Regardless of whether you’re opening a new restaurant, expanding your existing business, or simply renovating an existing restaurant, you need financing and capital to make it happen. In this article, we’ll walk you through what restaurant financing is, what are your options, and how to compare/evaluate different options.
Let’s start with the basics.
What is restaurant financing
This refers to the practice of borrowing money, and getting funds from an outside partner, in order to help you start, expand, and grow, a restaurant business. This working capital gives you a way to make your goals a reality.
Why do business owners need to apply for restaurant financing
If you want to be competitive and succeed, you need money to grow. Here are some popular reasons people borrow working capital
- Starting a business
- Renovating an existing location
- Investing in a new location
- Buying new equipment
- Changing up your floor plan to get more tables etc
- Investing in new equipment
- Funding operation expenses
- Having savings
If you’re looking to get working capital for your restaurant then it’s a good idea to have a business plan before you apply for working capital. It’s important you dig into your P&L and look into what you’re realistically able to afford and what you’ll be able to use the capital for.
Now that we’ve got you thinking about how you’re going to use the money to grow your business, let’s go into the most popular financing options available.
10 Popular Restaurant Financing Options
What are the most popular restaurant financing options? It seems like there’s a lot of different financing options available. Some are great for short-term projects, while others are better for long-term goals. It’s worth nothing that when a business owner thinks of business financing they think they can only get loans, or funding from a brick and mortar bank. There are MANY other options, like Merchant cash advances, lines of credit, PO financing, invoice factoring, and more. These are all alternative lending options. They offer great flexibility, and make it easier when it comes to eligibility, qualification, etc.
Here are the most popular lending options for restaurant financing:
- Term loans from banks
- Alternative loans
- SBA loan
- Merchant cash advance
- Line of credit
- Funds from family
- Equipment financing
Term Loans from Banks
These come from banks and vary. Here are some of the pros and cons, and general info about term loans.
They have a length application process. They usually take 30-60 days, and are a GREAT option if you are flexible on your timeline, and have time. Often, they require you to put up collateral to secure it. This could be personal or business collateral. Most business owners use personal assets to secure the loan. Usually, term loans have compounded interest – meaning if you don’t pay it back quickly, the amount you have to repay will increase exponentially. In addition, term loans are typically billed monthly. This means you have to make sure your finances are always on point.
One of the great things about term loans is that they offer flexible terms (3 to 10 years). It allows you to customize the payback period to an amount which is easy for you.
Alternative Loans For Restaurant Financing
Sometimes, you won’t qualify for a traditional loan and you have to go to a nonbank lender. This is a great option if you need funds. Some lenders offer alternative loans to give you capital, especially when you don’t fit the traditional lending “guidelines.” The guidelines a traditional lender have are different and more flexible. They usually offer flexible repayment options. Traditional lenders will insist you’ve been in business for more than 2 years, whereas a nonbank lender might be ok with just 3-4 months of business operations. Alternative lenders will offer methods of repayment that adjust based on your daily sales.
Rather than requiring you to make one fixed monthly payment, alternative loans may offer daily payments that are a fixed % of your credit card sales. As a result, the amount you’re repaying ebb and flows with your business’s sales. It makes it easier for seasonal restaurants to keep up with repaying the loan.
SBA loans from the US Small Business Administration. The SBA is not the one lending the funds. It has a network of partner lenders who provide small businesses with the money they need. You’ll be working with one of their partners. SBA loans fall into two buckets: Working capital SBA loans and Fixed assets.
In order to qualify:
- You have to be a for-profit business which operates in the USA
- Have an owner/founder who has invested equity
- The owner cannot get funds from other lenders
SBA loans usually require applicants to put down a lot of personal or business collateral to back the loan. SBA loans also have a lengthy application process which can extend for weeks to months. SBA loans can be a great fit for you if you have a flexible timeline, and don’t need the capital quickly. If you have time to spare, SBA loans are great.
