Discover how SBA 7(a) loans can help emerging restaurants secure funding for essentials, from equipment to property. Get the support you need to grow today!
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October 28, 2024
Running a restaurant is expensive.
From food to utilities, kitchen equipment to marketing, POS systems to labor and recruiting, running a restaurant requires a huge amount of capital.
In order to successfully support your business in a way that is sustainable and profitable, you’ll need to get smart about how you source and spend your time and money.
While this is applicable to restaurants of any size, it’s especially important to those who are starting to open new locations and expand their business.
For newer business owners, securing funding can be an especially daunting task. Banks, unfortunately, are less likely to grant loans to new business owners. Likewise, fundraising from private investors might seem like a confusing process dependent on a deep network of contacts.
If you feel like you’ve exhausted all options and are at the end of the rope, you’re in the right place.
Today, we’ll dive into the U.S. Small Business Association’s (SBA) 7(a) loan. This is the SBA’s primary loan program for small businesses, and is a crucial opportunity for emerging restaurant owners to secure funding that’s backed by the government.
As a wise woman once sang, “Let’s start at the very beginning, a very good place to start.”
Before we dive into the specifics of an SBA 7(a) loan, let’s break down what it actually is.
As we’ve previously established, the SBA is the U.S. Small Business Administration. Per the SBA website:
“The SBA is the only cabinet-level federal agency fully dedicated to small business and provides counseling, capital, and contracting expertise as the nation’s only go-to resource and voice for small businesses.”
To put it plainly, the SBA is a government-backed agency specifically designed to provide assistance to small businesses. In restaurant speak, this might mean that you have 3-5 locations and are looking to grow outside of your home market.
7(a) is the SBA’s primary loan program. While the loans are issued by private lenders, such as banks, they are backed by the government. Should you be unable to repay your loan, the government will be responsible to the lender for a portion of the repayment.
Another question at top of mind is the amount of money that you could actually borrow with an SBA 7(a) loan.
Currently, the maximum loan amount for an SBA 7(a) loan is $5 million.
One of the first questions you’ll have to ask yourself is whether you qualify for an SBA 7(a) loan.
To be eligible for this loan, you’ll have to be a for-profit business, currently operating in the United States. You’ll also have to formally qualify as a “small business” according to the following criteria.
Per the Code of Federal Regulation, “The number of employees or annual receipts indicates the maximum allowed for a concern and its affiliates to be considered small.”
What does this mean for emerging restaurant brands?
As a Full-Service Restaurant, you’ll have to generate under $11.5M of annual revenue to qualify.
Limited-Service Restaurants will have to generate under $13.5M of revenue to qualify.
Operating a different kind of restaurant? Check out the chart below to see if you qualify:
Additionally, certain criteria needs to be met to qualify for an SBA 7(a) loan.
While small restaurants as a whole are eligible, certain extenuating circumstances, such as if a business associate is currently incarcerated or if any associates own an equity interest, may make you ineligible. Click here for more information on SBA 7(a) loan eligibility.
Lastly, this loan is catered towards small businesses who have exhausted all other pathways to securing funding. You will likely need to provide proof of this, so keep it in mind as well as you begin to prepare your application materials.
Per the SBA website, 7(a) loans can be used for the following purposes:
Many of these items will seem pretty applicable to growing restaurant chains, especially if you’re opening a new restaurant.
Whether you’re buying property to open your first location, a set of new fryers, or the furniture that your guests will use, a 7(a) loan may be a good fit for you.
When it comes to traditional bank loans, it’s often a deterrent if the borrower has no history of owning a business. Thankfully this isn’t the case with SBA 7(a) loans.
Johnny and Sarah Courtney, co-owners of Atoma in Seattle, were able to secure an SBA 7(a) loan despite Atoma being their first restaurant.
“Most banks will not lend to folks who don’t have two years of very successful history owning a business,” they shared in an interview with Eater magazine. “But the SBA is a government-backed loan. You can get that through banks, but the government cosigns your loan with you. They guarantee 50 percent of your loan. If we were to go belly-up, the bank will still get at least 50 percent of the money back. So it’s a great option for people who haven’t been in business previously.”
While an SBA 7(a) loan is an incredibly viable option for emerging restaurants, it may be wise to take off your rose-colored glasses before beginning the process.
Per Funding Circle, “it could take months to get funding. For this type of restaurant business loan, you’ll need to offer collateral, along with a personal guarantee, and meet minimum credit score requirements.”
Remember, SBA 7(a) loans are borrowed from more than 800 private lenders across the United States. To start your application process, you’ll want to use the SBA’s Lender Match tool.
After filling out your initial submission, you’ll be given a list of interested lenders within 2 days, if eligible. From here, you’ll work on contacting lenders individually to determine interest rates, payment timelines, credit scores, and other factors.
Speaking of interest rates, you’re probably wondering…
Per the Wall Street Journal, “interest rates on SBA loans are negotiated between the lender and the borrower, within the SBA’s minimums and maximums.”
SBA loans can be variable or fixed rate, the lowest being the current prime rate.
While interest rates will be negotiated with each individual lender, refer to the charts below to give you an idea of what rates you can expect to see on your SBA 7(a) loan.
From rising food costs to struggling to hire and retain top quality workers, being in the restaurant business is certainly not for the faint of heart.
But when it comes to funding, know that you have options.
SBA 7(a) loans are a great option for emerging brands who are unable to secure funding via alternative or traditional sources.
At the end of the day, you deserve the support to make your restaurant vision a reality. We hope that this article has been helpful and informative in helping you chart the next steps in your restaurant’s journey.
Now that you've got your finances figured out, you’ll need to ensure that every dollar is put to good use. Labor costs make up approximately 30% of gross restaurant revenue, and having quality team members is a crucial way to drive the success of your restaurant.
We’ve helped 500+ brands, including Another Broken Egg Cafe, Erewhon, Torchy’s Tacos, and KFC, to leverage cutting edge technology and ensure that every inch of their hiring spend is put to good use.
Ready to maximize your budget? Book a demo with our team of experts and see how you can save time and money while creating the best quality team possible!
