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Limited Options Strangle Restaurant Loans

From a conventional stand point restaurant loans are taking the worst of it as the credit crisis has seemed to have worsen. Special use properties such as restaurants are always the first to feel the tightening as the process to sell the facility in case of borrower default is more difficult that your typical general use property that will have a wider pool of buyers.

Conventional financing for restaurants, meaning loan issued directly by the funding banks, without any guarantee by the SBA or other such institutions, are getting very conservative. Loan to values are hover at 55% on refinances and 60% on purchases. Debt coverage ratios have tightened as well from a 1.25 to a 1.3 and with some banks a 1.4. Meaning that for every $1 of proposed mortgage debt the borrower would still have $.40 left over after all expenses and proposed mortgage have been paid.

In addition, the cap rates have really been taking a beating with conventional sources. For example, I recently spoke to a bank loan officer that said they are putting on a minimum 10% capitalization rate on all restaurants regardless of the market.

The solution is to think non conventional for either purchase or refinance money. For example it’s still possible to get 85% financing on purchases on a 5 year fixed 25 year amortization loan, if you work through the right sources.

One loan program that deserves mention is the SBA 7a loan as it was designed for niche building types like restaurants, motels, etc. They can go as low as a 1.1 debt coverage ratio, and business projection can be used to supplement cash flow if it’s too low to meet the guidelines. Which in a cash business like restaurants, where most owners understate there income is very important.

CMBS sources are still out there though on a limited basis. For example, a 30 year fixed rate mortgage at 80% financing is still available. Primary benefit of course is that the borrower doesn’t have to worry about their rate fluctuating.

Author: Jeff Rauth
Article Source: EzineArticles.com
Provided by: Excise Tax

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Restaurant Loan Options

Owners looking for a restaurant loan have limited options and the credit crisis is giving a “beating” on all special purpose properties; such as restaurants. Although borrowers still have three main sources for financing, including conventional bank loans, CMBS lenders and SBA programs, borrowers are encourage to take a hard look at the SBA programs first due to their reliability of closing and strong benefits.

SBA 7a loan has many benefits on both purchase AND refinances, despite the notorious reputation it has with some borrowers. Most of these earlier issues have been ironed out in the last 5 years though borrowers should be careful who they work with, as bank that are inexperienced with the SBA can quickly complicate the process.

Examples of the benefits include 85% financing and low rates at prime + 1-2% for most borrowers. Right now Prime is at 5%. An effective rate of 6% from a historical stand point on a special use property such as a restaurant is exceptional. In addition, most 7a loans are amortized over 25 years helping the borrower spread out their loan and thereby increasing cash flow as compared to most traditional bank loans of 15 or 20 year amortizations. Working lines of credit, equipment, and construction/renovation loans can easily be tied into the loan.

One of the other huge benefits is the flexibility this program has for cash flow analysis aka debt coverage ratios. Most sources want to see a 1.3 on this type of building while the SBA 7a loan only needs a 1.1. In other words, the business needs to show that for every $1. of proposed mortgage payments that the restaurant has $1.30 of net income to cover the proposed loan. So after all expenses have been paid including the mortgage the restaurant should have $.30 left over. With the 7a it would only have to be $.10 left over which can be a big difference for most business that have tight cash flow.

Further, the borrower is allowed to use future business projections as well, to supplement any existing short falls in cash flow. This is not possible with 99% of the other options out there as they will only look at historical statements like your tax returns, balance sheet or profit and loss statements.

The negative with the 7a loan is that the rate typically floats and the SBA has a guarantee fee of 2.75% of 75% of the loan balance. However this is not always the case. For example, we have a source that offers this as a 5 year fixed, 25 year amortization loan. And there are banks out there that will absorb or pay for the guarantee fee themselves.

The short of it is if you’re looking for a restaurant loan keep you eye on the 7a loan.

Author: Jeff Rauth
Article Source: EzineArticles.com
Provided by: Creditcard Currency Conversion Fee

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