This is where you take a % of your future sales in exchange for a lump sum. Unlike a loan where a payment is due each month, a merchant cash advance takes an automated payback approach. You will pay back the loan with a daily ACH payment from your bank account. Merchant cash advances are great for businesses that accept credit or debit card purchases.
This is great if you have good credit. Approved restaurant owners will love this restaurant financing option. As with credit cards, theres a spending limit. It must be repaid monthly, or annually, before you can draw down additional credit. This option is great for two big reasons:
This is the most trendy. Crowdfunding is where you pitch your idea to the public in exchange for some sort of benefit, like a free meal, etc.
Kickstarter has a full section devoted to restaurants seeking crowdfunding. Restaurant owners looking for funding can open their first restaurant by using this innovative fundraising method.
This is the oldest method. You don’t need to have good credit, a business loan, W-2’s, or other history. Make sure you well document the loan, so you can make sure there’s no misunderstanding
As real estate property values continue to rise, its resulting in greater equity being built up. As a result you can tap into that equity and get additional working capital for your business.
When your equipment is broken, or you’re looking to upgrade, equipment financing is a great option to get capital. Equipment financing lenders will sell you the equipment you need, or give you the funds to buy it. You then pay them back in monthly increments + interest. Some equipment financing companies will also let you take out a loan against paid-off equipment in order to fund small projects. Sale leasebacks tend to have low interest rates.
Purchase Order Financing
If you want more revenue/need more money, then purchase order financing might be a great option. This gives restaurants who have already taken orders, but need additional capital the funds they need. It’s a great fit for brands who have a great track record and simply need quicker access to funds.
How to determine whats the best restaurant financing option
The main thing you want to look at is: cost, term, speed, and the lender you’re working with.
Some secondary things to consider are:
- Reputation of the lender
- Is it a fixed rate payment or a variable rate payment
- Whether you need collateral
- Is it a daily or monthly payment
- How quick you can get the funds
How quick can you get the capital for restaurant financing
Before you go with a restaurant financing option, consider how long it will take. Ask your lender what information they need, their process, and how expeditious the process is.
There are many different ways repayment works. Some lenders will do a term loan with an APR, some will do a factor rate. Some have upfront fees, compounding interest, penalties, etc.
APR is a calculation which looks at all the interest, fees, and timing of the fees. It’s expressed as a % and represents the annual cost of the funds.
Look at the term
The third thing you should look at is the repayment term. It dictates the size of your payments.
Weight out the benefit of fixed rates, and variable rates
If you’re approved for a loan, you’re not just paying back the loan amount. You’re responsible for paying back the amount borrowed, plus the interest, or a fixed cost.
Find out if you need collateral before getting restaurant financing
Sometimes, in exchange for money, banks and lenders will require you offer valuable items like a house, etc. It’s important to note that some lenders will require you to offer collateral. This is a stressful process – because if you default on your payments, you might lose the collateral.
Consider the reputation of the lender before you take restaurant financing
Research the lender, google them, look at their reviews. You want someone who is trustworthy, not just the first lender.
Running a successful restaurant, café or bistro requires a certain passion for bringing people together over a mouth-watering meal. Beyond that, however, it also takes money to make your culinary venture a success.
Term loans can help you to cover the gap when you have a short- or long-term financial need. Bond Street has provided restaurant loans to a number of restaurateurs, including Gabriel Stulman, co-founder of NYC-based Happy Cooking Hospitality restaurant group, Matt Kliegman, co-owner of New York City’s The Smile, and Philip Tadros, founder of Chicago’s own Bow Truss.
If you’re looking for a way to take your own restaurant to the next level, this guide’s for you. Keep reading to learn:
- How a term loan works
- What needs a term loan is designed to help restaurant owners address
- The benefits of term loans
- How term loans compare to other restaurant financing options
- How to Qualify for Restaurant Financing
Term Loan Basics
If you’ve ever taken out a mortgage, a student loan, or a car loan you already have some experience with term loans. With this kind of loan, the lender provides you with a lump sum of cash that you repay over a set period of time.
