Your Complete Guide to Restaurant Financing and Loans

Whether you're upgrading inside your current four walls, extending your business idea, or creating a new restaurant, you'll need financing.

To jumpstart your restaurant venture, our guide to restaurant financing and loans will explore the fundamentals of securing funding.

We'll cover various financing options, teach you how to compare choices, and help you evaluate the best fit for your needs.

But first, let's review the fundamentals: what does the term "restaurant financing" mean?

What does financing for restaurants mean?

When money is obtained, borrowed, or lent from an outside partner to support, launch, grow, or renovate a restaurant business, it's referred to as restaurant financing.

The ability to obtain essential cash gives restaurant operators a dependable means of allocating funds to realize their immediate and long-term objectives.

Restaurant financing refers to the capital obtained through external sources, such as loans, investments, or grants, to fund various aspects of a restaurant business, including starting, expanding, renovating, or covering operational costs.

John R. Hamburger, a restaurant industry consultant and author of "The Restaurant Startup Guide

Why do entrepreneurs submit loan applications?

To succeed and maintain their competitive edge, enterprises and restaurant owners require access to funding for expansion.

As noted by Robert L. Hisrich and Michael P. Peters, prominent entrepreneurship professors, loans are a common financing strategy for new and growing businesses, particularly during their initial stages ([Source: Entrepreneurship, 9th edition]).

This aligns with the reality of the restaurant industry, where owners often seek outside funding for various purposes, including:

• Launching a fresh and new company
• Remodelling their current venue
• Purchasing new machinery or restaurant equipment 
• Launching a 100th, third, or second location
• Updating the design and atmosphere of the restaurant
• Rearranging floor plans to make room for more tables or adding a patio can allow you to host more visitors.
• Making an investment in new equipment for the kitchen, such as a commercial range hood or oil filter.
• Paying for running costs
• Establishing a reserve that can be utilized to cover inevitable future expenses.
• Working with a consultant to enhance their hiring procedure, marketing campaigns, operational efficiency, or purchasing choices.
• Changing the entire brand
• Extending into new markets for sales, such as catering or consumer packaged products.

If you want to apply for restaurant financing, it's a good idea to start looking for funding early on and gather some of the financial statements you'll need for your application.

You should also define how you intend to use the funds.

Now that you're thinking about how you could use a little extra money to support, enhance, or grow your business, let's explore the most common forms of business financing that are available, as well as the ones that are most appropriate for restaurateurs looking to apply for financing for their restaurants.

Here are some insights from the Reddit community below: 

10 Restaurant financing options to take into account

Finance alternatives most commonly used for restaurants

It appears that there are just as many options for business financing available as there are justifications for doing so.

While certain funding solutions are more appropriate for long-term business objectives, others are ideal for short-term enterprises.

It's important to note that most business owners believe their only options for funding are loans or that they can only obtain capital from physical banks. False!

Strong restaurant finance choices outside of the loan category include merchant cash advances, credit lines, purchase order financing, and invoice financing.

Furthermore, compared to traditional banks, alternative loan lenders are a little more lax and flexible when it comes to qualifying, eligibility, and the payback schedule.

When looking for restaurant finance, restaurateurs usually rely on these possibilities from the large pool available to them:

• A term loan obtained through a physical bank
• An alternative loan
• An SBA loan is often referred to as a small business association loan.
• A cash advance from a merchant
• A credit line for businesses
• Money or stock from relatives and friends
• Finance for equipment
• Using crowdsourcing

Let's examine the features of ten common restaurant financing choices, from business lines of credit to restaurant loans, to help you determine which option is ideal for you, your restaurant, and your objectives.

1. Term loans from traditional "brick and mortar" banks

Brick-and-mortar bank loans differ between banks as well as between companies.

Let's go over some of the benefits, cons, and basic features of conventional term loans from brick-and-mortar banks.

Frequently, a "brick-and-mortar" bank loan:

• Has a delayed application procedure. Term bank loan applications at brick-and-mortar banks often take 14 to 60 days to complete. If your project has an open end date or you begin your financing search long in advance of the period when you need the money, this can be a good fit for you.
  
  
• Demands collateral to be put up to support the loan. This collateral could be personal or business-related. While 49% of small business owners use business assets—such as real estate if you own your physical site, equipment, etc.—to support their loan, 31% of small business owners with debt use personal assets to secure financing. Collateralization, or the use of a personal guarantee, is frequently necessary regardless of cost and can occasionally lower your funding costs. You must determine how much risk you can take in this situation and whether it is worth risking personal or business assets for less expensive funding.
  
