Chapter 5 — Key Takeaways
The core claims
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Restaurants are hard to finance because they are hard to collateralize. Construction becomes part of somebody else's building, equipment auctions for a fraction, smallwares are worth nothing, and soft costs are simply spent. Every funding structure in this chapter is a different answer to that one problem.
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The SBA does not lend you money. Under 7(a), a participating lender underwrites, funds, and services the loan; the SBA guarantees a portion of the lender's exposure. Different lenders give different answers on the same file, and every parameter — rate, spread, fee, injection requirement, collateral policy — changes and must come from a lender in writing.
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Ask four questions of every dollar of capital. What does it cost? When must it be repaid? What does it claim if this fails? What does it require of me while things go well? Most first-time owners can answer the first and none of the others. The third is the one that changes your life.
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Outside money funds hard assets; your money funds everything else. In Bellwether's plan, all \$45,000 of smallwares, all \$35,000 of pre-opening, and the entire \$45,000 reserve come from the owner injection — because no lessor repossesses a training program. An injection set at the lender's minimum gets consumed by hard assets, which is a precise description of undercapitalization.
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Term drives cash; rate drives cost. The equipment lease carries a lower implicit rate than the SBA note and costs half again as much per dollar per year, because it amortizes in five years rather than ten. Chasing rate without looking at the payment optimizes the wrong variable.
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Principal never appears on the P&L. In year one, \$34,230 of Bellwether's note payment is interest and \$20,014 is principal — real cash out the door that never reduces reported profit. Cash is not profit, and debt is where the two diverge most visibly.
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The personal guarantee is the most consequential term in the package, and nobody negotiates it. Typically unlimited, unconditional, joint and several, and it survives the closing of the business. Bellwether's partners guarantee the note and the ten-year lease — on the order of \$950,000 before escalation — against a \$150,000 investment.
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The SBA guaranty protects the lender. Your personal guarantee protects the lender. Same direction. Nothing in the program protects the borrower.
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Landlord money and "free" vendor equipment are loans that do not quote a rate. A \$75,000 TI allowance is recovered inside ten years of rent — somewhere between \$2.68 and \$3.90 a square foot a year — and is usually reimbursed after completion, meaning you must spend it before you have it.
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Family money is priced by the relationship and governed by securities law. There is no defensible valuation for a restaurant that does not exist, so any equity price is a negotiation between people who love each other. Decide debt or equity, write it down, use an attorney, and have the four conversations before the money moves.
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Three points of prime-cost drift is \$46,500 a year — two-thirds of Bellwether's entire annual debt service. Once there is debt in the stack, cost control is not hygiene. It is the payment.
The formulas
$$\text{DSCR} = \frac{\text{cash flow available for debt service}}{\text{total annual debt service}}$$
$$\text{Owner injection \%} = \frac{\text{owner cash}}{\text{total project cost}}$$
$$\text{Cents per dollar borrowed} = \frac{\text{annual debt service}}{\text{amount borrowed}}$$
$$\text{Monthly lease payment} = \text{equipment cost} \times \text{lease rate factor}$$
Bellwether's numbers, on plan
| Project cost | \$620,000 |
| Owner injection · TI · lease · SBA 7(a) | \$150,000 · \$75,000 · \$60,000 · \$335,000 |
| Injection as % of project | 24.2% |
| SBA note: rate · term · payment | 10.5% · 10 yr · \$4,520/mo (\$54,244/yr; plan carries \$54,300) |
| Total interest over the note's life | \$207,440 |
| Year 1 interest / principal | \$34,230 / \$20,014 |
| Equipment lease | \$15,200/yr over 60 months (\$76,000 total on \$60,000) |
| Total annual debt service | **\$69,500** — 4.5% of plan sales, ~\$5,792/month |
| Operating profit before debt service | \$261,020 |
| Projected DSCR | 3.76 |
| Revenue at which coverage reaches 1.00 | \$986,700 — 63.7% of plan |
| Working-capital reserve | \$45,000 ≈ 1.8 weeks of operating cost |
The benchmarks (orientation, not law — lenders set their own)
| DSCR | Reading |
|---|---|
| below 1.00 | the business does not generate its own payments |
| 1.00–1.15 | covers, with no room |
| 1.15–1.35 | the band commonly described as a working minimum |
| 1.35–2.00 | comfortable; absorbs an ordinary shock |
| above 2.00 | strong — and on a start-up projection, a reason to audit the forecast |
Key terms
capital stack · owner injection · SBA 7(a) · SBA 504 · collateral · personal guarantee · term loan · line of credit · amortization · debt service coverage ratio (DSCR) · tenant-improvement (TI) allowance · equipment lease · friends-and-family round
What you should be able to do Monday morning
Take any restaurant project, build a sources-and-uses statement that foots in both directions, and compute its debt service coverage ratio in under five minutes. Then ask the two questions that reveal whether the person across the table actually understands their own funding: "What does each of these layers claim if this fails?" and "Show me the guarantee, not the loan agreement."