What Type Of Restaurant Business Financing Is Available To Buy A Restaurant?

Comments & Replies: 1     Views: 11634     Posted By: Peter Siegel MBA  Peter Siegel MBA: Business Purchase Financing Advisor

In this Discussion, we define financing options available to potential restaurant buyers when purchasing a small to mid-sized restaurant business (with or without real estate). When it comes to financing a restaurant purchase, potential restaurant buyers have several options to choose from.

Topics: Business Purchase Financing, Buying A Business     Tags: buying a business, financing, non SBA loans, SBA loans, seller notes



When I chat with potential restaurant buyers in the BizBen ProBuy Program and look at the financing portion and (pre-qualification process) I like to cover these 5 areas in detail. Usually with the right combination of these five financing tools we can get the right type of business purchase financing secured for restaurant (with or without real estate) purchases.

1. Seller Financing - The vast majority of small business for sale transactions contain some amount of seller financing. So this route is definitely an option for you if you are looking to buy a restaurant. Seller financing provides buyers with several benefits. Borrowing from the seller allows for more negotiating room for the buyer than they would have with a bank. For example, a buyer may be able to stretch out their payments over longer periods or negotiate earn-outs. The seller will also benefit by offering financing through lower taxes associated with the sale as sale proceeds are deferred across multiple years.

2. Borrowing from a 401(k), IRA, Or Retirement Account - This potential option may sound scary to you. But, if you look at it as just a different type of investment, one with the potential for greater returns than a traditional 401k (or retirement account), it might not sound as scary after all. The way it works is; buyers roll their retirement funds into stock for a new business without incurring any tax or early withdrawal penalties. The benefit is it's your money so there are no prequalification concerns or loan payments to make on that portion of the payment (most people who use their 401k - or retirement funds - use it to finance only part of the purchase - possible the down payment portion). The downside is, it's your money. If you fail, you risk losing a part of your retirement savings.

3. SBA-Backed Loans - Many banks remain hesitant funding business purchases, even when dealing with qualified business buyers. So business and restaurant buyers often rely on SBA-backed loans to fund some other portion of the sale of a restaurant or business.

The Small Business Administration (SBA) does not give out loans directly. They guarantee a portion of the loan from an approved SBA lender. This guarantee makes banks feel more comfortable issuing loans for a small business purchase. There are however conditions attached to these loans. You are required to put down between 10%-25% in most cases, you must have good to excellent credit (usually have a credit score of over 650), and the business you are looking to purchase must have a verifiable cash flow (supported from tax returns) to support repayment of the loan. There are approximately 24 key factors that financial institutions look at when evaluating both buyer and seller of a restaurant business.

4. Non SBA Financing - This would include asset-based lending, hard money loans and other niche oriented financing tools. Interest rates can be high with this type of financing - but many would be restaurant buyers would be willing to pay ten to twenty-five percent annual interest to achieve their dream of buying a small to mid-sized restaurant.

5. Family And Friends - Believe it or not one of the most common ways to finance a restaurant purchase is by asking family and or friends for the money. To some people, this may seem like a bad idea. Borrowing from friends or family can put a strain on relationships. The key is to treat the loan like you would if it were acquired from a traditional bank. Set terms and stick to them. Also, make sure to borrow from a friend or family member who is is a position to make the loan. This can help you avoid issues with your relationships.

As you can see there are many options when it comes to finding the financing to purchase your restaurant. Most would be restaurant entrepreneurs use a combination of these options to fund the purchase of their restaurant business. With so many options it's important that would be restaurant buyers (and restaurant sellers) get pre-approved with a professional advisor and financing expert who specializes in business purchase financing and who has a long history of success of obtaining financing for business purchases.

Replies To This Comment
 
Sweat Equity is another way in which an individual can be a co-owner of a business. In the restaurant business an investor may be interested in either converting or opening up a restaurant but lacks the expertise in the food style, such as Sushi. The investor may partner up with a former chef who lacks the financial funds, but brings experience in the restaurant business. It's a lucrative proposition, because one person who doesn't have money can obtain ownership, and the other person who finances the operation is not burdened by the time commitment of being present to run the business.



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