  
• Compound interest can be applied, which means that if you don't make your payments on time, the amount you owe will keep going up. Working in the restaurant business requires you to always be ready for the unexpected. The penalties for missing your monthly payment could dramatically increase your cost of capital if compound interest is applied.
  
  
• Term loan bills are normally sent out every month. Recipients must monitor a monthly bill as a result. Compound interest is a common feature of bank loans, as previously noted, so the longer you hesitate to make payments, the higher your cost of capital can get.
  
  
• Flexibility about term duration (usually 3–10 years). You can adjust the payback term to a duration that suits your restaurant thanks to this flexibility. Generally, the cost will depend on the term duration you select. For example, a bank will usually offer you a better interest rate if you can afford to repay your loan faster rather than over a longer period. Generally speaking, interest rates increase with the length of time you take to make payments, increasing the amount you must return.

2. Alternative Credit

When people and business owners consider applying for a loan, they typically picture a conventional loan from a physical bank.

If, on the other hand, you're looking for working capital or funding to launch a new project at your restaurant, alternative loans from banks and nonbank lenders are a great alternative to think about.

To give financing to qualified business owners, some lenders offer alternative loans.

These lenders can provide more flexible repayment alternatives and often have access to more advanced technology than traditional brick-and-mortar banks.

A bank offering alternative loans, for example, might accept newer restaurants or base approval criteria on your business's performance and other factors, rather than your credit score, whereas a "brick-and-mortar" bank might look for a business to has been operating for two+ years and require the owner to have a great credit score.

Repayment plans for alternative loans might also adjust based on your daily sales.

Alternative loans may offer daily payments as a fixed percentage of your credit card sales instead of requiring you to make a single, fixed monthly or daily payment for the term of the loan.

This allows payments to fluctuate in line with your company's sales, which makes it simpler for restaurants that open and close seasonally to make their payments on time.

3. A Loan from the Small Business Administration (SBA)

Funds from the U.S. Small Business Administration loans are lent to borrowers through the Small Business Administration or SBA.

It's important to remember that the SBA depends on a large network of partner lenders to give eligible small businesses the funding they require to launch their enterprises.

The SBA does not lend money to small businesses. Working with a smaller, nationally, or locally renowned lender is what you can expect.

As a result, depending on the kind and amount of loan you want, it can take one to three months to collect your money.

SBA loans are classified as either fixed assets or working capital.

To demonstrate their involvement in the project, applicants for SBA loans usually need to put down a sizeable amount of personal or corporate property as security for the loan.

In addition, SBA loans have drawn-out application procedures that can go on for weeks or months.

Applicants must provide financial statements going back several years and show receipts for every significant purchase their company has made.

If your project has a flexible timeframe and you don't need money right away, SBA loans can be a good choice for you. Additionally, SBA loans provide flexibility about the available funding quantity.

The SBA allows up to $5.5 million in loan originations, and many SBA-approved lenders will provide loans up to that amount.

The Small Business Administration has established the following criteria for loan eligibility: 

In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must meet size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding.

4. Advance for merchant cash

With a merchant cash advance, a supplier will pay a large amount upfront to buy a portion of future sales (usually credit card sales) from an approved restaurant.

In contrast to a loan, which includes a monthly payment due to the lender, the merchant cash advance buyer usually uses a more automated process to recover the portion of sales that it has purchased: Most buyers will employ a daily ACH (Automated Clearing House) debit from a bank account to get the money they're owed.

The cost of some loans may be shown as a "factor," which is a fixed percentage of the borrowed amount added to the total amount the restaurant owes the buyer.

This is in contrast to most loans, which will show the cost of capital as an interest rate, or APR.

For example, a $100,000 loan with a 1.16x factor would need a total repayment of $116,000, of which $16,000 is the fixed loan cost.

Businesses that take debit or credit card payments can benefit greatly from a merchant cash advance. This can be a smart choice for you if you manage a cashless restaurant.

5. Credit line for business use

The operation of a company line of credit is like that of a credit card: An open line of credit is provided by a traditional bank or an alternative lender to an authorized business owner.

Similar to credit cards, there's usually a spending limit that needs to be paid back every month or once a year for a retailer to be able to take out new credit. There are two main advantages to choosing this option:

1. It provides entrepreneurs with the freedom to determine how much working cash they require at any one time.
2. It assists company owners in raising their credit scores.

Pro tip: You should discuss whether secured or unsecured debt is better for your company when looking into funding options: Unlike unsecured debt, which is not backed by an asset, secured debt is.

Unsecured debt is frequently more costly than secured loans, but it carries few or no personal guarantees.

Secured debt is typically less expensive since it is backed by a personal or business asset, but it also puts more personal risk on the assets of the company or business owner.

