How to qualify for a SBA loan
What is essential for underwriting SBA loans, and how to qualify for a SBA loan? EATS Restaurant Brokers receive this question often when talking with restaurant buyers.
Qualifying for SBA loans has multiple vital factors to consider; we will cover the critical points in this blog.
The process to qualify for SBA loans has changed and evolved since the pandemic began. In today’s post-Covid environment, securing financing for RV parks and campgrounds is more easily approved, while fitness centers and restaurants are challenging.
When providing restaurant valuations for restaurant owners, EATS Restaurant Brokers always let them know, based on their financials, if the restaurant will get approved for SBA lending. Dealing with the buyers to get qualified for lending is a much different story.
Dominique Maddox, a Restaurant Resale Specialist, states, “selling franchise restaurants with SBA loans today has far less failure rate than independently owned restaurants. Established franchise restaurant brands give buyers better odds to qualify for bank lending.
Franchise Restaurants for sale have systems, brand awareness, training, Financial Disclosure Document (FDD), and they are proven to have success”.
Selling a restaurant? Here are the 5 Key Factors for Buyers to get qualified for SBA lending:
1. Background
Underwriters are always curious about a buyer’s background. They want to know about the previous work experience and education that could help a buyer be successful. Previous or current ownership and management experience is a huge plus.
If a buyer does not have restaurant experience, then underwriters will consider what current or previous experience they have to help them be successful? The buyer might have a background in sales, marketing, management that can be very useful in their new role.
2. Credit Score and Debt-to-Income ratio
To be safe, a restaurant buyer should have a credit score of over 700. Yes, lower credit scores get approved, but sometimes the lender will ask for additional supporting documentation.
A debt-to-income ratio is derived by dividing the monthly debt payments by the monthly gross income. The ratio is expressed as a percentage, and lenders use it to determine how well a borrower manages monthly debts — and if a borrower can afford to repay a loan.
3. Skin in the Game
Today’s lender will ask for a range from 10%-30% down depending on the borrower and situation. Bank wants to make sure the borrower has skin in the game. EATS Restaurant Brokers recommends that buyers have at least 20% down or do not consider lending.
In some cases, the SBA lender will require the seller to carry a seller financing note up to 10%, so everyone has skin in the game, and the buyers have to bring less to the closing table.
4. Collateral
Besides money down, the SBA lenders want some collateral attached to the loan. Collateral will not always be requested for loans under $350,000. Collateral can be described as something pledged as security for repayment of a loan, to be forfeited in a default.
Disclaimer-if a borrower has a house that is free and clear of payments and wants a loan, typically, the bank will use the personal home as collateral.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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Selling a Restaurant: What Documentation is needed?
When selling a restaurant, what documentation is needed from the seller? The answer is simple it depends on what type of sales transaction. Trained Restaurant Brokers use two methods when providing a Restaurant Valuation to a seller.
The most profitable and best way to sell a restaurant is based on past Profit and Loss Statements and Tax Returns. If these documentations are not available, the restaurant should be priced as an Asset Sale, meaning pennies on the dollar for the equipment and build-out.
EATS Broker breaks down the essential documentation needed for both types of transactions. We list the documentation that is provided during the due diligence period for the buyer:
Selling a Restaurant Business Based on Tax Returns and Profit and Loss Statements:
– Tax Returns for the past three years
– Profit and Loss Statements for past three years
– Copy of Lease and all amendments
– Sales Tax Clearance Letter
– POS Sales Report
– Bank Statements (sometimes)
– Balance Sheet
– Copy of Franchise Royalty Report
– Equipment List (only items owned by the seller)
– Franchise Agreement
– Sales Tax History
Selling a Restaurant priced as an Asset Sale:
– Sales Tax Clearance Letter
– Copy of Lease and all amendments
– Equipment List
– Limited Profit and Loss information
– Sales Tax History (sometimes)
– Bank Statements (sometimes)
Providing documentation for a successful and profitable business net the seller the highest asking price, can qualify for a restaurant for bank lending and attracts more buyers. Asset Sale is harder to sell and makes the Restaurant Broker work for their commission.
Asset Sale can be a challenging sale because you sell the opportunity or potential to a new buyer. You can tell when a restaurant is listed as an Asset Sale because Cash Flow and EBITDA will be low or nonexistent.
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a restaurant’s overall financial performance.
Dominique Maddox of EATS Restaurant Brokers says, “selling a restaurant business has two phases for a restaurant owner. First providing the documents needed for a valuation. Second, providing more detailed supporting documentation during the buyer’s due diligence period”.
Some restaurant owners can be frustrated and think they provided enough financial information during the valuation phase for buyers to confirm their numbers. This thinking is usually incorrect, and most buyers will ask and want to see more additional supporting documentation before arriving at the closing table.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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