Term loans may be secured or unsecured, depending on how much you’re borrowing and what you plan to use the funds for. Repayment can last as little as three months or extend over several years, based on the lender.
Bond Street, for example, offers an intermediate term loan option. You can borrow up to $1 million, with a loan term ranging from one to three years. Payments are made on a biweekly or monthly basis. With shorter term loans, you may be looking at weekly or daily payments instead.
Your loan may have a fixed interest rate, meaning the rate remains unchanged for the entire length of the repayment period, or a variable rate, which adjusts up or down with changes in the underlying index rate it’s tied to. Be aware that term loans typically have a fixed payment but choosing a variable rate may cause your payment to increase or decrease in correlation with changes in the rate.
What Can Restaurant Owners Use Term Loans For?
Term loans can be used to address a host of issues that are unique to restaurants. Here are some scenarios where a term loan could prove valuable when your cash reserves are running low:
- Your range suddenly stops working and you need to replace it quickly to avoid any temporary kitchen shutdowns.
- The holidays are approaching and you need to hire additional staff to handle the anticipated surge in traffic.
- Alternately, you run a seasonal restaurant that’s busiest in the summer and you need cash to cover day-to-day operating expenses through the slower winter months.
- You want to expand beyond table service and takeout to include full-service catering but you lack the necessary equipment.
- You’re planning on attending a local food expo and you need to purchase extra supplies and equipment for cooking demonstrations.
- You’ve decided to revamp your marketing campaign and move into new advertising mediums that your current budget won’t accommodate.
- Your restaurant has taken off to the point that you’ll either need to expand your existing premises or open a second location to keep pace with sales.
- You have a mobile restaurant that’s doing well but you’re ready to move into permanent digs of your own.
That last scenario is something that Bond Street was able to help flavor maestro Pepe Urquijo with. After transplanting to New York from San Francisco, Urquijo was moved to create his own pop-up burrito restaurant, B’klyn Burro. His Mission District-inspired burrito creations allowed him to establish a loyal customer following in the Big Apple. Feeding off that success, he approached Bond Street for a term loan to give his labor of love a permanent home in Brooklyn.
The Benefits of Term Loans
Term loans have several characteristics that make them attractive to restaurant owners. For example, you have some leeway when it comes to your repayment term. You can choose a loan with a longer term if you’re borrowing a larger amount or you want to stretch out repayment without straining your cash flow. A shorter term may more suitable, on the other hand, if you’re taking out a smaller loan that you can afford to pay back quickly.
Compared to a personal loan or a business credit card, term loans generally offer much higher borrowing limits. If you need $500,000 because you’re planning on opening another location across town, you wouldn’t be able to charge that to a credit card. With personal loans, the borrowing limit typically tops out at $100,000.
Speed is another plus if you’re working with an alternative lender versus a traditional bank or the Small Business Administration (SBA). Bond Street, for instance, is able to fund loans in a matter of days. If you come across a great deal on an industrial dishwasher or one of your food suppliers is offering a limited time discount, a term loan could help you get the deal done so you don’t miss out on an opportunity.
Are there any downsides to term loans?
While term loans can be a solution for restaurant owners who need cash quickly, there are some potential downsides to consider.
First and foremost, pay attention to the interest rate and fees. If you’re getting a term loan through an online lender, there’s a chance you could end up with a higher rate or pay a larger origination fee than you might with a traditional bank or through an SBA loan program. As you’re comparing online lenders, remember to weigh the cost against the convenience they offer.
Next is the repayment term. This could either be a pro or a con, depending on the details of your situation. If you need to borrow half a million dollars, for example, but the lender expects you to repay it all within three years, you have to be sure that you’re capable of managing the payments. A bank, by comparison, may be able to stretch out repayment for five or 10 years, which could give you a little more breathing room.
