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Restaurant Financing & Loans (Ultimate Guide)


Whether you’re opening a new restaurant, expanding your business, or looking to renovate, you will need money. 

Whether you’re completely green and looking to open your very first restaurant, or you already own a restaurant and are looking to expand your business, this article will have you covered.

In this article, you’re going to:

  • Learn what financing is, how it works, and why you can easily get it
  • Learn about the most popular types of financing
  • Go over the most popular types of restaurant loans
  • See how to get a business loan for a restaurant
  • Troubleshoot some of the most common obstacles restaurant owners face when seeking to obtain a loan

The article was written as a guide to help you better understand restaurant financing options and make educated choices. It will include elements like best practices and a glossary. Feel free to consume it part by part and skip the parts you already feel familiar with.

Please keep in mind that the content presented in this article is intended solely for informational use and does not constitute financial or legal counsel. For guidance on financial or legal matters, it is recommended that you seek the expertise of a certified financial advisor or a legal practitioner.

Funding for Restaurants – the Basics

restaurant loans - restaurant funding basics for restaurant owners

Starting a restaurant requires a chunk of money upfront for costs like renting a space and buying equipment. Restaurant owners often get this money through loans, where the terms and interest rates depend on their business credit score. A better credit score can mean lower interest rates, making the loan cheaper in the long run.

Once the restaurant is up and running, owners need to keep enough cash coming in to cover daily expenses—this is cash flow. They also need some extra money in the bank, known as working capital, to handle any unexpected costs or to seize opportunities to save or make more money in the future. Balancing this cash in and out is key to a restaurant’s success.

Basic glossary:
  • Interest rates: The cost of borrowing money, expressed as a percentage of the loan amount, typically charged annually. 
  • Credit score: The borrower’s creditworthiness. It impacts loan eligibility and interest rates. A high credit score may enable a restaurant to secure a larger loan or a lower interest rate for renovating the dining area.
  • Loan principal: The original sum of money borrowed, which does not include interest or additional fees. 
  • Cash flow: Positive cash flow ensures a restaurant can pay its staff and suppliers on time, even during slower business periods.
  • Working capital: Funds available to a business for immediate use, essential for managing short-term expenses. A restaurant might use working capital to stock up on high-quality ingredients before a busy holiday season.
  • Return on investment (ROI): A measure used to evaluate the efficiency of an investment, calculated by dividing the profit earned by the cost of the investment. A restaurant calculates ROI to determine if the new espresso machine is profitable based on the increase in coffee sales post-purchase.
  • Collateral: Collateral is an asset that a borrower offers to a lender as security for a loan. If the borrower can’t pay the loan back, the lender can take the collateral. For example, a restaurant may use its commercial property as collateral to secure a loan for updating its dining room.

Best Ways of Financing for Restaurants

restaurant loans - restaurant funding basics for restaurant owners

There are endless ways of financing your restaurant. That said, there are some that have been widely used within the restaurant industry with success for decades. Let’s take a look at some of the top ways of financing your restaurant. 

Restaurant Equipment Financing

restaurant loans - restaurant equipment financing for restaurants

Equipment loans provide owners the means to procure the necessary gear to run their operations. These loans cater specifically to the needs of the food service industry.

Tax benefits: Payments made for equipment financing can often be deducted as business expenses, offering potential tax savings.
Collateral risk: The financed equipment may be used as collateral and can be repossessed if payments aren't made.
Flexible payment options: Repayment plans can be adjusted to fit the restaurant's budget and financial situation.
Long-term commitment: Payments continue even if the equipment becomes outdated or less useful.
Easier than traditional loans: It's often more accessible for businesses with limited credit history or collateral than standard business loans.
Credit requirements: Credit history affects loan terms, and less favorable terms might be offered to those with lower credit scores.
Can be financed through grants: Grants have certain requirements, and might require effort to find ones you are eligible for.
Limited usage: Equipment loans are typically used solely for purchasing equipment.
Additional benefits: Equipment financing can also be applied when purchasing an online ordering system for restaurants

Equipment loans are a critical resource in restaurant finance, offering a targeted restaurant financing option that can help both established venues and start-up establishments to thrive.

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Crowdfunding for Restaurants

restaurant loans - crowdfunding for restaurants

Crowdfunding allows small business owners to raise funds without the steep loan costs associated with bank loans or business credit cards. 

