Restaurant Financing
Buying a restaurant is within the reach of most buyers as long as they have the right restaurant financing in place. There are a number of ways to finance a restaurant, and the best option will depend on your individual circumstances. Whether you have a chunk of change sitting in your bank account waiting to be invested or minimal reserves, you may be seeking the best course of action to cover the costs associated with buying a restaurant.
 
We will review the most common financing methods, buyer requirements and pros and cons of each approach. There are several methods of restaurant financing including the acquisition of businesses that are not generating cash flow today. The expert Restaurant Brokers at We Sell Restaurants can make lending introductions for all of these resources. Just reach out or complete this online form for follow up.
 
Remember that when you consider financing a restaurant, the costs to acquire may include more than simply the purchase price. It is common to need to cover the following costs:

• Lease Deposits
• Inventory
• Working Capital
• Franchise Transfer Fees
• Lease Transfer Fees

Restaurant Financing Methods
There are several options for buyers looking to fund their restaurant purchase. Buyers are not limited to a single approach. In fact, it may be possible to combine several restaurant financing methods, although this varies depending on the restaurant, your personal credit and other factors.
 
This article will outline the following restaurant financing options:

• SBA Loans
• Seller Financing
• Unsecured Lending
• Investors
• 401(k)
• Crowdfunding

Restaurant Financing with SBA Loans
The most common restaurant financing method is through the Small Business Administration or SBA lending program. The SBA is not a lender, however, the program, authorized by Congress in 1953, provides a guaranty to banks that do provide lending. That makes lenders more willing to accept risk since the government is standing behind the deal. In fact, the government guaranty can be as much as 80 or 90 percent of the risk. The SBA lending program works with banks with the goal of promoting growth and job creation and has helped countless Americans achieve their entrepreneurial dreams, including restaurant buyers.
 
Because the SBA program is a government initiative, any bank in America may participate in SBA lending. HOWEVER, there are certain banks that are designated as PLP lenders or the Preferred Lender Program. This is a very important distinction because these loans are actually underwritten locally at their bank meaning they make the credit decision. Other lenders may only "package" loans and send them to the SBA to actually process.
 
Restaurant buyers and sellers who hear about backlogs, lengthy delays and overall paperwork associated with SBA lending are usually talking about non-PLP lenders. After all, they are simply acting as a third party and packaging something they are then sending to the West Coast for handling by a government entity. That is very different from having someone locally handling the full package, walking it across the hall at the same bank to the underwriter and getting a decision. The Restaurant Brokers at We Sell Restaurants will only work with PLP lenders. In addition, we work with lenders who are familiar with restaurants in particular, resulting in very high approval rates for our clients.
 
SBA lending for financing a restaurant purchase will require that the business meet the following requirements:

• Three consecutive years of profitable operations
• Minimum of two years of tax returns plus the current year balance sheet and income statement
• Ability for the proceeds (Seller's Discretionary Income) to meet the debt and equity requirements of the long (monthly payment) with a 25% cushion.

 
Financing a restaurant purchase will mean that the buyer should meet or exceed the following requirements:

• Equity injection of at least 10% of the purchase price
• Ability to collateralize the purchase with a second mortgage on your home or other property
• Direct management experience (does not have to be restaurant experience)
• Restaurant buyers may not have a bankruptcy within the past 7 years or a felony conviction

 
Now, with all that being said, We Sell Restaurants has successfully overcome virtually all of these requirements (except the need to be a U.S. citizen), at one time or another in the past two decades. Know that a PLP lender who is doing underwriting on the deal has some discretion to waive requirements and expert Restaurant Brokers know how to work with these banks on all waivers.
 
Another condition of financing the restaurant, the following requirements will be met as part of the lending process.

• A lien will be placed on the furniture, fixtures, and equipment
• A business valuation will be performed by a third party (independent of the buyer, seller, broker or lender
• The loan holder will need a life insurance policy

 
While some requirements can seem daunting, a experience restaurant broker if very familiar with the restaurant financing process and can assist with all requirements.
 
Pros and Cons of SBA Lending for Restaurant Financing
 
The pros of financing a restaurant purchase with SBA lending is the straightforward path and assurances that if all parties meet the conditions, the loan will fund. In addition, lenders will include additional funds above the purchase price for working capital and other costs associated with buying the restaurant. For new buyers, it may feel like a complex approach but with an expert guide like a Certified Restaurant Broker, this form of financing is easily obtained.
 
