Restaurant Loans and the SBA Programs

Examining options on a restaurant loan? Due to the current credit crisis you might want to take a look at the SBA  programs first, as they are currently the most reliable comercial mortgage programs.  Not only do they have the highest probability of closing, they also boast some of the lowest rates, highest leverage, and longest fixed rate financing around for restaurants.  

Commercial loan interest rates right now, for restaurants, are in the 6%’s to low 7% depending on the particulars of the deal.  Combine that with 90% to 85% financing, meaning you only have to come out of pocket 10 to 15%, it’s easy to see the benefits of these programs.  Compare that to traditional bank financing, rates are about the same, but you would have to come out of pocket 30 -40% down. 

On refinances loan to values are also very conservative with banks at 60 – 65%.  While with the SBA you can go up to 80% on restaurants refinances.  In terms of fixed rates it depends on the structure of the loan.  With the SBA 504 you can easily get 10 year fixed, 25 year amortization loans.  With the SBA 7a most are floating though we have a program that is fixed for 5 years and amortized over 25 years.  Again, as a comparison most bank financing would not exceed 3 -5 years fixed and will often not have amortization schedules beyond 20 years. 

  

Restaurant Loans and SBA 

In fact, if your loan amount is less than $2,000,000 you may find that the 7a has more benefits for you than the 504.  Like the ability to roll in working capital, rehab capital for the subject property and debt consolidation for business expenses.  Also, the 7a offers some of the most lenient underwriting in the commercial mortgage industry.  For example credit scores can be as low as 500. 

Also, debt coverage ratio can be as low as 1.1, which in a cash business like restaurants can be the difference between a canceled or closed loan.  Also as far as proving the cash flow of the business, you are allowed to use business projections as well…  

This is a huge point.  Say your historical financials (tax returns) don’t provide enough cash flow to cover the proposed mortgage.  With 99% of lenders out there you would be dead in the water.  However with the 7a you can use projections to cover the difference.   This leads to an important point.  The SBA programs can provide a lot of flexibility but keep in mind that not all lenders are the same. 

So, if you have been turned down by a bank that offers SBA loans, it does not mean that you are ineligible for SBA financing, it just means that that bank didn’t like your transaction.  At the end of the day the bank is still on the hook for the loan and banks appetite for deals and guidelines vary widely.   And the way that banks structure the loans vary as well.  For example 99% of banks offer the 7a as a floating rate.  We however have access to a 5 year fixed 7a program.