This method leverages online platforms to gather contributions from numerous backers, reducing reliance on traditional debt refinancing methods. Unlike other credit options, it’s a direct way to secure capital and build a customer base without the immediate need for repayment.

Access to capital: Access funds needed to start or grow a restaurant without the need for traditional loans or credit lines.
Uncertain funding: There's no guarantee of reaching the funding goal; if you don’t, you don’t receive any funds.
Marketing and exposure: Increase visibility and buzz for the restaurant, acting as a promotional tool.
Time and effort: Running a successful crowdfunding campaign can require significant marketing effort and time investment.
Community engagement: Build a sense of community involvement and loyalty as contributors become invested in the restaurant's success.
Potential overpromise: There's a risk of making too many promises to backers, such as rewards or perks, that can become difficult or expensive to fulfill.
No repayment stress: Unlike loans, funds raised typically do not need to be repaid, easing financial pressure on cash flow.
Regulatory hurdles: There can be legal and financial regulations that govern crowdfunding, which can be complex to navigate.
Validation of concept: Support through crowdfunding can serve as proof of concept, showing that there is demand for the restaurant.
Crowdfunding sites for restaurants:

Asking Friends or Family Members

 restaurant loans - family financing for restaurants

Many business owners turn to family and friends as a bank loan alternative, especially when options like a traditional loan may be out of reach due to bad credit or lack of collateral

Leveraging those close relationships can be more flexible and less formal than securing funds through an alternative lender. Instead of a long-term loan with stringent payment schedules, agreements with family and friends can be tailored to suit both parties, potentially offering more lenient repayment terms.

Flexibility: Financing from family and friends can be more adaptable than loans for restaurants obtained through banks, with the potential for personalized repayment schedules.
Relationship risk: Mixing personal relationships with business can strain ties if the restaurant struggles to repay the loan.
Easier access: For many, getting restaurant startup loans from people they know is easier and quicker, especially for those who may not have the collateral or credit history needed for traditional loans to open a restaurant.
Limited funds: The amount you can raise from family and friends is typically less than what professional lenders offer, which may not cover all needs.
Lower costs: There might be little to no interest rates involved, reducing the overall financial burden that typically comes with commercial lending.

Lack of formality: Informal loans can lead to misunderstandings or disputes over terms, potentially causing confusion or conflict without proper documentation.

Seeking Private Investor’s Aid

restaurant loans - private financing for restaurants

When seeking a loan from a private investor for your restaurant, it’s important to present a clear and detailed business plan highlighting your establishment’s profitability and growth potential. 

Make sure to have accurate and up-to-date financial statements proving your restaurant’s performance, including revenue, which will be critical for restaurant investors assessing the loan risk. 

Be prepared to discuss and negotiate the loan terms, such as the interest rate, repayment schedule, and any collateral required. A well-prepared approach showing a track record of success or a solid plan for a new venture is key to securing a private investor’s loan.

Flexibility in terms: Private investors may offer more flexible terms than traditional banks, which can be particularly helpful for customized repayment plans or unique business models.
Higher costs: Private investors often charge higher interest rates compared to traditional loans, reflecting the increased risk they take on.
Potential for additional support: Besides capital, private investors can bring valuable experience, industry contacts, and mentorship to help guide and grow the business.
Equity or profit sharing: Some private investors may want a stake in the business or a share of the profits in return for their investment, which can be costlier in the long run.
Speed of funding: The process of securing a loan from a private investor can often be quicker than going through a bank, meaning you get access to the funds you need faster.

Less formality: A more informal lending arrangement can lead to ambiguities and potential legal issues if not all terms are clearly outlined and agreed upon in a contract.

Best Restaurant Business Loans

 restaurant business loans - private financing for restaurants

Restaurant business loans are probably the most popular way of financing your operations. Business loans, typically offered by banks or financial institutions, come with formal, legally binding agreements that include specific repayment schedules and interest rates and often require collateral or a strong business credit history. 

Below are the most popular types of business loans you can get as a restaurant owner, along with their pros and cons.

Small Business Administration Loan for Restaurants

restaurant business loans - SBA loans for restaurants

An SBA loan is a type of small business loan for restaurants backed by the U.S. Small Business Administration. 

