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Explore the options for restaurant and bar financing

What to consider when financing a restaurant or bar purchase 

  • Traditional bank loans are often difficult for startup businesses to qualify for.
  • If you need cash quickly, alternative lenders can approve loans within a few days.
  • Merchant cash advances also provide quick cash, but at very high interest rates.
  • Look to a home equity loan or HELOC as alternatives to a business loan.
  • Watch out for loans that require a personal guarantee or blanket lien.

If you’ve ever dreamed of owning a burger joint, bistro or friendly neighborhood tavern, you’re probably also aware that opening a restaurant or bar is a complex task. There are many startup costs to consider, including a mortgage or rent payment, equipment purchases and employee wages, not to mention food and beverages to sell to your customers.

Whether you’re a seasoned restaurateur or a first-time business owner, you’ll likely need to secure financing to open your doors and stay viable. Although estimates vary widely, a 2014 study of U.S. Department of Labor statistics showed that roughly one in five restaurants close within the first year.

Identifying the right lender or funding source for a restaurant or bar requires some homework, and business owners should closely scrutinize the true startup costs as many people fail to borrow enough. Here are a few paths to consider.

Bank loans

Traditional lenders, such as banks and credit unions, offer a variety of business loans. These loans generally have longer repayment terms and lower interest rates, but can be difficult to obtain, especially for a new business without established revenue. But a borrower with a strong credit score and a detailed business plan may have a solid foundation for a long-term business loan.

The U.S. Small Business Administration (SBA) is a common financing route for restaurant and bar owners. The SBA’s 7(a) program offers up to $5 million, and guarantees between 75 percent and 85 percent of the loan amount to mitigate the lender’s risk. Business owners should expect to make a down payment of at least 10 percent. There are additional benefits, such as interest-only repayment periods, but the documentation process is extensive and approval may take several months, so SBA loans aren’t a good fit for someone needing quick cash.

Alternative loans

If you’ve already created a plan that analyzes the business’s cash flow, customer base and competition — among other factors — you may also have a location in mind. In this case, time may be of the essence to purchase a property or secure a lease. Alternative lenders can be useful in these situations. They can often approve financing in a matter of days, compared to weeks or months with a traditional lender.

Alternative lenders offer convenient, online application processes and are generally less concerned with credit scores. Loan amounts of $25,000 to $1 million are common and repayment terms are often flexible, ranging from a few months to a few years. Lines of credit, which allow you to borrow as needed, also are available. Equipment purchases, such as stoves or refrigerators, may serve as collateral and remove the need for a personal guarantee. Funds can also pay for working capital, such as employee expenses, or for inventory like food and beverages.

Other sources

Merchant cash advances, or MCAs, are another popular funding source. MCAs are not loans, but commercial transactions based on a business’s future revenue. A business owner repays the advance, usually within six to 24 months, with a percentage of their daily or weekly credit- and debit-card sales. Interest rates can soar into triple digits, however, and MCA providers may require substantial revenue, making startup business ineligible.

Some business owners thrive thanks to angel investors or venture capitalists. But these have potential drawbacks as the investor may require an ownership stake or high rate of return.

If you’re a homeowner, you may consider accessing business funds through a home equity loan, home equity line of credit (HELOC) or cash-out refinancing. These products can help you get tens or hundreds of thousands of dollars at relatively low interest rates, but you could put your home at risk if you default.

The big picture

The search for funding is just one step in opening a restaurant or bar. Before that, you’ll want to have a vision in place. What type of business are you starting? Having a fundamental plan in place is critical to securing and repaying a loan.

For example, you may consider purchasing a franchise from an established restaurant chain. You’ll be selling products and brands with a proven reputation. Franchise fees may cost $25,000 or more, on top of other startup costs, although franchises can often connect you to funding sources. New franchise owners are 15 percent more likely than other business owners to utilize commercial bank loans, the SBA said. And the SBA can fund a franchise more quickly if it is already familiar with the business model.

Be careful with loans that require a personal guarantee or no collateral. In lieu of collateral, a lender may require a Uniform Commercial Code (UCC) blanket lien, which covers all of your business assets. Not only can these assets be seized if you default, but blanket liens can restrict access to other types of financing. Another lender would have to accept a subordinate position behind the blanket lien, reducing their ability to recoup an unpaid loan.