Restaurant Loan & Financing; Financing: All the Facts You Need

You don’t have to let money get in the way of your ambitions, if those are lofty plans to launch a restaurant or a desire to remodel what is already an existing space. You can consider a variety of restaurant loan solutions to make your ideas a reality.

This detailed approach on restaurant funding will cover anything.

• What restaurant financing is, why it’s important, and how to apply
• How to get money for a restaurant from seven different sources
• What to know before requesting funding for a restaurant

What is financing for restaurants?

Restaurant finance refers to funds that a restaurant obtains (borrows or loans) from a lender, such as a major national bank, a lesser regional bank, the Small Business Administration (SBA), or an alternative funding source. This cash is lent or borrowed with interest.

The average amount borrowed for a small business is about $630,000, and the interest rate ranges from 2.5 to eight percent. Restaurant financing options have a wide range of terms, with different repayment plans and other benefits and drawbacks. Soon we’ll get into the facts.

What Motivates Restaurants to Request Financing?

You’re not the only one who may be thinking about applying for finance. In fact, approximately 30,000 full-service restaurants received SBA loans in 2019, making them the leading receivers of these loans in general. Additionally, that year saw the SBA loan guarantee expand to nearly 1 million limited service restaurants, with the dental sector coming third.

Restaurant owners ask for financing for a variety of reasons, and in the end, each restaurateur makes a different decision depending on his or her unique personal situation. Let’s go over three of the most frequent causes

1. Starting a new company

It’s exhilarating to open a restaurant, but it can also be stressful. Running a restaurant requires investment. You require a structure, staff, tools, financial resources for marketing, and food, of course.

You’re also operating in a sector with slim profit margins and intense competition, so managing your money wisely is important. This is particularly true when you’re just starting up and trying to establish a presence in your area, which is why securing  restaurant loans is noticed when beginning a new company or expanding out to another region.

2. Remodeling Your Dining Establishment

Is it time for a new ventilation system, walk-in fridge, or oven? These are essential components of a successful commercial kitchen, so you shouldn’t be using inferior machinery. Given how expensive this perfect kitchen equipment is, you might need some extra money to assist purchase for it. Financing for restaurant equipment can help with that.

It’s relatively simple and fast to obtain funding of this kind, way of paying for up to 100% of purchases for restaurant kitchens. In this manner, one won’t need to be concerned about costly locally sourced ingredients going bad in a broken refrigerator.

3. Restaurant Rebranding

You could be itching to rename the company if glancing at the same logo your restaurant has had for the previous ten years is making you crazy. This is a typical aspect of a restaurant’s development, and it can improve your reputation and financial line, but first you have to pay for the rebrand.

Depending on how extensive your rebrand is, you’ll need a certain amount of money. Are your logo and menu designs changing while the brand’s hues remain the same? Or are you replacing all of the furnishings and redesigning the entire space? If the latter, you might require finance for the restaurant. Let’s look at how to accomplish it.

Seven Options for Financing a Restaurant

There is no one best method to take while learning how to fund a restaurant. Here are 7 options to think about dependent on your situation.

1. Loans from traditional banks

Either a big national bank or a small local bank might be able to give you a standard bank loan for your restaurant. Traditional brick-and-mortar hotel loans entail borrowing a specified sum of money for a specific time period at a fixed interest rate. These loans typically have a term with a yet another term and monthly payments.

Advantages and Negatives

The average amount of money that small firms receive from large banks and small banks altogether is $593,000. One of the main advantages of traditional bank loans is the probability of obtaining access to a big amount of funds. These loans also often provide lower interest rates than other options, which is a bonus.

However, a downside to this type of funding is the low approval rates for traditional bank loans for restaurants. Large banks in particular, with a small company loan approval rate of under 14%, are examples of this. Even for small bank loans, less than 20% of requests are approved.

Additionally, as the restaurant owner, banks typically require collateral from you to secure your loan. This might be money, stocks, or estate development. However, personal loans may not always be able to provide the collateral. It can also be hard to obtain a bank loan if you’re just starting off. Be ready for certain lenders to reject your request because their terms may specify that your restaurant must have been open for at least a year in order to be eligible.

2. Nontraditional Loans

For many restaurateurs, getting financing from alternative lenders is an appealing choice. Online businesses. The usual small business loan of this type is between $50,000 and $80,000, while some alternate lenders give loans up to $500,000.

Non-traditional restaurant loans are typically easy to obtain and quick to process. Some are even accessible 24 hours after submitting an online application. Interest rates are highly variable, and loan periods can range from several months to years. Alternative loans assess your credit score when deciding eligibility, just like a bank restaurant loan would.

