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Updated: April 30th, 2021
Your restaurant’s recipe for success hinges on a mix of different ingredients — delicious food, a killer location, a great concept — and of course, a steady supply of capital.
You need to know how to get funding for a restaurant in order to cover essential operating expenses, such as paying your staff and keeping the kitchen fully stocked. Then there’s marketing and advertising, which is crucial for getting the word out about your culinary destination. And finally, you have the bigger costs, like upgrading your old equipment to state-of-the-art industrial ovens, stovetops, or refrigerators, or opening up a second location.
A restaurant business loan can help with meeting all of those expenses and then some. Here’s a look at how these types of loans work as funding for restaurants, what’s needed to qualify, and different ways you could put them to use them to grow your restaurant.
Restaurant loans are business loans that are designed to meet the unique needs of restaurant owners. Restaurant business loans can be used for funding both short- and long-term goals.
Some types of restaurant loans are suited for startups and brand-new eateries; others are geared toward business owners that have at least one to two years of operating history under their belts.
Qualification requirements and repayment terms can vary greatly, based on the lender and type of financing you pursue. Keep in mind, though, that in general restaurant business loans can be harder to get because lenders may view the restaurant industry as riskier than other types of businesses. It’s possible, however, to find restaurant financing options that have lower minimum credit score or revenue requirements.
The great thing about business loans when used as funding for restaurants is that they can be molded to fit just about any need you may have. Some of the most common use cases include:
Get a restaurant business loan when opening a new location or introducing new services
Restaurant loans can be a great help if you’re ready to grow your footprint. For example, you may want to open a pop-up restaurant to showcase some of the new recipes you’re working on, or set up an entirely new location across town to keep up with increasing customer demand. Or, you may want to branch out into offering catering services on the side. In these scenarios, restaurant financing options like a loan could be used to secure your new location, buy equipment, or pay for a marketing campaign to spread the word.
Remodeling an existing location
Understanding how to get funding for a restaurant with a loan is also useful when you want to give the interior or exterior of your restaurant, cafe, or bistro a fresh look. A restaurant business loan can help with everything from basic updates such as painting or new drapes to more time- and cash-intensive projects, like adding an outdoor patio or a banquet room.
Upgrading your kitchen equipment
Your equipment is vital to what goes on behind the scenes at your restaurant. Without it, you wouldn’t be able to continue serving up the food your customers crave. Replacing ovens, ranges, stand mixers, coolers, refrigerators, espresso machines, or other equipment can easily get expensive. With a restaurant loan – specifically one geared towards restaurant equipment financing – you can handle the cost of repairing, maintaining, and upgrading equipment when those needs arise.
Using a restaurant loan to grow your staff
As a restaurant owner, you rely on a lot of helping hands. Managers, chefs, host staff, wait staff, bartenders, busboys, and dishwashers are just some of the people you might count on to keep your customers happy and coming back for more. If you’re expanding your location or your restaurant is growing faster than you can keep up, a restaurant loan can allow you to hire and train new employees so you have all hands on deck.
Handling seasonal fluctuations in business
Some restaurants stay busy all year-round, but many experience seasonal ebbs and flows. Restaurant financing options like a loan can help in both scenarios. In the slow season, for instance, you might use a working capital loan to pay your overhead expenses — which could include everything from payroll and rent to insurance and utilities. As the season begins to pick up, you could use a restaurant loan to hire staff or stock up on inventory.
There’s more than one type of restaurant financing. If you’re in the market for a loan, here are six options you might consider:
1. Term loans
A term loan is a loan that’s repaid over a set time frame, with interest. Restaurant owners can use term loans to meet short term expenses or fund longer-term investments in their business.
Term loans may or may not require collateral and can have fixed or variable interest rates. Repayment terms can be as short as three months or stretch up to five years. The loan amount you can borrow typically ranges from $25,000 up to $500,000, although some online lenders may go as low as $5,000 and as high as $1 million.
A short-term loan may be a good restaurant financing option if you have a cash flow gap you need to fill quickly — such as paying insurance premiums or settling an outstanding invoice with a vendor. This type of term loan is better when you’re able to repay it in less than a year. A long-term loan, on the other hand, might be a more appropriate type of funding for restaurants that need to borrow a larger amount or need more time to repay, or for those that want to refinance some existing debt.
Restaurant equipment financing
As the name suggests, restaurant equipment financing refers to loans that help restaurant owners buy equipment. The equipment usually serves as the collateral for the loan, and it’s possible to borrow up to 100% of the cost. Once the full amount of the loan has been paid back (plus interest), the business owns the equipment outright.
Some equipment loans may come with a long term repayment period of 10 years or more. That’s appealing if you’re borrowing a larger amount of money and you want to keep the payments manageable. The downside of this restaurant financing option, however, is that the longer you extend the repayment term, the more you may pay in interest over the life of the loan.
