Commercial bank loans are the most common form of start-up funding for new businesses. Unfortunately, securing a loan from a major bank as a first-time restaurant owner, has a few major challenges:
- Inherent risk factor. Commercial banks typically find start-up restaurants extremely risky to finance, since more than 25% of new restaurants fail within the first year of opening. And only 3% of them ever make it through their 5th year! Bank loans are risky for restaurant owners as well. If the restaurant business does go under, the owner is still responsible for repaying the loan. Luckily I was one the exceptions with the 4 of mine! A local bank was an easier way to go.
- Bias against first-time owners. Lenders examine restaurant loan applications extrememly closely, and first-time owners usually confront skeptical lenders when presenting their business plans. For subsequent openings, the process becomes much easier. Lending institutions prefer applicants who can submit evidence of successful past performance. The was the case with me as well. We had to jump thru hoops to get our first loan, the second was so much easier and by the forth, secured a loan within 2 weeks!
- Probability of rejection. Many restaurant owners are rejected for loans the first time. Do not be afraid to try again at a different bank. With every attempt, refine your argument and perfect your business plan. It may take a while, but perseverance will usually reward you with the loan you need. As the saying goes, try and try again.
When turned down for a typical commercial bank loan, or when looking for additional loan resources, many restauranteurs turn to SBA loans. The SBA—the U.S. Small Business Administration—does not offer loans directly, but guarantees loans made by private and public institutions. Thousands of American banks grant SBA loans, and even the same bank that dismissed your application for a traditional loan may be able to grant an SBA loan. Factors affecting eligibility for an SBA loan include the type of business, the size of the business, how the funds will be used and the availability of funds from other sources, such as personal financing or investors. Below are the most common forms of SBA loans:
- 7(a) Loan Guaranty Program. 7(a) is the SBA’s most basic and most common loan program. These loans are available through commercial lending institutions, and most American banks participate as lenders in this program. Lenders typically grant loans up to $2,000,000.
- CDC/504 Loan Program. The CDC/504 loan is a long-term, fixed rate loan program, typically repaid over 10-20 years. Certified Development Companies (CDCs) are non-profit groups who aim to boost economic development in their regions. CDCs around the country work with the SBA and government lenders to provide funding to small businesses focusing on new construction, renovation, expansion projects and new equipment purchases.
- 7(m) Micro-Loan Program. This program offers loans of up to $35,000 for start-up or growing small businesses. The SBA makes funds available to intermediary non-profit lenders, who then grant loans to small business borrowers. The average loan size is about $13,000, with a maximum payback term of six years. Lenders usually require some form of collateral for a micro-loan.
If all those attemps fail, there are always private investors. I brush over that soon, as I have also experienced first hand that route as well.
Part One Restaurant Owner in Attleboro,MA to Realtor in Attleboro, Mass
Part Two From Restaurant Owner to Realtor In Attleboro, Mass
Part Three Existing Restaurant or Vanilla Box
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