How to Fund Startup F&B Businesses: SBA Community Advantage Loans

Do you need funding to open your dream restaurant? Maybe you have a great idea for “the next big thing” in coffee or craft beer? While successfully launching a new venture takes a lot of money for equipment, staffing and supplies, this funding has long been hard to come by due to the “high risk” nature of startup businesses in the food and beverage (F&B) industries.

That’s why the U.S. Small Business Administration (SBA) Community Advantage loan program is a great resource for new F&B ventures—like restaurants and cafes, food trucks, craft breweries, distilleries and others—that likely won’t qualify for traditional bank loans.

How can you use Community Advantage loans to start and grow your F&B venture and what does it take to get one? Let’s begin with a breakdown of what these loans are and who is eligible for them.

What Are SBA Community Advantage Loans?

The SBA’s Community Advantage loan program is a partnership between the SBA and non-profit, mission-driven lenders, such as community development financial institutions (CDFIs) and many credit unions. It was created to meet the financial needs of underserved small business markets. 

With the Community Advantage loan program, business owners can typically borrow between $25,000 and $250,000, with variable interest rates of prime + 4% to 6% and no prepayment penalty. Competitive rates and longer repayment terms (up to 10 years for working capital, rather than the usual 3-5 years) mean that monthly payments on Community Advantage loans are typically lower than other loans. This leaves business owners with more money on-hand each month to invest in growth. (It’s important to note that specific terms and conditions for Community Advantage loans are case-specific and depend on individual cases and lenders.)

In addition, the SBA and its partners offer mentoring, workshops and more. 

Who is Eligible?

There are some eligibility requirements across the board:

  • Businesses must be for-profit and based in the United States
  • Business owners must be U.S. citizens or green-card holders and, if applicable, must be in good standing on previous government loans, such as student loans, federally-backed mortgages and other SBA loans
  • There are also size limits(generally, under 500 employees and $15 million in annual revenue) and some restrictions based on the type of business or industry, which potential lenders can review with you. 

How Can Funds be Used?

The allowable uses are excellent for opening, running and growing successful F&B businesses, including:

Working Capital: Especially for startups and cyclical F&B businesses, the amount of money left after short-term expenses are paid gets tight quickly. Community Advantage loans can be used to supplement working capital for things like salaries and benefits, rent and utilities, marketing and supplies.

Equipment Purchases: In the F&B industries, startup costs are significant because commercial-grade equipment, as well as things like trucks for distribution, are needed. Community Advantage loans can be used to get the right equipment early on, helping F&B entrepreneurs establish high levels of product quality, industry compliance and customer service.

Acquisition or Improvement of Owner-Occupied Commercial Real Estate: Although many F&B industry businesses launch as home-based businesses or out of shared kitchen spaces, they tend to outgrow these quickly. If you find the perfect space for your venture, a Community Advantage loan can help you acquire and renovate it, too.

Refinancing of Existing Business Debt:. If your business qualifies for a Community Advantage loan, the proceeds can be used to pay off existing, higher-rate debt so that you have more money available to reinvest in the business each month.

Increase Your Odds of Approval

When determining borrower creditworthiness, lenders set their own criteria, but several tend to be important across the board:

Business-plan financial projections. Review your financial projections to ensure that they’re realistic for your business plan and your industry. Demonstrate to your lenders that you’ve completed research to determine projected revenue and expenses and have accounted for all related costs to meet your goals. Lenders won’t expect your business to be profitable right away, so be sure to factor in a ramp-up period, as well as cyclical ups-and-downs.

Management experience. Lenders will consider your management and industry experience as factors in loan approvals, too. Be sure that your business plan details your experience (and, if you have partners, their experiences as well), and how that relates to your venture. If you fall short in key areas, explain your plans for overcoming this. In areas where you lack specific important experience, lenders will want to see that you have “key employees” that you’ll hire (or work that you’ll outsource) and that you’ve included those potential costs in your financial projections.

Outside income. Living expenses and financial obligations don’t stop when you start a business, so discuss your plans for staying afloat. Do you have outside income that will continue as you launch your business? Importantly, have an estimate of when you’ll realistically start taking a salary from the business. 

Additional Requirements and Considerations

Owner Equity Contributions and Post-Closing Liquidity: Lenders set the specific criteria but, on average, they’ll require a 10-30 percent equity contribution. In this case, though, equity represents the money you’ve already invested into your business rather than a down payment on the loan itself. Be prepared to provide documentation to substantiate the source of your equity contribution, including:

  • Free Cash: This is how much you’ve contributed from savings and liquidation of investments.
  • Standby Debt: These are loans that won’t be paid back until after your SBA-backed loan is paid in full. For example, when a family member loans money with no repayment required until after the Community Advantage loan is paid off, that’s considered standby debt. Both you (as the borrower) and your family member (as the lender) will be required to sign a Standby Agreement.
  • Gifted Funds: When a friend or family member gives you money for your business with absolutely no strings attached, these are considered gifted funds. Be prepared to document the gift with letters and bank statements from the gift provider.

Tell your lender which capital is available now and what’s available to cover any potential cost overruns, such as unanticipated equipment needs, and how a Community Advantage loan factors into your plan.

Collateral: From a lender’s perspective, if you have something to lose, you’re more likely to plan effectively and manage your finances well. Community Advantage loans require that any and all available collateral be pledged (up to the loan amount)—and this point isn’t negotiable. 

While lenders can’t decline a Community Advantage loan due to the lack of collateral, if it’s available, it must be pledged. Acceptable collateral includes personal holdings like homes and cars, as well as items acquired for the business, such as real estate and equipment. A lender will need to know whether those items are liquid (cash or items easily converted to cash) or illiquid (something that can’t easily be converted or that will likely lose substantial value if sold quickly).

In addition, lenders may set additional criteria, such as:

  • Requiring that potential borrowers demonstrate a good payment history for business financial obligations, like other debts and taxes
  • Owners must have three years of business tax returns (or personal tax returns for startups) available
  • Information on existing business debts, if any, must be disclosed
  • Community Advantage loans are great options for entrepreneurs who are serious about success
  • For people who put the time and effort into researching and planning their startups and demonstrate commitment and experience, Community Advantage loans are a great option.