What types of loans can I get to fund my restaurant?

Like a classic recipe, the ingredients for a successful restaurant are many and precise. Fresh food, good location, a unified concept. While none can replace the others, you can bet that steady access to money is as vital to the mix as any of them.

To even stay afloat, restaurants have to spend to keep their kitchens humming and their staff paid. At the same time, marketing efforts are always needed to bring diners in the door. But if you’re an operator with an eye on growth, that’s not the end of the cash requirement. Maybe you’ve got more waiting in your idea for a revamped front-of-house or back-of-house, or you’ve been watching a new spot come up down the road and wondering if you could open a second location.

Financial needs can pop up anywhere in the life cycle of a restaurant. If you want to improve what you have or make the leap to something more ambitious, you’re going to need funding to back up your plans. Below, you’ll discover which type of loan is right for you as well as how to apply for and secure that financing.

Restaurant loans are basically a type of small business loan designed for the unique needs of restaurant owners. Think of them as restaurant financing solutions that you can tap for goals as short-term as covering payroll or as long-term as a large-scale renovation.

While some loans are available for startups, others require at least a year of business, and often two.

Just like any other loan, the requirements and terms for restaurant loans vary by lender and loan type. However, because they tend to see restaurants as risky investments, lenders might be less likely to approve them. Fortunately, some options accept weaker credit or lower revenue, so it’s worth weighing all your options.

Ways Restaurateurs Use Business Loans

While your use of a restaurant loan can fit any number of objectives, there are several common situations restaurant operators might find themselves in that call for financing. If you’re hoping to build your brand or grow your business, there’s probably a loan for it. Here are some of the ways restaurateurs use business loans to keep money flowing into their business.

Now that you’ve built up a strong customer base at your restaurant, you may be interested in adding to what you already have. Some operators dream of expanding their brand by opening new locations. However, large amounts of money are required for activities as pricey as leasing a second spot and doing renovations to fit your restaurant’s style. Buying new equipment and hiring new staff will also likely eat into your savings. A loan can help you do everything from building out a bigger kitchen to purchasing real estate to starting a catering service.

Even if you don’t plan to build your brand’s real estate portfolio, you may be looking to invest in the space you already have. A remodel can do everything from increase customer experience to promote a new menu. You might decide to build a patio, while brightening up the interior could mean adding a TV or purchasing new tables. Even switching up your paint job or adding new signage are marketing techniques that require funding. A loan can provide money for remodels big and small.

Running a busy restaurant requires top performance from your equipment. That’s why it’s crucial to make sure it stays in good shape by paying for maintenance or upgrades or replacing items that have seen their better days. And with the high cost of equipment in the restaurant industry, some businesses have to spend a lot to keep their operation up to standard. Cooking a popular dish with a faulty fryer might lead to disappointed customers, or forcing your chefs to make do with a broken oven could prevent them from creating your most-popular dishes. For repairs, upkeep and upgrades, restaurant equipment financing can provide the funds to keep your kitchen in tip-top shape.

Restaurants can be the opposite of a one-man show. Many need multiple hands at work to run smoothly, with staff from managers to waiters to prep cooks all in on the effort. Hiring and training are often necessary when business picks up, but paying for these activities is pricey. With adequate restaurant financing, you can keep bringing in qualified staff for open positions and ensure that they receive the training they need to help your business succeed.

Restaurants often experience busy and slow seasons throughout the year, when trends in customer traffic can hit your business’s revenue. To ride out rough financial waters, restaurateurs can opt for a working capital loan covering payroll, rent, insurance and utilities. If you’ve seen your sales spike at certain times, you might be able to ride that trend into higher profits through inventory purchases that let you produce even more of the food customers crave. Restaurants might even want to hire additional staff to accommodate the increased business.

Types of Loans

Restaurant loans can appear in many different shapes and sizes. Each has its own standards for securing funding, as well as unique benefits and drawbacks.

A term loan works just like any other loan you might take out. You borrow a sum of money that you pay off in installments, plus interest, for a predetermined repayment term. Term loans can take on a wide range of purposes. They can go toward anything from marketing to working capital to renovations.

They can be short-term — as little as three months — or can stretch out to seven years. Collateral may be required or may not be needed; rates can be fixed or can vary; and the amount you can borrow can run from $25,000 to $500,000, though occasionally lenders will go to $1 million.

Short-term loans are like a periscope view — they will bridge an immediate need. Something like paying insurance premiums or settling a vendor invoice. Their payback ideally runs under a year. If, on the other hand, you’re looking to purchase an asset like machinery that you’ll use to grow the business over time, you’ll want to focus on loans with longer repayment terms. Long-term loans assume major expenses, and they can also be a lifeline to debt refinancing.

If you’re looking to put your financing toward a specific piece of equipment or machinery, an equipment loan can do just that. With this type of loan, you can purchase new equipment and use the equipment itself as collateral for the loan. It can cover up to 100% of the equipment’s cost. As soon as you’ve repaid it with interest, that equipment belongs to you outright.