The cons of restaurant financing with the SBA are that it will not work for a business that is not cash flow positive or an asset sale. In addition, the requirement to collateralize the purchase with a second on your personal home makes this less attractive to some buyers. There are also substantial fees associated with this restaurant financing approach, but these are built in to the loan itself and are usually a minimal amount per month when considered over the life of the loan. Full details on SBA lending can be found at SBA.gov

Owner/Seller Financing
Another restaurant financing option is seller or owner financing. This is sometimes referred to as a "seller's note." This means the owner agrees to personally finance a portion of the transaction, in effect serving as your bank. Instead of paying the entire purchase price up front, the seller allows for some amount (typically 25 to 50 percent) to be paid over time. 
 
This will still require a promissory note and guarantees from the buyers. Seller financing is an attractive option for buyers because of more favorable interest rates and the lack of fees. However, keep in mind that sellers are not always open to offering this option for an inquiring buyer. The restaurant brokers see this restaurant financing method most commonly among buyers who plan to reserve their cash for operations instead of using it to fund the initial acquisition. If a seller is especially eager to exit their business, they may be more willing to offer owner financing.
 
Seller financing for buying a restaurant is often the path when the business doesn't have sufficient documentation of the earnings making it ineligible for traditional bank lending either because of lower earnings or limited years in business.
 
If this doesn't sound like the right restaurant financing method that meets your needs, read on to see what other options may help you achieve your goals.

Unsecured Lending
Unsecured lending is a type of restaurant financing that does not require collateral, such as a home or business. This can be a good restaurant financing option because it is not tied to the results of the business but rather to your personal credit.
 
We Sell Restaurants has access to multiple resources to assist with this type of restaurant financing. Our unsecured lending resources will provide an unsecured line of credit from $20,000 up to $200,000 with a credit score of just 680.
One downside to unsecured lending is that it often comes with a higher interest rate than secured loans because the lender is taking on more risk. Keep this mind while you are deciding on the best restaurant financing option for your business.

Investors
Another option for Financing a Restaurant purchase is through partnerships or investors. If you are able to find someone to put up the money for your restaurant in exchange for a percentage of the business, then this restaurant financing method may work for you. It allows you to keep full control of your business while still having the financial backing you need to get started.
 
A word of caution from the restaurant brokers on this method: it is important to choose your partner or investor carefully and make sure that you are on the same page in terms of goals and expectations for the restaurant before moving forward. Be prepared with a strong business plan that provides a clear idea of the investment you will need to buy the restaurant.
 
In general, investors are a great for restaurant financing with little to no risk to yourself, but it is important to make sure that you have a written agreement in place so that there are no misunderstandings down the road. Moreover, it is wise to consider the risks of partnering with friends or other close relationships. Weigh the pros and cons of this method of financing a restaurant before deciding if it right for your business.

Restaurant Financing with Your 401(k)
If you are a buying a restaurant and prefer to finance yourself, then Rollovers for Business Start-Ups (ROBS) may be an option for you. Restaurant buyers often overlook their 401(k) as a source of capital, without realizing there are ways to use 401(k) funds without facing a large tax bill from Uncle Sam. For over 10 years, 401(k) rollover services, also known as Rollovers for Business Start-ups (ROBS), have helped entrepreneurs fund their dream of small business ownership. With this method, you are your own bank. Some benefits of this restaurant financing method are:

• Improves cash flow
• Tax deferred growth
• Penalty free
• Combine with other funding
• Increase retirement deferrals

One major benefit of this restaurant financing option is improved cash flow at the start of your business, since you will not be in debt and paying back loans from other sources. We Sell Restaurants can connect you with a 401(k) firm to assist you with this method.

Crowd-Funding Restaurant Financing
Crowdfunding or Crowdsourcing is the new kid on the block when it comes to restaurant financing. It allows family, friends, customers, or anyone else to support your business in an online community-funding platform. This method has grown popular in recent years and could be an option for a restaurant buyer hoping to build capital before making their business purchase.
 
There are a number of different crowdfunding platforms out there to choose from, although be sure to consider the fees and community guidelines of these websites before choosing this as your restaurant financing option. Here are a few of the most popular platforms:
 
GoFundMe

• Automatic transaction fee of 2.9%+$0.30 per donation

Kickstarter

• Platform fee of 5% of total funds raised, plus an additional processing fee of $0.20 per pledged donation

IndieGoGo

• Transaction fee of 3%+$0.20 per donation

 
Crowdfunding can also be an opportunity to connect with the community you would be serving at your restaurant. Donors would share the campaign with others to support, and a polite follow-up email or phone call thanking donors can be a great way to develop goodwill between you, your restaurant, and the community.
 
Overall, there are multiple options for financing a restaurant. You may find additional tips in our e-book titled, "Free Guide to Financing a Restaurant" available at this link.