Beyond PPP – Financing Options for the Restaurant Industry

Business Insights

Beyond PPP – Financing Options for the Restaurant Industry

Jul 27, 2020 | Business Insights

The Small Business Administration administered Paycheck Protection Program (“PPP”), designed to incentivize small businesses to keep their workers on payroll, will stop receiving new applications on August 8, 2020. Franchisees and independent restaurant operators would be well advised to now consider financing alternatives in light of the impending PPP application deadline.

Most readily available options for smaller franchisees and independent restaurant operators include financing options offered by non-bank lenders. Real estate owning franchisees and independent restaurant operators, may consider a sale-leaseback financing arrangement as another alternative. Also, multi-unit franchisees with high capital costs but generating substantial free cash flows pre-COVID and with strong balance sheets may consider approaching their existing or new lenders for additional financing under the Federal Reserve’s “main street lending” program.

Non-Bank Financing

Franchisees and independent restaurant owners encountering liquidity issues post PPP program may look for financing with non-bank lenders specializing in the restaurant industry.[1] With traditional banks’ lending standards tightening during the COVID pandemic, and smaller franchisees and independent restaurant owners struggling to meet the banks underwriting criteria, smaller restaurant operators may find non-bank lenders more appealing.

Smaller restaurant owners with lower credit scores and low annual revenue may find it easier to go through the non-bank lenders application process. Typically, non-bank lenders loan applications require little documentation and are approved faster. Additionally, traditional banks do not deal with low cash figures, while alternative lenders do. Generally, non-bank loans interest rates are higher as compared to banks, and terms are shorter.

Some non-bank lenders may be more flexible with respect to the PPP resolution, allowing stacking, while other non-bank lenders include PPP loans in debt servicing analysis until the approval of PPP loan forgiveness.


Franchisees and independent restaurant owners owning real estate may monetize their real estate assets by engaging in a sale-leaseback (“SLB”) transaction. The SLB market is positioned for a significant pick up after the COVID pandemic induced pause. The SLB was also impacted by the extension through July 15, 2020 for the property identification for Section 1031 exchange buyers.

In an SLB transaction, franchisee sellers will want to structure lease terms and maximize the value of the property by: pushing back the term to a 15 or 20 year lease, matching the SLB term to the franchise agreement, entering into absolute triple net leases, and negotiating rent increases and options.

Likely Sellers

Quick service restaurants (“QSR”s), especially national and corporate concepts, are more likely to successfully monetize their real estate holding than emerging concepts. Casual diners SLB market is still very slow. Less risky sellers i.e., sellers with more units and stronger sales supporting the lease, seem more successful in negotiating lower capitalization rates. Smaller unit operators may have to provide personal guarantees to obtain lower capitalization rates.

Primary Buyers

Most active buyers in the current market are institutional buyers, REITs, and Section 1031 exchange buyers. REITs and institutional buyers are successfully negotiating SLBs with higher capitalization rates.

Section 1031 exchange buyers typically need financing, subject to bank underwriting standards, including Loan-to-Value (LTV) and debt coverage ratios.

Federal Reserve Main Street Financing

Multi-unit franchisees generating strong cash flows pre-COVID with high capital costs may benefit from the Federal Reserve backed Main Street Lending Program. Main Street Lending Program New Loan and Primary Loan facilities are now fully operational.

Principal benefits of the New Loan and Primary Loan facilities are the deferral of P&I for the first 12 months, with principal repayments deferred for another 12 months, and then repaid at the following schedule: 15% at the end of the third year, 15% at the end of the fourth year, and 70% at maturity (the end of the fifth year). Minimum loan size is set at $250,000, with the maximum set at the lesser of (i) four times 2019 EBITDA, or (ii) $35 million for New Loan Facilities. Prime Loan facility allows for more leverage, with the maximum loan amount set at the lesser of (i) six times 2019 EBITDA, or (ii) $50 million. Interest rates are set at LIBOR + 300 basis point for both facilities, plus an origination fee (if any). Unlike PPP facilities, Main Street Loans are not forgivable.

Under both facilities, borrowers can repay the existing debt and take on additional debt for equipment financing costs (provided the equipment financing is secured by newly acquired inventory or equipment). Borrowers will also be allowed to repay the existing lines of credit and refinance the existing debt with maturities within 90 days of the refinancing.

Both New Loan and Primary Loan facilities will be underwritten by a regulated bank, thrift, or a credit union, (“Eligible Lender”) which will hold on to the 5% of the loan with Federal Reserve SPV purchasing the 95% of the loan. Accordingly, Eligible Lender’s underwriting standards will largely determine which borrowers are likely to obtain financing.

Borrowers obtaining financing through New Loan and Primary Loan facilities will have very few limitations on the uses of proceeds. For example, borrowers cannot pay salaries more than $425,000, cannot finance distributions, distribute equity, accelerate existing debt payments, or refinance existing debt unless debt is owed to a different, unaffiliated lender in case of a Primary Loan facility. [2]

Likely Borrower

Multi-unit franchisees with acceptable debt coverage ratios and strong balance sheets pre-COVID, as well as real estate backed pre-existing debt, are most likely borrowers fitting Eligible Lenders underwriting criteria.

Federally mandated covenants, especially the pari passu priority and seniority feature, may be problematic for existing lenders.

Main street loans are stackable with PPP loans. However, for purposes of overall indebtedness maximum loan size, a PPP loan that has not yet been forgiven is counted as outstanding debt.

[1] According to the Federal Reserve 2020 Small Business Credit Survey, 33% of small businesses used non-bank lenders as funding sources in the last five years.

[2] If an employee salary was higher than $425,000 in 2019, for 12 consecutive months the salary must not exceed the 2019 compensation. For an employee salary exceeding $3 million in 2019, amounts in excess of $3 million must be reduced by 50% for 12 consecutive months.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.


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