Your restaurant can’t operate without inventory, but food and alcohol expenses can take a big bite out of your cash flow. Inventory financing is meant to be a source of funding for restaurants that helps you purchase the inventory you need, when you need it, through a short- or medium-term loan.
The inventory itself acts as the collateral for the loan. That’s both an advantage and a disadvantage. It’s good because you don’t have to offer any other assets as collateral. But this can make inventory financing more difficult to qualify for, since lenders will want to ensure that you’ll be able to sell that inventory to generate revenue to repay the loan. Another potential hitch: inventory financing may carry higher interest rates compared to other types of restaurant business loans.
Working capital loans
Working capital loans are a flexible financing option for restaurant owners who are able to quickly repay a loan. These loans are designed for short-term needs, such as paying suppliers or vendors or meeting payroll. Depending on the lender, you may be able to borrow up to $500,000 in working capital, but these loans may carry higher interest rates or fees compared to other restaurant loans.
Business lines of credit
A business line of credit could be a good restaurant financing option if you have more than one capital need to meet. Instead of a lump sum of funding, a line of credit is a revolving line that you can draw against over time, as long as you have available credit.
In that respect, a business line of credit may be the most flexible financing option for restaurants. You can use the line as needed, and you only pay interest on the portion of your credit line you’re using. It’s similar to a business credit card in terms of how it works, but a line of credit may offer a lower interest rate and higher limit.
But, there are downsides. You may pay an administrative fee to draw against your line of credit or keep it open. Plus, a business line of credit may only be good for a set time period. After that, your line of credit may be closed and you’ll have to apply for a new one to continue using it.
Small Business Administration (SBA) loans for restaurants
The Small Business Administration backs loans for both new and established restaurants. Microloans, which top out at $50,000, are generally better for startups or restaurants that have a smaller capital need. SBA 7(a) loans can offer up to $5 million in capital, while the CDC/SBA 504 program can provide restaurants with up to $20 million in capital to purchase, construct, or renovate commercial real estate.
However, it’s important to note that SBA loans can be tough to qualify for, and it could take months to get funding. For this type of restaurant business loan, you’ll need to offer collateral, along with a personal guarantee, and meet minimum credit score requirements. You’ll also need to meet the size standard to qualify as a small business, which is based on your number of employees, annual revenue, and net worth. Additionally, your restaurant must be officially licensed, operate in the U.S., and you have to have exhausted other financing options before you can qualify for an SBA loan.
Merchant cash advances
A merchant cash advance is a way to borrow against your business’ future debit and credit card receipts. It’s a convenient form of financing if your restaurant has a steady daily flow of credit and debit card sales.
Merchant cash advances are a flexible restaurant financing option in that you can generally borrow between 50 percent and 250 percent of your restaurant’s average credit card sales. The payback for merchant cash advances is relatively simple: payments are deducted from your credit and debit card sales daily. It’s possible to get funding in one or two business days, and it may provide you with more spending power than a loan or line of credit.
That convenience may come with a high price, however. Merchant cash advances use a factor rate, rather than an annual percentage rate, to determine loan costs. Depending on how much you borrow, the factor rate, and your time frame for repaying the advance, the effective APR could end up being much steeper than what you may pay for other borrowing options.
There are two primary things to focus on when applying for restaurant financing: the qualification requirements and the loan terms.
Qualifying for a restaurant loan
There are several factors that can influence restaurant business loan approval decisions. As you consider how to get funding for a restaurant, it’s important to keep in mind some of the things lenders look for. These include:
Before applying for a restaurant business loan, review both your business and personal credit to get a feel for how lenders may rate you on the risk scale. Get your financial statements in order, including a cash flow statement and profit and loss statement, which helps lenders gauge your ability to repay a loan. If you have a newer restaurant, review your business plan to make sure you’ve outlined a clear plan for becoming profitable.
Shop around with different lenders to compare terms. Specifically, zero in on:
It can be difficult to make an apples-to-apples comparison when you’re considering different loan products (such as a term loan and merchant cash advance), which is why the annual percentage rate (APR) is the most effective way to evaluate your restaurant financing options. The APR tells you the true cost of borrowing money per year (including all fees and service charges), and is key to selecting the best loan offer.
Finally, you’ll want to consider how quickly a restaurant loan can be funded. If your restaurant needs capital ASAP, you may not have time to wait two to three weeks for your loan application to be reviewed and processed.
Funding Circle offers term loan funding to restaurant owners that have at least two years in business. Borrow with flexible terms and repayment terms ranging from six months to five years.
Loan decisions can be made in as little as 24 hours after you submit your documents, and funds could be in your account in as few as 10 days. Restaurant term loans from Funding Circle feature fixed monthly payments and transparent fees and rates.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.