As a restaurant owner, if you’re looking for an SBA loan, you’re applying for a loan that the government will guarantee to some extent. This makes it less risky for lenders to give you money. 

SBA loans often have lower interest rates and longer repayment terms than other types of loans, making them a good option if you’re looking to start or grow your restaurant.

Lower interest rates: SBA loans often have more favorable interest rates, reducing the cost of borrowing for restaurant owners.
Complex application process: The paperwork and requirements for SBA loans can be daunting and time-consuming.
Extended repayment terms: These loans typically offer longer repayment periods, which translates to lower monthly payments and better cash flow management for the restaurant.
Requirement for collateral: Many SBA loans require collateral, which can be a hurdle for new or smaller restaurants without significant assets.
Flexible use of funds: The money can generally be used for a variety of purposes, from renovation to inventory, offering comprehensive support for a restaurant's needs.

Commercial Real Estate Loan for Restaurants

restaurant business loans - CRE loans for restaurants

Commercial real estate loans are designed specifically for purchasing or renovating property for business use. If you, as a restaurant owner, want to buy a new space or upgrade your current location, a commercial real estate loan is the type of restaurant business loan you’d look into. 

This kind of business loan for restaurant owners is tailored to help with the big costs of real estate, making it possible to finance a restaurant’s physical location. The loan is secured by the real estate itself, meaning the property acts as collateral. This can often allow for more favorable loan terms since the lender has the property as security for the loan.

Ownership opportunity: They provide a path to property ownership, which can contribute to long-term business stability and equity growth.
Upfront capital: They typically require a significant down payment, which can be a hurdle for some restaurant owners.
Long-term investment: Real estate can appreciate in value over time, potentially increasing the restaurant owner’s assets.
Collateral risk: The restaurant property serves as collateral, meaning it can be lost if the loan is not repaid.
Tax benefits: The interest paid on these loans is often tax-deductible, which can save money at tax time.

Merchant Cash Advance for Restaurants

 restaurant business loans - merchant cash advance loans for restaurants

Merchant cash advances are a type of funding where a restaurant owner gets a lump sum of money upfront. In exchange, the business owner agrees to repay the advance with a portion of the restaurant’s future credit card sales. These are often sought by owners who may not have high credit scores or long credit history.

The repayment term for merchant cash advances isn’t fixed like traditional loans; it depends on your restaurant’s sales—when sales are up, you pay back more, and when they’re down, you pay back less. 

This flexibility can be helpful for a restaurant’s cash flow since the repayment adjusts with your income. However, it’s important to consider that the overall cost of this type of financing can be higher than traditional loans.

Flexible repayments: The repayments are a percentage of daily credit card sales, adjusting with the restaurant's revenue, which can be particularly helpful during slower business periods.
Higher costs: This type of financing can be more expensive than traditional loans, with higher fees and interest rates.
Quick access to capital: Merchant cash advances can often be obtained quickly, sometimes within a day or two, providing fast funding when needed.
Impact on cash flow: Although repayments are flexible, they can also take a significant portion of daily income, impacting overall cash flow.
Minimal qualification requirements: They usually have less stringent approval criteria, so restaurants with lower credit scores or limited credit history may still qualify.
Less regulation: Merchant cash advances are not as regulated as other types of business loans, which can mean less protection for the business owner.
No collateral required: Unlike many traditional loans, merchant cash advances don't require collateral, which means a restaurant owner's property is not at risk.

Potential for debt cycle: The ease of access and high cost can lead to a cycle of advance after advance, creating a long-term debt trap for the business.

Business Line of Credit for Restaurants

restaurant business loans - business line of credit for restaurants

A Business Line of Credit is like a safety net for a restaurant owner. It’s a set amount of money that a restaurant can borrow from whenever needed. Think of it like a credit card for your restaurant; you only pay interest on the amount you use, not the entire credit limit.

When cash flow is tight, or an unexpected expense pops up, like a fridge breaking down or a sudden opportunity to buy discounted ingredients in bulk, a restaurant owner can draw from this line of credit to cover the costs. 

Once the money is repaid, the credit is available again for use. It’s a flexible way to have funds on hand without taking out a full loan for more than you may need.

