The advantages of financing with an SBA loan

Kurt Chilcott

After 13 years of owning the iconic Lucques restaurant in West Hollywood, CA, co-owners Caroline Styne and head chef Suzanne Goin faced a crossroads: buy their building outright or continue to lease their space and eventually face being priced out of the area.

“It’s risky as a restaurant to change locations because it becomes part of your brand and reputation,” Styne says. “We decided to pursue buying our building so we’d be in control of our destiny.”

The owners turned to a little-known financing tool called the SBA-504 loan program, a U.S. Small Business Administration vehicle that allows small and growing businesses to purchase commercial and industrial buildings. Small business owners need only contribute 10 percent of the total purchase price of a building. The remaining 90 percent is financed by a bank and a certified development company (CDC), typically a nonprofit with a mission to create jobs via economic development. The 504 loan can be for up to 20 years and offers a below-market rate.

Using an SBA-504 loan to purchase the building for Lucques, Styne and Goin were able to fix their occupancy costs going forward, secure a long-term home for their marquee restaurant and retain all 40 employees.

From June 2008 to June 2013 many restaurants were left with few financial options as small business loans declined by 27 percent. Small businesses often have more difficulty getting traditional financing because they lack the capital to put 20 percent down on a loan. To qualify for an SBA-504 loan, the restaurant must:

• Be owner-operated

• Be for profit

• Organized as a sole proprietorship, corporation, partnership or LLC

• Have a business net worth below $15 million and a net-profit after taxes below $5 million within the last two operating years

The SBA-504 loan is government-guaranteed. Therefore, the collateral required is normally the property being purchased; no additional collateral is needed. Closing costs such as appraisal fee, environmental fees and contingency fees can be included in the financing. The CDC can consider projected income of a business in addition to historical cash flows in the approval process. This is particularly advantageous for growing restaurants.

“The SBA loan process was surprisingly painless, despite a quick escrow demanded by our landlord,” said Styne.
 
Other advantages of an SBA-504 loan include:

• Lower down payment. Higher loan-to-value ratios allowed by 504 loans often make qualifying easier. Restaurateurs can borrow up to 90 percent of their financing needs and preserve their cash for other business purposes.

• Longer repayment terms. SBA repayment periods are longer than conventional bank loans. The monthly loan payment becomes more affordable and cash flow improves.

• Projected income consideration. Most SBA lenders consider the projected income of a business, not just historical cash flows. This is particularly advantageous if the restaurant business is growing.

Kurt Chilcott is president and c.e.o. of the nonprofit CDC Small Business Finance, the largest certified development company in the nation. For more information on CDC Small Business Finance, go to www.cdcloans.com.