Advantages and Negatives

You’ll probably have more success obtaining financing from a non-traditional lender than a bank if you’re launching a new restaurant. Since some alternative lenders would let you put up collateral for up to 50% of your loan, you could even be eligible to obtain it without putting up any. These loans have greater approval rates than brick-and-mortar loans, at almost 25%, which is another benefit for restaurants.

3. Loans from the Small Business Administration

The SBA provides several financing alternatives, giving business owners an average of $417,000 and up to $5 million, but it’s Guaranteed Loan Programs are especially pertinent to restaurateurs.

The SBA’s 7(a) Loan Program is probably your best option if you’re looking to buy a building for your restaurant. The association’s very well project is this one. In contrast, the 504 Loan Program is probably your best choice if you’re trying to finance the acquisition of large equipment. Furthermore, the Microloan Program for startups offers up to $50,000 to get you launched if you can only require a modest amount of money.

Advantages and Negatives

The fact that SBA loans typically give greater acceptance ratings than both bank loans and alternative financing choices is one of their main advantages. Additionally, they provide affordable interest rates ranging from 5.5 to 8 percent. You can apply for SBA loans without having a greater credit score as well. If you have a score of 690 or higher, you might well be qualifying.

4. Commercial Line of Credit

Another way for restaurant owners to get money is through a line of credit. A line of credit is a type of loan that is granted by a bank; whether you will be approved for one relies on a number of variables, such as your credit history. There is, however, a critical difference.

According to Investopedia, loans have a non-revolving credit limit, which implies that the borrower can only access the money once before having to pay off the debt. In the event of a line of credit, the borrower receives a fixed credit limit, just as they would with a credit card, and is needed to make regular payments that pay both the principal and interest. While the line of credit is open, the borrower can use it frequently and constantly, unlike a loan.

Advantages and Negatives

Some restaurant owners may find it advantageous that a line of credit provides ongoing access to money, such as those who like to carry out the spending over a longer period of time but instead of making a big purchase all at once.

Do not wait until you are in need of a line of credit before asking for one; keep in mind that they can be challenging to access in times when your finances aren’t in good shape. Get your line of credit before making any meaningful purchases.

5. Cash Advances by Merchant

Restaurants can obtain money in exchange for future payments using a merchant cash advance (MCA). The best candidates for this type of financing are companies who require money as soon as possible to cover urgent costs or cash flow shortages.

Advantages and Negatives

MCAs are typically accepted swiftly, and you might have the money immediately as the next day. Additionally, even if your product is new or you have bad credit, you could still be eligible, which is usually not the case with conventional loans.

6. Friends and family

Every person has a distinct reaction when they ask friends and relatives for money. And the wealth levels of everyone’s family and friends fluctuate (and varying levels of willingness to lend it to others). As a result, you could or might not find this to be a good restaurant financing choice.

7. Crowdfunding

You can raise money from a big group of people using crowdfunding or from a single lender. This makes it a company wanting autonomous or civic-minded restaurants.

You can distribute your pitch to a large group of stockholders via online crowdfunding sites. Then they can donate the money immediately through the platform.

If you choose to go down this path, decide on a loan amount and terms that you and your partner are comfortable with. How long will it take you to repay the money, and will interest be charged? How much, if at everything? What will happen if you will be unable to pay back the loan as previously agreed?

Advantages and Negatives

One of the main advantages of borrowing money from family or friends is that they might not expect you to pay back the amount. Nevertheless, this isn’t always the case because they are permitted to charge interest rates of up to 18%.

Additionally, borrowing from family and friends may have significant disadvantages. These can be anything from organizing the details of letting several individuals lend you tiny sums of money to perhaps destroying your connection with them.

Keep in mind that from a legal point of view, you’ll want to get your loan arrangement in writing in addition to making it enforceable and to defend the interests of both parties. And if a friend or family member gives you money for your restaurant as a present, you could have to account for it when you pay your taxes, depending on the amount.

Advantages and Negatives

Crowdfunding is frequently a more efficient strategy than trying to secure a bank loan, and by spreading the word to a big audience, it also serves as marketing for your company and aids in the advancement opportunities of loyal clients.

Crowdfunding isn’t all fun and games, though. As per NI Business Info, “If you don’t accomplish your funding target, all finance that has been promised will typically be returned to your backers and you will receive nothing.” Improper rewards or returns might also lead to too much business being given to investors.

What You Need Before Making a Financing Application

Make sure you have a strong business plan, financial forecasts. And a budget created before you meet with any lenders in order to be qualified for any type of restaurant finance. Lenders will want to peek inside your firm and review restaurant budgets and other documentation before they agree to loan you money because numbers provide a comprehensive picture of your financial state.

Confused about how to predict your income and costs? To help you in doing that, we’ve created four spreadsheets for restaurants.