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
- 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.
Read More: How to get a restaurant business loan
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.
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
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
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.
Evaluate the total restaurant financing payback
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
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
Research the lender, google them, look at their reviews. You want someone who is trustworthy, not just the first lender.