Current Restaurant Loans Options

By: jeff rauth

Restaurant owners have limited options for commercial mortgages, relative to other businesses and building types.? One of the most common options is the SBA loans.? Although not perfect, they can be a viable option.? For one, they are still reliable and are still closing.? Two, they do offer some of the lowest fixed rates available and the highest level of financing for .?

Interest rates for restaurant loans are currently in the mid 6%'s to mid 7%'s depending on the particulars of the transaction.? Combine that with 85% financing on purchases AND 85% financing on refinances and it is easy to see why the SBA has had such a huge impact on American Small Businesses.?

Compare that to traditional bank financing, rates are about the same, but you would have to come out of pocket 30-40% of the purchase price.? Refinance financing is more limited and harder to close and loan to values are normally capped at 50-60% as well.? Again with the SBA programs you can go up to 85% loan to value on refinances on restaurant loans.? ?

The SBA programs have received a lot of criticism over the years, some of it warranted, some of it not.? One of the biggest complaints is the time frame and bureaucratic process.? A key to avoiding the long delays is to work only with PLP lenders.? If you do not your loan will have to be underwritten and approved twice, once by the funding bank and secondly by the SBA.? If you work with a PLP lender the loan will only have to be underwritten once, and you will avoid at least one month of delays.? It is common to close SBA loans in 60 days which is right in line with all commercial loans.?

Another major criticism is that the fees are excessive.? The SBA 7a loan normally has a 2.75% front end 'SBA Guarantee Fee' and the 504 has a 2.5% fee for its half of the loan.? However it is important to realize that not all lenders and the way they structure deals are the same.? For example we work with a bank that will absorb/pays for this fee for the borrower. ?So the borrower gets all of the benefits of a long term fixed rate loan with zero fees.?

In terms of fixed rates it depends on how the loan is structured.? With the SBA 504 you can easily get 7 to 10 year fixed rates, with 25 year amortization schedules.? With the SBA 7a most are floating, however it can be offered as a 3, 5 and though rare, 10 year fixed rates.? We are currently working with two banks that offer the 7a as a 5 year fixed loan for restaurants.? ?Again, as a comparison most bank financing will not exceed 3 -5 years, and the amortization schedules rarely exceed 20 years with loan to value restrictions at 50 060%.??

The SBA programs can provide a lot of flexibility compared to conventional bank financing.? Again, keep in mind that not all lenders/banks that use the SBA guarantee 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 may just mean that the actual funding bank, didn't like your deal.? ?The SBA is not the lender, they are guaranteeing the loan for the funding bank in case of borrower default.? 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.? Again, for example 99% of banks offer the 7a as a floating rate, we however have access to a 5 year fixed, 7a program.?

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