Two examples of financial arrangements that can be either secured or unsecured are loans and credit lines.

6. Online fundraising

Crowdfunding is the newest and trendiest restaurant financing option on this list of alternatives.

Using crowdsourcing, entrepreneurs can raise money for their ventures by pitching their ideas to potential customers in exchange for rewards such as early access to the soft opening, a complimentary lunch, or a monthly reservation guarantee.

Popular crowdfunding websites are:

• Nextseed

• IndieGoGo

• Kickstarter

• GoFundMe

• Patreon

In particular, there is a whole area on Kickstarter dedicated to restaurants looking to crowdsource.

Crowdfunding may be a fantastic option for restaurateurs who need money to launch their first restaurant or expand into the consumer packaged goods market by bottling their well-known in-house jam or hot sauce.

Numerous advantages come with crowdfunding, including the capacity to connect with a large number of investors, create excitement on social media, and expedite the fundraising procedure.

Regulations governing the maximum amount of money an issuer can raise through crowdfunding, fees levied by the crowdfunding platform (such as Kickstarter's 5% success fee and 3% + $0.20 payment processing fee per pledge), and the disclosure requirements for specific details about the company and the fundraising endeavor are all important factors to take into account.

7. Making inquiries of friends or family

Good old dependable. A tried-and-true method of obtaining business capital without the cumbersome application and approval procedure is to ask friends and family for money.

There are no requirements for asking friends or relatives for a loan—just trust—nor a credit check, business plan, W-2s, or employment history.

Having said that, you should give careful consideration to integrating your personal and professional lives, as well as any potential conflicts of interest resulting from business actions that might not be in line with your lender's philosophy of life.

Make sure the investment is properly documented, and choose a partner who will benefit both your company and you.

In addition to the seven restaurant financing options listed above, three more options may be appropriate for your project depending on how these kinds of funding need to be used: purchase order financing, equipment financing, and commercial real estate loans.

8. A loan for commercial real estate

Renting a brick-and-mortar restaurant in a desirable area is becoming more and more difficult to afford as real estate prices climb.

Consider whether it would be worthwhile to apply for a commercial real estate loan to help you pay for the costs associated with opening a new restaurant or expanding an existing one by adding a new location or giving it a makeover at this time.

Remember that the majority of lenders will have a close eye on the financial stability of your restaurant.

Because real estate loans are typically large-scale, multi-year contracts, they can have a substantial negative influence on your cash flow and degree of flexibility.

9. Financing for equipment

Equipment financing is a fantastic way to obtain funding for projects involving restaurant equipment, regardless of whether you want to improve or replace a broken piece of expensive equipment.

This is how it operates: An equipment finance lender will either sell you the necessary equipment or provide the money for you to purchase it; you will then repay them every month (plus interest).

Certain equipment financing companies allow you to do a sell leaseback, or borrow money against your paid-off equipment to finance little projects around your restaurant.

When compared to other funding options, sale-leasebacks frequently provide highly favorable repayment periods and extremely cheap interest rates.

10. Finance for purchase orders

Do you want to increase sales, reach a wider audience with your brand, and explore new revenue streams?

A feasible income alternative for restaurants that have a signature product that customers love, such as spicy sauce, barbecue sauce, jam, or seasoning, is to test sales of consumer packaged goods (CPG) in grocery stores and other brick-and-mortar retail outlets.

Purchase order financing can be an excellent option for businesses wishing to enter the catering or consumer packaged goods industries and who may require assistance scaling to meet demand.

It provides restaurants that have already accepted orders but want extra money to deliver them with the required funds.

Your next concern is probably about how to select the restaurant financing option that is best for you now that you have a better understanding of the business financing alternatives accessible to both new and existing restaurant owners, as well as how they operate.

How to assess and compare financing options for restaurants

After doing some study on common business financing choices and outlining your plan for capital utilization, you're left wondering how to evaluate the possibilities that are open to you.

When comparing business funding solutions, the following are the primary attributes that entrepreneurs should take into account:

• Speed
• Term
• Partner or Lender
• Cost

We've included a few more things to think about, such as:

• How soon you can obtain the funds after they are authorized
• Assessment of the overall return
• Payments at fixed rates versus payments at variable rates
• If you must provide collateral
• The lender's reputation

1. Take into account how soon you can obtain your funds

Think about how long it will take before selecting one restaurant financing option over another.

will require until the funds are accessible to be allocated to the project you have in mind.

Inquire about the requirements, eligibility requirements, and expected time of response from your possible lender (or other third-party financing provider) but also consider whether you can wait for the capital with a longer-term build or if you need to replace your broken oven right away.