Equipment loans can extend 10 years and longer. You can maintain your cash position even on a major investment. It’s tempting to stretch the loan on a costly piece of equipment over the longest possible term, to keep the payments low. The downside is that the longer you draw it out, the more you pay in total interest.

Running a restaurant can feel like a treadmill — you have to continuously invest in inventory, to the tune of thousands of dollars in food and beverage costs. Inventory financing can help with purchasing any ingredient or supply necessary for keeping your restaurant stocked. Inventory financing is a short- or medium-term loan.

When you set up an inventory financing loan, the stock itself acts as collateral. You don’t need other assets. But lenders are more likely to look at you with a hard eye. They need to know they can resell the inventory to cover their money, if you default. And they may charge you a higher rate of interest.

Working capital loans can be really useful to a restaurant in need of some flexibility. A working capital loan is meant for any short-term purpose in the business. Examples of these purposes include payroll, inventory or to bridge a decline in business. Some lenders allow up to $500,000. But it could cost you plenty in interest.

A line of credit can be a powerful tool for a restaurant manager. Instead of borrowing a lump sum of money, a line of credit lets you borrow money as you need it. You’re given access to a pool of cash, and you can withdraw up to the limit whenever you want. If you withdraw and repay the money, it’s available again.

It’s one of the most flexible options when you need cash in a hurry. You’re charged interest only on the balance you actually use. It’s like a business credit card, but may come with a lower interest rate and a higher borrowing limit.

Lines of credit offer lots of advantages to your business, but watch out for fees. You might be charged a fee to draw down the credit line or to keep it open. And the line may expire after a while, so you’d have to reapply.

The Small Business Administration (SBA) backs several loan types that can support restaurants at any stage. Microloans are as big as $50,000 and are ideal for a startup or a small need. The 7(a) loan program can go up to $5 million and supports a wide range of business purposes. The CDC/SBA 504 can support up to $20 million toward the purchase, construction or renovation of land or buildings.

The money is out there, but the SBA loan program isn’t easy. SBA loans can take months to get. To get one, you must meet the SBA’s size standards (based on employees, revenue, net worth), have good credit, and have collateral. You must sign a personal guarantee to repay. You must have exhausted other funding sources. And the business must be a licensed U.S. business. It’s not impossible to get an SBA loan, but you have to jump through a lot of hoops.

If you receive a large proportion of your income through a point of sale (POS) system, you might want to consider a merchant cash advance. With this type of financing, the lender gives you an advance on revenue you expect to collect in the future.

A lender will look at the average of your card sales, and generally lend you 50% to 250% of that amount. You you repay it the same way customers pay you — automatically, by the day’s card receipts. And it’s ready to go in one or two business days.

Merchant cash advances are an easy, fast source of money, but they can be expensive. While a small business lender typically charges an annual percentage rate (APR), an MCA lender charges a factor rate. You won’t recognize it as the interest you pay on your credit card, or a mortgage. And a factor rate converted to APR can mean a sky-high cost.

To go into your loan process with confidence, keep these eligibility requirements and loan terms in mind as you make your application.

Common Eligibility Requirements

Just as there are several types of restaurant loans, there are multiple lenses through which a lender might look to determine if you are eligible for that loan. Here are some common eligibility requirements to keep in mind when assessing your candidacy for a loan.

• Age of the business: Lenders will look at how long your business has been in operation.
• Revenue: Your restaurant will have to show enough revenue to convince lenders that you will be able to pay off the loan.
• Credit score: Both your personal credit score and your restaurant’s credit score could be considered when the lender is deciding whether to approve you.
• Collateral: Collateral can support your application by guaranteeing lenders that they can receive payment if you are unable to make your payments.

Before applying for a loan or cash advance, it’s important to gather all your paperwork. Ask yourself these questions: Do I know my personal credit score? Do I know my business’s credit score? Lenders look for consistent revenue and a profit and loss statement, plus a cash flow statement. If you’re still establishing the business, make sure you have a solid plan for profitability.

Don’t rely on the first loan you find. Compare offers. Here’s what to consider as you weigh the pros and cons of each lender.

• Maximum loan amount: How much can you borrow, and will that cover all the expenses you hope to address?
• Term lengths: How long will it take to repay your loan, and can you handle those payments?
• Interest rate: In addition to the loan principal, you’ll have to repay interest payments, which can add up fast. Some lenders tack on additional fees to your loan cost.
• Collateral required: Does the lender require collateral, and what are those requirements?
• Personal guarantee: Would you be required to provide a personal guarantee of repayment? Could you be comfortable doing so?

When you’re looking to borrow money, it’s hard to know the true costs of a loan. Comparing a term loan with a merchant cash advance is like comparing apples with potatoes. Comparing apples to apples isn’t easy, but you can get close by looking at the annual percentage rate (APR), which covers all the fees and charges the lender will bill.

There’s another consideration when you’re choosing a lender, and that’s how quickly the money arrives in your account. If you need a loan urgently, factor that in when you’re comparing loan offers. Some lenders take two or three weeks to review and process a loan application.