Flexibility: You can withdraw funds up to your credit limit at any time, making it a flexible option for unexpected expenses or cash flow gaps.
Variable interest rates: The interest rates can be variable, which means they can increase over time and make the cost of borrowing unpredictable.
Interest rates: You only pay interest on the amount you borrow, not on the unused line of credit, which can save money compared to a traditional loan.
Potential for mismanagement: Because funds are easily accessible, there's a risk of using the credit for non-essential expenses, leading to unnecessary debt
Reusability: Once you repay what you've borrowed, the funds become available again, giving you a continuous source of financing.
Qualification criteria: They may have stricter qualification requirements, including a good credit score and a solid business track record.
Financial control: It offers better control over your finances, as you can manage how much you borrow based on your current needs.

Maintenance fees: Some lines of credit come with annual fees or require a certain level of usage to avoid additional fees.

Purchase Order Financing for Restaurants

restaurant business loans - purchase order financing of credit for restaurants

Purchase Order Financing is a way for restaurant owners to fill large orders or restock inventory without having to pay upfront. 

Here’s how it works: Let’s say your restaurant just got a huge catering order, but you don’t have enough cash to buy all the necessary ingredients. With Purchase Order Financing, a lender pays your suppliers for you, so you can get the ingredients now and pay the lender back once you’ve fulfilled the order and your customer pays you.

It’s a short-term solution that helps you take on bigger jobs or stock up for a busy season without depleting your cash reserves. Essentially, it turns your incoming orders into ready cash, allowing your restaurant to continue operating and growing without the stress of covering large costs immediately.

Enables growth: Allows your restaurant to accept larger orders or bookings without having the capital upfront, thus facilitating growth.
Cost: It can be more expensive than traditional financing options due to higher fees or interest rates.
Improves cash flow: You don't have to pay out of pocket for inventory or supplies needed for a big order, which helps maintain your cash flow.
Dependency: Relying on this type of financing could lead to operational challenges if used too frequently or for orders that don't lead to immediate payment.
Quick funding: Can be obtained relatively quickly compared to traditional loans, which is crucial when you need to fulfill a large order.
Customer reliance: Your ability to repay the financing is dependent on your customer paying their invoices on time.
No long-term debt: Since it's a short-term financing option, you won't be taking on long-term debt, as the financing is settled once the customer pays.

Working Capital Loan for Restaurants

 restaurant business loans - working capital loan for restaurants

Working capital loans are a type of financing that helps restaurant owners cover everyday operational costs. Think of it as a boost to your restaurant’s cash flow that allows you to pay for rent, utilities, employee wages, and the like. Unlike other types of loans that might be used to buy long-term business assets like property or equipment, working capital loans are meant for short-term expenses.

Here’s the simple breakdown: When you get a working capital loan, you receive a sum of money to help run your restaurant. You then pay this money back over time, typically paying interest on the amount borrowed. This kind of restaurant loan is really helpful when your business needs a financial cushion – maybe during a slow season or when you’re gearing up for a busy period but don’t have enough cash on hand.

Immediate cash flow: These loans provide quick access to cash, which can be crucial for managing day-to-day operations like paying suppliers or employees.
Higher interest rates: Compared to traditional loans, working capital loans might come with higher interest rates, increasing the overall cost of borrowing.
Flexibility: They can be used for a variety of short-term needs, offering flexibility in managing the restaurant's finances.
Short repayment terms: These loans usually need to be repaid within a shorter timeframe, which can be challenging if the restaurant's income doesn’t increase as expected.
Easier approval: Often easier to obtain than other types of loans, especially for businesses that may not have significant assets for collateral.

Can lead to debt cycle: Relying heavily on working capital loans for ongoing expenses can lead to a cycle of debt, especially if the restaurant's revenue isn't steadily increasing.

How to Get a Business Loan for a Restaurant?

In the end, what steps do you need to take to maximize your chances of securing a restaurant loan? Below are a couple of key factors that will greatly enhance your chances of successfully securing a loan.