2. Calculate the overall return

Lenders employ a wide range of cost structures, and there are numerous variables to consider when calculating the overall cost, such as the total amount owed, the annual percentage rate, upfront costs, compound interest or other penalties, and more.

The idea that interest rates and annual percentage rates (APR) are interchangeable is widespread.

The annual percentage rate (APR) evaluates all interest, fees, and the timing of those charges equally. The annual percentage rate, or APR, is a measurement of the cost of borrowing money.

APR is a useful tool for comparing financing options, but it's not the only consideration.

The total amount of money you will have to repay for the funds you obtain (including origination, late, application, and interest fees) is another element taken into account when determining how much a loan will cost.

The entire amount borrowed that must be repaid does not always equal the annual percentage rate (APR). View our two examples that are provided below.

This loan has nine months, a fixed loan fee based on a factor rate, and no interest accruing:

• $10,000 credit
• Rate of interest = N/A
• Duration: Nine months
• $1,600 fixed loan fee

In this case, the $10,000 borrowed will require a total payback of $11,600 ($10,000 loan + $1,600 fixed loan cost).

Even though the total amount you would owe is almost the same as it was in the previous case, this equates to an annual percentage rate of 40%.

This is because you are paying back the loan balance plus the additional expense in nine months as opposed to three years.

In summary? The optimal funding choice for your budget and cash flows can be found by computing the absolute dollar amount you will repay and comparing it to your other offerings.

To have a complete understanding of the entire cost of borrowing, it is crucial to closely monitor any additional fees—such as late fees—that you might incur in connection with the cash you receive.

3. Examine the terms

The payback period (if applicable) is the third factor you should consider when evaluating business finance options because it determines the amount of your monthly payments.

The time you have to return the amount of funding you are given is referred to as the payback period.

This loan has a fixed loan fee, as an example. We've taken out a $100,000 loan with three different terms: nine months, six months, and three months.

The three-month period may seem to have a much lower overall cost than the other options, but the shorter-term source has the highest annual percentage rate.

A shorter term results in a higher annual percentage rate due to the much larger daily payment required. Well, that's fine if you can afford the payment, but not everyone can.

4. Compare the advantages of variable versus fixed rates

If your loan application is granted, you will be accountable for repaying not just the principal amount but also any associated interest or a one-time loan fee.

The interest rate or fixed loan charge could be determined by several variables, including your restaurant's debt, length of operation, personal credit score, and sales history.

Interest rates may be variable, meaning they can change over the course of the loan in response to changes in the economy, or fixed, meaning they remain constant for the duration of the loan.

5. Determine whether collateral is necessary

Collateral is "an asset that a lender accepts as security for a loan," according to Investopedia. The lender may take possession of the collateral and sell it to cover its losses if the borrower fails on the loan.

Banks and other lenders might ask you to give up a valuable asset as collateral in exchange for a substantial cash loan.

This asset can be your home, automobile, or the physical site of your company. If you default on the loan, the lender would then hold the valuable asset.

It's important to remember that certain lenders may ask you to provide collateral that belongs to the company, such as the money in the account, your food truck, or your physical location if you own it.

Other lenders, on the other hand, may ask for personal assets, such as your home, car, or retirement fund, if they need a personal guarantee, which means you have to risk losing everything you own if something goes wrong.

It can be very stressful to provide collateral because you might lose something significant and valuable to you if you don't make your payments on time.

Therefore, it's crucial to consider the advantages and disadvantages before signing on the dotted line.

6. Take into account the financial provider's reputation

Do you know the financial provider or somebody who has previously collaborated with them? If you get into problems or forget a payment, will they still cooperate with you?

What is their volume for the capital product that you chose? Do they only work with restaurants as their specialty?

Rather than having to reject your application due to seasonality, you might choose to concentrate your search on lenders who understand the difficulties faced by the restaurant business.

These lenders are more likely to factor seasonality into their rate calculations.

Takeaways

Owning and running a restaurant requires significant financial resources, and navigating the various funding options can be overwhelming.

This guide has provided a comprehensive overview of the most common restaurant financing options available, including:

• Traditional bank loans
• Alternative loans
• SBA loans
• Merchant cash advances
• Business credit lines
• Crowdfunding
• Loans from friends and family
• Commercial real estate loans
• Equipment financing
• Purchase order financing

By understanding the features and benefits of each option, you can make an informed decision about the best way to finance your restaurant's needs.

Remember to consider factors such as the speed of funding, total cost, loan terms, and collateral requirements.

Additionally, compare offers from different lenders and choose a reputable financial provider with experience in the restaurant industry.