SBA Loans for Restaurant Owners: Find the Right Option For Your Business

Small Business Administration (SBA) loans are tailored to provide flexible funding options to small business owners. The SBA does not provide the funds for the loan directly but will guarantee the loan on behalf of the borrower and a third-party lender will provide the money. 

Key Points:

• SBA loans are made specifically for U.S. businesses that need financing to grow or start their businesses. 
• With small loans available and loans up to $5 million, there are options for most business owners. 
• There are many SBA loan options with varying interest rates and requirements, it’s vital that all business owners carefully research each option before making a final decision. 

Types of SBA Loans a Restaurant Can Use

The SBA provides dozens of loans. Some are for ultra-specific purposes, others are more generalized. For restaurants, the best options the SBA offers include:

• SBA 7(a) loans.
• SBA 504 loans.
• SBA Express loans.
• SBA Microloans.

SBA 7(a) Loans

One of the most common types of SBA loans is the SBA 7(a) loan. It has a broad range of uses, including:

• Funding retail spaces. 
• Buying new equipment. 
• Refinancing previous debt. 
• Most other business funding needs.

With SBA 7(a) loans, you can take out up to $5 million in funding if you qualify. In order to qualify for an SBA 7a(a) loan, there’s a long list of requirements you have to meet, such as:

• Run a for-profit business. 
• Be considered a small business.
• Have a business or have a plan to start a business within the U.S. 
• Using personal savings before seeking other financial assistance from the SBA. 
• Demonstrate a real need for a loan.
• Use the funds for a demonstrated business purpose. 
• Prove that you’re not delinquent on any debt obligations to the U.S. government. 

Pros

• Borrowing limits up to $5 million. 
• Competitive interest rates for those who qualify. 
• Long loan terms. 

Cons 

• Have to use personal savings before you can apply for the loan. 
• You need good credit to qualify through most lenders. 
• Collateral is often needed. 

SBA 504 Loans

SBA 504 loans are offered by Community Development Companies (CDCs). These lenders are SBA partners that offer funding within their own local communities. Like SBA 7(a) loans, you can qualify for up to $5 million in funding. 504 loans are meant to help businesses grow and create new job opportunities. SBA 504 loans can be used to:

• Buy or construct new facilities.
• Renovate existing buildings.
• Purchase equipment.
• Improve land, parking lots, or other existing facilities.

504 loan qualifications are simpler than 7(a) loans. You have to:

• Own a for-profit company in the U.S.
• Have a net worth of less than  $15 million.
• Have an income of less than $5 million after taxes. 

Pros

• Easy qualification requirements. 
• Long loan terms are available. 
• Large loans are available. 
• Loans are fixed-rate loans, so they won’t fluctuate with the market. 

Cons

• The application process is lengthy. 
• Wait times for loan decisions can be long.

SBA Express Loans

SBA Express loans are designed for restaurant owners looking for faster funding. You should have a response from the lender within 36 hours. While not as high as other loan options, the maximum loan amount is $500,000. Loans closer to $500,000 will often require collateral, but that will be up to the specific lender you’re working with. However, loans up to $25,000 are less likely to have collateral requirements. 

Pros

• Turnaround time for SBA Loans is expedited. 
• Creditworthy applicants can typically access low interest rates. 
• The duration of repayment terms is flexible. 
• No collateral is a prerequisite for loan amounts less than $25,000. 

Cons 

• A respectable credit score is mandatory. 
• There can be restrictions on how you utilize the money. 
• Collateral is needed for larger loans.

SBA Microloans

SBA microloans are small loans offered by the SBA. Borrowers can only get up to $50,000, although the average microloan is closer to $13,000. Microloans can be used for most business purchases, including:

• Working capital.
• Inventory and supplies.
• Furniture and fixtures. 
• Machinery.
• Equipment.

If you are a current or soon-to-be business owner, you may be eligible to receive an SBA Microloan. However, it is important to be aware that these loans typically require some form of collateral since they are offered through outside lenders and the eligibility requirements may vary.

Pros

• Short-wait time for approval. 
• Many different industries qualify. 
• There are options for borrowers with poor credit. 

Cons 

• Some borrowers with bad credit still won’t qualify. 
• Loan amounts are much smaller than other SBA loans. 

