Getting SBA Financing to Buy a Restaurant

One of the biggest myths in small business finance is that restaurants receive financing less often than other businesses. In fact, data on Small Business Administration (SBA) loans show that restaurants made up the largest number of SBA borrowers between 2006 and 2015. If you already have a restaurant or want to buy a franchise, the SBA is a perfect source of financing. Borrowers can take advantage of the SBA’s 7(a) loan program, but the 504 loan has features that make it an especially good fit for buying a restaurant.

One Restaurant or a Group?

When looking for a restaurant to buy, you might want to purchase the entire operation down to the flatware and condiment dispensers. Or you may purchase the bare bones of a restaurant—a space with plumbing and electrical outlets—where you can make your unique vision of fine dining a reality.

In any case, if you are transitioning from owning a single restaurant to multiple properties, you will probably be creating a legal structure known as a restaurant group. A restaurant group is made up of entities with discrete functions that maintain important functional and ownership distinctions as your operations expand.

The basic structure of a restaurant group is a parent company that owns your restaurants and includes the principal owners of the business and any partial owners. More than one company may need to be created to reflect the different ownership of individual restaurants. The intellectual property of the group—its concept, as it were—is held by a different company that will include you as the head of the organization and your close associates only. A third company manages and operates the restaurants.

There are finance companies that specialize in restaurants, and other forms of alternative funding are available, but all of these sources typically have rates that are well above the prime rate. Many of the top franchises in the country are limited-service restaurants that offer their own financial plans, along with other forms of support such as personnel training and cooperative advertising. They uniformly require the franchisee to provide funds as well, so you may still require outside financing if you decide to open a franchise restaurant.

SBA Financing for a Restaurant Purchase

If you don’t want to go with a specialized financing company to expand your restaurant business, you can use SBA’s 7(a) and 504 loan programs. You can buy or build your restaurant using SBA financing, make improvements to the restaurant you already own or purchase equipment with a service life of ten years or more.

While the 7(a) loan can be used for leasehold improvements and operating costs as well, it also has rates up to 2.75% over prime rate with a  down payment of 15-20%.The 504 loan, on the other hand, has a fixed, below-prime rate and only requires a 10% down payment in most cases.

The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender to provide a loan in three parts:

  • The first is a loan from a conventional lender—a bank or credit union—for 50% of the total amount. You and that lender determine the interest rate and term of that loan, which becomes your first mortgage. TMC can help match you with the perfect banking partner for this loan, if requested.
  • Your CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. You can receive up to $5.5 million for projects that participate in the SBA’s Green Energy Program. This is your second mortgage.
  • Then you, the borrower, contribute 10% to the loan as down payment.

Thanks to their first lien position in a 504 loan, a conventional lender can loan to you with a very low level of risk, making them more willing to do so than mighty otherwise be the case. The 504 has a 10-year or 20-year term, with a 25-year option coming soon, and it is fully amortized (so there are no balloon payments).

A restaurant’s equipment, such as stoves, ovens and refrigerators, form a large portion of the financing. The 504 loan’s low down payment leaves you more money to use for the needs of your restaurant, and the lower interest rate compared to the 7(a) loan will save you money for years to come.

TMC Client Success Story

San Francisco’s Salt Partners is a good example of a restaurant group, developing and managing some of the most famous venues in the city. Salt Partners was founded by Hanson Li in 2014. He was joined by partner Tiffany Yam later that year. Among the restaurants, bars and nightspots they have had a hand in creating are Atelier Crenn and Petit Crenn with Dominique Crenn, Humphry Slocombe Ice Cream, Horsefeather, LocoL, Bacon Bacon, Halcyon and Stella Public House.

You can find out more about using a 504 loan to finance your next restaurant purchase from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.


Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison