Loans 101: All About Loan Applications

Restaurant loans — and restaurant financing in general — often weigh heavily upon the minds of restaurant operators. According to the National Restaurant Association’s State of the Restaurant Industry report, over 25% of restaurant operators say obtaining credit or financing is a significant challenge for their restaurant.

Whether you’re looking into short-term working capital loans for small projects and cash flow needs or long-term loans for costly growth projects, you’ll have to go through loan applications before you can evaluate your options. 

That’s where this series of articles comes in. Read on to learn about loan applications, common terminology you’ll come across, and information to prepare when applying.

The information discussed in this article is provided for informational purposes only and should not be relied upon as financial or legal advice. For financial or legal advice, you should consult a professional financial advisor or your attorney.

Toast Capital Loans are issued by WebBank. Loans are subject to credit approval and may not be available to borrowers in certain jurisdictions. WebBank reserves the right to change or discontinue this program without notice.

What is pre-qualification vs. pre-approval vs. approval for a loan?

Between your business and personal lives, you’re bound to have come across various types of terminology when it comes to loans, mortgages, credit cards, and more. While things like pre-qualification and pre-approval may sound like synonyms for approval, they’re actually very different. Let’s demystify the most common terms.

Pre-qualified

Pre-qualification is an invitation to apply for a loan. Pre-qualification happens when a lending solution provider performs a high-level evaluation of your business against its lending criteria using information available, such as how long you’ve been in business, your sales history and projections, and risk assessments.

Traditional lending products, such as SBA Loans and Bank Loans, often require borrowers to submit some high-level business and financial information for pre-qualification evaluations. If your business gets pre-qualified, these lenders may generate a pre-qualified loan offer to allow you to apply for a loan. However, it does not mean your application will be approved and doesn’t guarantee the terms of your pre-approved offer. 

Pre-approved

Things can get tricky since “pre-approval” is still different from approval. A pre-approved offer guarantees the terms of your loan offer if you apply before your offer expires but still requires an application, review, and approval. Consumers may be familiar with pre-approved offers from credit card issuers or mortgage lenders.

Generally speaking, a lending solution provider’s pre-approval assessment has more rigor built into its criteria than a pre-qualification assessment. However, pre-approval still doesn’t guarantee you will be approved after applying. For example, a lender may require a hard credit check that could result in a rejection. Similarly, significant factors of your business may have changed since the pre-approved offer was generated, such as a prolonged business closure or bankruptcy, which may result in a rejection.

Conditionally approved

Depending on the terms, conditional approval and pre-approval can be pretty similar. Conditional approval means that you are approved, but it is still conditional (contingent) upon meeting certain criteria set by the lending solution provider. For example, you may need to pass a fraud check or otherwise confirm your eligibility status when signing your final loan agreement to be fully approved. 

Approved

Approval is the clearest of these terms and is a “final state” of the statuses above. Once your application is approved, you’re generally good to go and should receive your funding as laid out in your loan agreement.

Approval can expire, so staying on top of your application status is important to get your funding on time. There are rare circumstances where a lender may rescind your approval as well.

What kind of information do I need to apply?

While applications and processes vary from lender to lender, there are generally very common types of information you’ll have to gather when applying. Sometimes, lending solution providers already have the bulk of this information ready.

Business Information

• Basics: legal entity name, address, federal tax identification number, years in business
• Ownership: beneficial owners and control persons, and ownership percentages
  • What is a beneficial owner? A beneficial owner is an individual who, directly or indirectly, owns 25% or more of the business.
  • What is a control person? A control person is someone who controls, manages, or directs your restaurant, such as an executive officer, senior manager, or someone who performs similar functions.
• Type of business and industry: lenders may shy away from higher-risk businesses, such as restaurants
• Business plan
• Lease information

Financial information

• Business revenue and net income
• Business debt and types of outstanding debt
• Financial projections

Other information

• Credit score
• Bankruptcy filings
• Judgments, lawsuits, and liens

How do loan underwriting and loan decisioning work?

The information you submit in your application goes through a decisioning process that’s automated, manual, or sometimes both.

What are automated loan underwriting and decisioning?

Algorithmic calculations are performed based on the data you provide, which assesses your creditworthiness, business risk, and whether there are any “red flags” such as bankruptcies or disruptions in your business. An approval decision will be generated if your application passes the lender’s thresholds. Lenders use automated loan underwriting because it’s very fast and generally is great at handling simple loan types or applicants with complete, clear-cut applications.

What are manual loan underwriting and decisioning?

A person or people manually review information from your application to make a decision. As you can imagine, this process takes longer because there isn’t a computer blazing through your application. Manual underwriting can be performed for more complex loan applications, applicants with unique circumstances, or when an automated underwriting process results in an unclear result.

What are some factors lenders may look for in your application?

• History of business closure or other business disruptions could be discovered through your revenue and net income data. This increases the lender’s risk because you could fall behind on loan payments while closed, or your business could close for longer than expected (or even permanently).
• Changes in ownership or recent new ownership — which sometimes coincides with a change in restaurant concept — can materially change the operations and result in a different financial profile than the existing data you provided. Operational and restaurant concept changes inherently increase the risk if those strategies fail.
• Short-term or expiring leases that end before your desired loan term increase the risk of business disruption. While you could be in good standing with your landlord or have an unspoken agreement to extend your lease, it’s not something a lender can quantify when evaluating your application.
• If you have outstanding loans with the lender for your other businesses, defaults at those locations may influence your approval. Even though the application could be for a different location, defaults at other locations may expose the lender to a higher aggregate risk level.

What are some typical application fees and costs?

Below, you’ll find some typical costs you could come across when applying. 

• Application fee: a one-time fee per application that covers the cost of evaluating your application. Application fees are typically a fixed fee amount and may be a few hundred dollars. 
• Business valuation costs: when taking out a loan to purchase a business, you’ll often need to have that business appraised by a third-party valuation service provider first. 
• Collateral appraisal costs: if you’re putting up collateral for your loan, you likely need appraisal services to get a fair value of that collateral.
• Credit report or credit check fee: sometimes, lenders that require a credit check will pass the cost of pulling your credit onto you.

There are no application fees or upfront costs for Toast Capital Loans.

Wrap-up

Congratulations on completing part one of our series on loans! Now that you’ve expanded (or refreshed) your application knowledge, it’s time to take the next step by continuing onto part two, which covers loan terms and costs.