How to get a restaurant business loan:
  • Have a complete restaurant business plan: This should include details about your restaurant concept, target market, competitive analysis, marketing strategies, menu design, and financial projections. A comprehensive plan demonstrates to lenders that you have a clear vision and strategy for your restaurant.
  • Provide compelling, factual estimates: Use realistic and data-driven financial estimates in your plan. Include projected revenues, expenses, cash flow, and a break-even analysis. Accurate estimates show lenders that you understand the financial aspects of running a restaurant and have thought through the economic feasibility of your venture.
  • Prepare answers to common questions: Anticipate and prepare for potential questions lenders might ask, such as how you’ll handle challenges, what makes your restaurant unique, or how you plan to attract and retain customers. Being well-prepared with thoughtful answers can build confidence in your abilities as a business owner.
  • Practice your pitch: Rehearse how you’ll present your business plan and loan request to lenders. A clear, concise, and confident pitch can make a significant difference. Focus on highlighting the strengths of your restaurant and your preparedness to operate it successfully.
  • A solid credit score can only help: A good personal and business credit score enhances your credibility and can lead to better loan terms. If your credit score is less than ideal, be prepared to explain why and how you’re mitigating this risk.

Securing Loans for New Restaurants: Challenges and Solutions

When securing a loan, you’re likely to have to deal with an obstacle or two. It’s best to troubleshoot before we make mistakes and possibly lose a chance for a loan. 

The Collateral Hurdle for Restaurant Owners

For a restaurant owner looking to secure a loan to open a restaurant, collateral is a significant barrier. Banks are inclined to secure loans against substantial assets like cash, real estate, or investments. This often means a restaurant startup loan requires the owner to offer personal assets as a personal guarantee. If a bank demands $25,000 as security for a $50,000 loan, many owners are left in a quandary, feeling that if they had such funds, they might not need a loan in the first place.

No Collateral? No Problem

What happens when a restaurant owner doesn’t have enough collateral? Some lenders specializing in funding for restaurants offer solutions. They might provide a personal guarantee for half the collateral on the owner’s behalf, facilitating an unsecured loan for the restaurant while the lender assures the bank with their backing.

Selecting the Appropriate Lender for Restaurant Financing

When it comes to loans for restaurants, choosing the right financial partner is crucial. Before seeking a restaurant startup loan, an owner must clearly outline the intended use of funds. For example, securing a $600,000 loan might involve investing in new equipment and stocking up inventory. Equipment leasing companies could offer competitive rates since the equipment can serve as collateral.

The Importance of the Right Fit

It’s essential for restaurant finance that the chosen lender is invested in understanding the restaurant’s vision and needs. Rather than impulsively settling for the seemingly convenient online lender with attractively low advertised rates, it’s vital to scrutinize the details. Often, these low rates are monthly and can quickly accumulate. Plus, the repayment terms could pressure the restaurant’s finances if they’re too brief.

Proceeding with the Loan Application

After vetting potential lenders and selecting one that aligns with the restaurant’s needs—be it a conventional bank or a novel financial entity—the restaurant owner can confidently move forward with the application process, paving the way for their restaurant’s launch or expansion.

Key Takeaways

  • Restaurant Equipment Financing: Provides funds specifically for purchasing essential restaurant equipment, with the equipment often serving as collateral for the loan. Applicable when purchasing restaurant software such as an online ordering system for restaurants.
  • Crowdfunding: Involves raising small amounts of money from a large number of people, typically via the Internet, often in exchange for rewards or equity.
  • Loans from Family and Friends: Informal loans that can offer flexible repayment terms but carry the risk of strained personal relationships and unclear terms.
  • Private Investor Loans: Involve obtaining funds from individual investors, often accompanied by mentorship and networking opportunities, but can include higher costs or equity sharing.
  • SBA Loans: Government-backed loans that offer favorable terms for small restaurants, including lower interest rates and longer repayment periods.
  • Commercial Real Estate Loans: Aimed at funding the purchase or renovation of restaurant property, secured by the real estate itself.
  • Merchant Cash Advances: Offers quick, flexible financing based on future credit card sales, suitable for restaurants needing immediate capital.
  • Business Line of Credit: Acts as a revolving fund that restaurants can draw from as needed, paying interest only on the amount used.
  • Purchase Order Financing: Provides short-term financing to pay suppliers upfront for large orders, with repayment made after the customers pay.
  • Working Capital Loans: Offers short-term funding to cover daily operational expenses, helping restaurants manage cash flow effectively.
Emil Gawkowski

Emil Gawkowski

Creative digital writer and marketer. A caffeine-fueled madman who loves to make things better.

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