How to Determine Which SBA Loan Is Right for Your Restaurant?

There are a lot of SBA loans to consider, it can be difficult to narrow them down. To help, here are a few tips for finding the right loan for your restaurant:

• Evaluate your financial needs. Before you can identify the right loan option, you must assess your current financial situation and determine how much money your restaurant requires. Do you need a large loan to get your business up and running? Or just a small loan to replace some broken equipment or hire a new staff member?
• Spend time researching the different SBA loan options. The Small Business Administration offers several loan options for business owners. Familiarize yourself with the different loan programs, including their requirements and terms, to ensure that you select the right one for your restaurant. 
• Consider the loan term and interest rate. Many SBA loan options have longer repayment terms than traditional bank loans, so you should evaluate the long-term financial impact of the loan. Additionally, compare the interest rates of the different loans to determine which one will be most beneficial for your restaurant in the long run. 
• Be prepared for a long application process. The SBA isn’t just another bank that hands out loans as long as you submit to a soft credit pull. All SBA loans require extensive documentation, so make sure you are prepared to provide all the necessary information. This includes financial statements, liability information, and other relevant documents. 

How to Get an SBA Loan for Your Restaurant

Applying for an SBA loan will be a similar process to other loan applications, but can come with a few extra steps. Here’s what the process will look like:

• Calculate how much money you need. Before looking into specific lenders, figure out what you need to borrow so you know which loan you might want to apply for. Calculate how much it’ll cost to do renovations or purchase land or equipment or whatever other business purchase you need to make. 
• Have a business plan in place. Lenders will want to understand your business plan. Since these lenders are potentially approving you for millions of dollars, they want to understand the business they’re lending to. Your business plan demonstrates that you have a clear plan in place for success. 
• Research all your options. There are a lot of SBA loan options, and it’s important you spend time researching the requirements and features of each. If you’re looking for fast funding, you’ll want to stick with Express loans, but those looking for large loan amounts may want to consider 504 or 7(a) loans.
• Pick the SBA lender that works for you. The lenders that the SBA works with come in many different forms from credit unions to big banks and online lenders. The SBA has a Lender Match tool to help you narrow down your options. 
• Gather all your documents. Before diving into the application process, make sure you have everything you need. It’ll help make the process go a lot quicker. While it varies from lender to lender, you’ll likely need your business plan, tax returns (personal and business), cash flow projections, collateral options, and business licenses.
• Fill out and submit your application. The application process will likely just be a slightly longer version of a traditional loan application. You’ll use all the documents you gather in the step above and answer questions about your financials as well as your business’s.
• Wait for approval. Wait times vary depending on the loan type. You may have to wait just a few days or you could be waiting months. 

What You Need to Know About SBA Restaurant Loans

SBA restaurant loans are a great option for many restaurant owners, but they’re complex loans. They have:

• Very specific requirements. 
• A long application process. 
• Typically more relaxed rates. 
• Long loan terms. 

How Can a Restaurant Use an SBA Loan?

A restaurant can use an SBA loan to finance the purchase of land and buildings, new equipment, and supplies, hire new staff, launch a marketing campaign, expand its operations, and remodel its interiors. The loan can also be used to purchase inventory, finance working capital, open a new location, purchase an existing restaurant, and much more depending on the specific loan you get. 

Who Offers SBA Loans to Restaurants?

Small Business Administration (SBA) loans are available to restaurants through participating lenders. These lenders include banks, credit unions, online lenders, and other financial institutions. Certain companies like Wells Fargo and Funding Circle specialize in providing SBA loan products to restaurants. These lenders understand the unique financial needs of restaurants and can provide access to capital at an attractive cost.

What are the Requirements for an SBA Loan?

While exact qualifications vary by the type of SBA loan you’re looking to apply for, most of them have the same general requirements:

• Operate for-profit business. 
• Have a business or are about to start a business within the U.S. 
• Have a reasonable amount of personal savings to invest in the business. 
• Have a decent credit score and few delinquencies. 

What Are Typical SBA Loan Rates and Terms?

The typical Small Business Administration (SBA) loan rate and terms vary depending on the type of loan the applicant is applying for. To give you an example, SBA 7(a) loans have an interest rate that’s the Prime Rate plus 2.25%-4.75%. The loan term is typically set at 10-25 years depending on the loan purpose. 

