SBA lenders.

2. Improve your debt-service coverage ratio (DSCR).

Generally, it is easier to qualify for an SBA loan if your restaurant is generating money and has little outstanding debt. In some cases, solid profits and revenues can help to offset low collateral and borderline credit scores. SBA lenders like to see your DSCR — net operating income divided by debt and interest payments — at 1.25 or more. A DSCR of 1.00 or below indicates to lenders your restaurant is not bringing in enough money to repay current debts.

3. Gather as much collateral as possible.

While there is no required amount of collateral, and collateral requirements for SBA loans are typically less stringent than many traditional loans, your chances of approval can increase if you have an adequate amount. Collateral can be a mixture of personal and business assets, including commercial real estate you own, equipment, appliances, your home, a vehicle, or personal investments. When determining collateral to pledge, remember that an SBA loan requires a personal guarantee from anyone who owns 20% or more of the business. So even if you don't list any personal assets as collateral, they are still on the line if the restaurant isn't able to pay back the loan.

Bank Term Loans

If you don't quite meet the eligibility requirements for an SBA loan, or you require the funds sooner than even the SmartBiz streamlined application process can provide, a bank term loan may be able to provide the working capital you need. SmartBiz marketplace banks offer term loans available for amounts between $30,000 and $200,000. These loans feature a fixed interest rate between 6.99% and 26.99% along with repayment terms that range from two to five years. Your financial profile and credit score will determine the interest rate you qualify for, and similar to SBA loans, there is no penalty for prepayment.

How to Qualify for a Bank Term Loan

The specific criteria required to qualify for bank term loans vary from lender to lender. SmartBiz Loans marketplace lenders have the following qualification requirements for a bank term loan:

  • You must have been in business for a minimum of two years.
  • Your personal credit score must be at least 640.
  • You must demonstrate the ability to pay current loan payments.
  • You must have proof that you're a legal permanent resident or U.S. citizen.
  • You must have no foreclosures or bankruptcies within the last three years.
  • You must have no outstanding tax liens.

Selecting the Right Loan Option for Restaurants

The most significant difference between a bank term loan and an SBA loan is that the government partially guarantees an SBA loan. Due to this fact, SBA loans generally have larger amounts, longer repayment terms, and lower interest rates.

When you require funds faster than the SmartBiz streamlined SBA loan application process allows, a bank term loan can be beneficial. However, if you don't need the funds immediately, your cash flow is sufficient, and you have a high enough credit score, the favorable interest rates associated with SBA loans can result in saving thousands of dollars over the lifetime of your loan.

If qualifying for a bank term loan or an SBA loan is not possible, SmartBiz works with non-bank lenders who may still be able to provide you other financing options to access working capital through a business credit card or business line of credit. It's crucial to realize, however, that both of these credit options come with short repayment terms and high interest rates.

The Bottom Line

Check out SmartBiz Loans when you're ready to grow your restaurant business. Our top-notch customer service and streamlined application process consistently receive positive reviews. Our online bank marketplace connects you with the lender most likely to approve your loan application, eliminating wasted time visiting bank after bank. Create an online account with us to get started today.

 What you need to know: The information provided through SmartBiz® University and the articles contained therein are for educational purposes only. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.