7(a) loans have a maximum loan amount of $5 million. SBA does not set a minimum loan amount. The average 7(a) loan amount in fiscal year 2012 was $337,730.
Loans guaranteed by the SBA are assessed a guarantee fee. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. The lender initially pays the guaranty fee and they have the option to pass that expense on to the borrower at closing. The funds to reimburse the lender can be included in the overall loan proceeds.
On any loan with a maturity of one year or shorter, the fee is 0.25 percent of the guaranteed portion of the loan. On loans with maturities of more than one year, the normal fee is 2 percent of the SBA-guaranteed portion on loans up to $150,000, 3 percent on loans of $150,000 to $700,000, and 3.5 percent on loans of more than $700,000. There is also an additional fee of 0.25 percent on any guaranteed portion of more than $1 million.
The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. Both fixed and variable interest rate structures are available. The maximum rate is composed of two parts, a base rate and an allowable spread.
Lenders are allowed to add an additional spread to the base rate to arrive at the final rate. For loans with maturities of shorter than seven years, the maximum spread will be no more than 2.25 percent. For loans with maturities of seven years or more, the maximum spread will be 2.75 percent. The spread on loans of less than $50,000 and loans processed through Express procedures have higher maximums.
If you cannot get financing through normal channels, you may wish to look for some private investors who might be interested in your venture. These investors may be friends, family, business colleagues or just people known to you who have capital available.
To interest a private investor, and because there is a perceived risk to a restaurant business the return on their investment must be greater than they would receive through other investment opportunities. Therefore you will need to be able to clearly explain what the idea is, why it will be successful; and how you intend to give them a good return on their investment.
Asking family and friends to invest money in your business can be a very difficult task. On the one hand, they will probably be willing to invest but on the other, you don’t want to be responsible for not providing them with a return on the investment or, worse, to be responsible for losing their money. So think carefully before heading down this path.
Before approaching investors, you are advised to have a well-prepared Business Plan or Prospectus and a well-prepared Financial Estimate showing exactly how you intend to repay the investment, along with any relevant interest or dividend. You should also consult with an accountant to investigate any preferential tax allowance may be available for investors.
To incentivize investors, you may also think about other ways to make the investment more attractive. For instance, the following incentives may be of interest to potential investors:
- Annual Food & Beverage Allowance (actual cost to the business is 30% of amount)
- Preferential Reservations (Top of the Line)
- Participation in Annual Golf Tournament
- Annual Golfing or Tourist Trip to Ireland
- Special Food & Wine/Beer Evenings
- Access to Merchandise
- Visits to Wineries/Breweries
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.
The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership. As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership’s business.
Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement. General Partners thus carry more liability, and in cases of financial loss, the GPs will be liable.
So a Limited Partnership might work in the following way. If I need $750,000 to develop my pub, I might have $250,000 of either my own or borrowed money and require $500,000 to get the pub built and open. If I form a Limited Partnership and appoint myself as the General Partner with a 50% share of the business, I can offer Limited Partnership Units at a cost of $50,000 per unit and look to sell these to investors who will then become my Limited Partners. If I sell these units to 10 different investors, each of those investors will own a 5% stake in the business, and if any investor wants to buy more than one unit, they will also increase their shareholding accordingly.
If you decide to go in this direction you should consult with an attorney who specializes in setting up this type of business partnership.