Can SBA Loans Be Used for a Restaurant Startup?

Yes, there are SBA startup loans that can be used for a restaurant startup. The most popular loan program for restaurants is the SBA 7(a) loan, which can be used for a variety of business purposes including working capital, equipment purchases, and real estate. This loan also has a large maximum, meaning you can take out up to $5 million to get your business going. 

Why Are SBA Restaurant Loans Hard to Get?

SBA restaurant loans can be difficult to get for a couple of reasons. The biggest reason is an inadequate credit score or financial resources. Not just anyone can get a loan to start a restaurant. Lenders want to know that you’ll realistically be able to pay off the loan. They’re already taking a gamble since the restaurant industry has a high failure rate.

If you don’t show up with a good business plan and a record of good business practices and financials if you’ve been in business for a while, you’ll have a more difficult time qualifying. 

Tips to Improve Your Chances of SBA Restaurant Loan Approval

When applying for an SBA restaurant loan, make sure you’re taking the right steps to increase your chances of approval. Here are some tips to help you do just that:

• Create a solid business plan. A well-crafted business plan can help demonstrate to lenders that you have a clear plan for the way you will use the funds and the expected return on their investment. It also shows you’re serious about your business. 
• Show lots of evidence of financial stability. Lenders will want to see a well-maintained financial track record of your business, even if you’ve only been in business for a few months. This should include updated balance sheets, income statements, and cash flow statements.
• Work on building a good credit score. A strong credit score will improve your chances of getting an SBA loan and will also ensure you get better rates. Make sure to pay off any outstanding debt and reduce your credit card balances before applying.
• Be prepared to make a down payment. SBA loans often require a downpayment between 10% - 30%. Make sure you have the funds in place and are comfortable with the payment terms before making any final decisions. 
• Have collateral. This can range from property, equipment, or other assets that can be used to guarantee the loan. This is especially important for borrowers with lower credit scores. Lenders will want some reassurance that they’ll get their money back. 

Alternative Restaurant Financing Options

While SBA loans have a lot of good qualities, they’re not the right option for every restaurant owner. Or, you simply might not qualify for any. Thankfully, there are plenty of SBA loan alternatives.

• Traditional Business Loans. In addition to offering SBA loans, many lenders offer their own restaurant business loans. There are many options and some lenders even accept bad credit borrowers. 
• Business Line of Credit. Business lines of credit function much like credit cards in that you can draw from the line of credit to buy items for your business, pay back that line, and use it over again. These are ideal for small purchases such as renovations that can be easily paid off.
• Equipment Financing - There are both in-person and online lenders that offer financing specifically for business equipment. You’ll still put up collateral with this type of loan, but it’s often in the form of the new equipment you’re buying.
• Personal Loans. Personal loans can be used for any personal use except for buying property. These are flexible loans with a large range of amounts and payoff times.
• SBA Restaurant Grants. The SBA provides a limited number of small business grants for certain entrepreneurs. Just know that these aren’t for startups, but for those with at least a limited time in business.
• Crowdfunding. Sites like Prosper and LendingClub offer peer-to-peer loans that are funded by private investors. Getting a loan through these companies is similar to applying for any other loan. You’ll get an interest rate determined by your credit score and a set schedule of payment.

Further reading - Useful Resources

Whether you’re looking for info on how to choose the right loan option or you just want general help with your business venture, there are a host of resources that can help. Here are a couple we suggest:

• Small Business Administration. The SBA provides explanations of all of the loan options and also offers free and low-cost business training programs.
• SCORE. This is a nonprofit organization of volunteer business owners and counselors that provide free mentoring and low-cost workshops for entrepreneurs.
• National Restaurant Association. This organization offers business mentoring and resources to help restaurant owners launch and grow their businesses.
• Women’s Business Centers (WBCs). WBCs align with the SBA to provide business counseling and training to women-led businesses, including mentorship and access to capital. 

Final Word

The Small Business Administration (SBA) offers several loan programs tailored specifically to the needs of restaurant owners. Taking the time to research and compare various SBA loan options can help restaurant owners determine which loan is the best fit for their project. Restaurateurs must carefully consider their business goals, budget, and project needs in order to make the right choice when selecting an SBA loan.