Alternative Restaurant Financing Options
Term loans, while advantageous, are by no means the only financing choice restaurant owners can turn to. Here’s a look at four other possibilities you may want to think about when you need funding for your restaurant.
Option #1: Merchant cash advance
Merchant cash advances aren’t technically loans. Instead, it’s an advance against your restaurant’s future sales. The merchant cash advance provides you with funding, which you then repay as a percentage of your daily credit and debit card receipts.
Approval for a merchant cash advance doesn’t hinge on your credit score so it may be a good choice for restaurant owners who don’t have perfect credit. Funding is fast and no collateral is required. Your payments adjust based on your sales so you don’t have to worry about getting caught in a crunch if sales are slow.
There is a hitch, however. Merchant cash advances can carry an APR of anywhere from 50% to 250%. That makes them an exceptionally expensive way to finance your restaurant’s needs.
Option #2: Inventory financing
Inventory financing is meant to be used specifically for inventory purchases. The inventory acts as the collateral and this kind of loan usually has a shorter repayment term. The idea is that assuming you’re able to sell the inventory at a rapid clip, you wouldn’t need years to pay the loan off.
Similar to a merchant cash advance, a low credit score may not be a barrier to getting an inventory loan. That being said, the short-term nature of inventory financing may be a better fit if you own a seasonal restaurant and you need to stock up ahead of the rush.
Before you commit to inventory financing, read over the details first. Some inventory loans can come with above-average interest rates. Certain lenders may also require a UCC lien, which could put your restaurant’s assets in jeopardy if you default.
Option #3: Equipment financing
As the name suggests, equipment financing can be used to purchase equipment, which the lender uses as collateral. Whether you want to give your kitchen a complete overhaul or just add a few new pieces to the ones you already have, an equipment loan can help you do it.
Approval through an online lender is quick and again, lenders are going to focus more on your restaurant’s financial health than your credit rating alone. If you want a shot at the best interest rates, however, you’ll need a higher credit score.
One pitfall to watch out for is the down payment requirement. With some lenders, the equipment alone may not be sufficient for collateral and you may be expected to bring some cash of your own to the table.
Option #4: Small Business Administration loans
The Small Business Administration offers multiple loan programs for restaurant owners and other entrepreneurs. SBA loans can be used for a variety of purposes and borrowing limits can be quite generous. For instance, you can borrow up to $5 million with a 7(a) loan.
You can take 10 years or in some cases, longer, to repay an SBA loan and the interest rates are likely to be among the lowest you’ll find. If we had to point out disadvantages associated with SBA loans, there are two.
Number one, certain SBA loans require a 10% down payment. That could be a barrier to getting financing if your restaurant doesn’t have that kind of money on hand. The other thing to be aware of is the funding speed. Online lenders can put money in your bank account in a couple of business days but a Small Business Administration loan could take weeks or even months to fund.
Qualifying for a Term Loan
When shopping around for a term loan, you should be mindful of the interest rate and fees various lenders charge. Aside from that, one of the most crucial things you can’t afford to overlook is what the lender requires to qualify for a term loan. If you want to apply for a term loan with Bond Street, for example, these are the criteria we’re most interested in:
- $150,000+ in annual revenues
- 640+ personal credit score
- 2+ years in business
Bond Street also asks for a personal guarantee, which is something other lenders may require as well. When you sign off on a personal guarantee, you’re assuming personal liability for the loan if your business were to default.
It’s also important to have key financial documents ready to go before you apply. Some of the things your lender may ask for include a recent balance sheet, an income statement, and your personal and business tax returns for the last two years.
Organizing your paperwork, checking your credit report and score to see where you stand, and making sure you meet the lender’s minimum qualification guidelines can help to streamline the application process. The more prepared you are ahead of time, the clearer the path to getting a term loan for your restaurant will be.