My experience applying for an SBA loan

Restaurant Business Loan Process

I’ve written and co-written many business plans not just for myself, but for other restaurant owners. We all planned on submitting these business plans to our banks and SBA. No matter how well our plans were written, we always got the same response, “NO”. The worst part is that the “No” took over 3-6 months, keeping our project at a standstill.

I mentioned earlier that no matter how good your concept is or that you’re backed by a national franchise, if it’s not Burger King, KFC or McDonalds it’s difficult to get the bank or SBA to back you. For them it’s a risky business and there are too many moving parts and unknown variables; more importantly, they must rely too much on the individual because it’s the individual that can and must guarantee the success of the restaurant. When I applied for an SBA loan, I felt I would be an excellent candidate. I had an excellent credit score over 750, a very low debt to income ratio, a proven franchise concept, I had over $50k in my bank account to put down for the loan, and a ton of equity in my home when home were going for double their value. I went in applied for the loan, did a ton of paperwork and met several times with my banker. It took about 4 months just to get this letter from the lender and it looked good. My wife and I were excited because we had an excellent location and it was grossing over $800k. We had the bank statements from the seller to prove it to the lender that the company was financially sound, and with its gross sales we could pay the loan back within the terms outlined by the vendor. How could they not lend us the money? Below is a copy of the letter I received from the lender. Let’s take a look at it.

SBA-Restaurant-Loan-Letter

Note: I’ve omitted the lender and the name of the franchise to protect their privacy since I did not get their approval for this ebook.

My loan was for $167 and I personally guaranteed the loan a practice that today I would not ever do. My attorney has been able to get me out of all of my personal guarantees. A quick note about personal guarantees, DON’T DO IT and be prepared to walk away. Before my attorney, I used to personally guarantee everything just because I wanted to move the process faster and emotionally I was not prepared to walk away. Don’t get emotional! I’ve learned that lesson the hard way. The next part of the letter outlines how payment will be made, additional information, and the fees associated with getting an SBA loan. The fees are refundable should you not get approved by the SBA.

SBA-Restaurant-Loan-Letter-2

Below is the breakdown of the loan. I did my own loan breakdown; however, if you are having trouble, the loan officer will help you with this process. A few weeks later I was sent a list of items that needed to be ready prior to closing. I’ve done the SBA three times with no success with different lenders and the lists are very much the same:

 

sba-restaurant-financial-break-down

 

  • Personal financial statements
  • 3 most current months of bank statements
  • Business entity documents
  • Fictitious name or trade name
  • Tax ID Number(s)
  • Evidence of Cash Injection (Must show on your last 3 back statements)
  • Franchise Agreement (if applicable)
  • Required licenses/permits
  • Special hazard area certification/insurance
  • Hazard and liability insurance
  • Life insurance policy in the amount TBD by the lender
  • Compensation Agreements – SBA requires that any party providing services to the borrower in connection with this loan transaction execute a compensation agreement (i.e. legal, accountant, etc.). Information about your attorney or Escrow Company – The name, address, and phone number of the attorney or escrow company who will be representing you in this loan transaction or will be handling the closing. The broker for the loan will have an attorney, I highly recommend you bring your own attorney to any closing!
  • Property lease including all addendums, subleases, and assignments
  • Business equipment itemized
  • Copy of executed construction
  • Copy of building permit (if applicable)
  • Certificate of occupancy

Make sure you have most of the items above in place not just for SBA, but for your own due diligence. Months later after getting all of my information together including my closing items I receive the following letter:

sba-restaurant-rejection-bank-letter

Thank you, but no thank you? I didn’t get it! The reason for the rejection… lack of managerial experience, and provisions of lease agreement. I called Elizabeth immediately after receiving this letter. I told her I had more than 10 years of managerial experience in a restaurant, and that the mall only offers any kiosk a 3-5 year lease. She explained to me that my managerial experience although sufficient was not recent. You see, I worked as a financial controller for 10 years after working as a manager. My managerial experience in a restaurant was not recent and could not be considered. Also, my lease had to be a minimum of 10 years. Wow, what the heck is going on here? I’m asking for a small loan of $167k for an established restaurant franchise, 5 years of existence, successful, and the answer was still, “No”! I found a way to open my business, and with an existing business years later I applied to SBA and the reasons varied, from “we don’t fund startups” to “you need 3 or more years in your current business”. That’s been my experience with SBA. Ultimately, the way we got funded for our first restaurant was a line of equity on our home, and loans from our parents. The true SBA! I had spent over 8 months dealing with SBA and we got nowhere. I just wished they would have cut me off immediately as opposed to loosing so much valuable time in the process. In all honesty, it wasn’t a total loss. Going through the process made me go out of my comfort zone to reach out and speak to professionals and ultimately build a very good team of advisors that I use today.

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