Securing a loan for a restaurant can be instrumental in actualizing your culinary visions, same for obtaining restaurant equipment financing. Before initiating any application process, it’s imperative to discern which of these funding options would synergize best with your business dynamics.
Restaurant Financing
Restaurant financing refers to the capital sourced from specialized lenders, small regional banks, the Small Business Administration (SBA), or alternative financial resources. The specifics of several restaurant business loan types and restaurant financing options can be quite diverse, encompassing a variety of loan types, repayment frameworks, pros, and cons. Certain loans may provide the right flexible financing option for particular scenarios, hence it’s prudent to pinpoint several loan types and how you intend to utilize the funds before attempting to secure them.
Envision being a chef where your restaurant is a savory dish. Like requiring the perfect ingredients and recipe, your restaurant’s triumph hinges on a blend of other factors, including a prime location, a good fit, a captivating concept, and a good option for meeting your funding needs.
Why Apply
In the volatile food and beverage industry, maintaining a resilient profit margin can be challenging for many restaurants, thus making it plausible for a restaurant owner to need urgent funds occasionally. Your choice between seeking short-term loans from an alternative lender or leveraging personal assets in traditional loans will dictate the kind of loan you are eligible for
In the volatile food and beverage industry, maintaining a resilient profit margin can be challenging, thus making it plausible for a restaurant owner to need urgent funds occasionally. Your choice between seeking short-term loans from an alternative lender or leveraging personal assets in traditional loans will dictate the kind of loan you are eligible for.
Startup Costs
Embarking on the journey of inaugurating a restaurant or bar is both exhilarating and tense. Essential steps involve securing a physical location, acquiring equipment, and initiating the hiring employees process. Efficiently administering your finances via securing a restaurant loan could potentially be the vital element in kickstarting a fresh venture.
Remodeling
Opting for a short-term loan from traditional banks and credit unions can facilitate reshaping your restaurant theme or dining area, enhancing customer satisfaction. Possessing a successful history allows you to gain approval by demonstrating how your revamp will allure more customers, culminating in augmented annual revenue, that guarantees loan repayment.
New Equipment
In circumstances where established restaurants necessitate new commercial kitchen equipment or aspire to afford to buy equipment to supersede obsolete ones, restaurant equipment loans can provide restaurants a seamless pathway to attain funding to purchase property, necessitating minimal financial documents or collateral required.
In circumstances where established restaurants necessitate new commercial kitchen equipment or aspire to have new menus that supersede obsolete ones, restaurant equipment loans provide a seamless pathway to attain funding, necessitating minimal financial documents or collateral required.
Payroll
During sluggish business periods, for example, availing a working capital loan can be a boon to meet payroll obligations. Even though factor rate loan costs might be on the higher side compared to those with annual percentage rates (APR), acquiring them is feasible even for borrowers with less than stellar credit. Unlike a traditional loan with a minimum fixed monthly payment, they entail daily or weekly payments deducted from your accounts receivable and generally have a concise repayment term of 6 to 9 months.
Expansion
Considering their agreeable interest rates and repayment terms, an SBA 7(a) loan stands as an optimal choice to fund the growth of or expand an existing restaurant or inaugurate a new location. Leveraging a prosperous history and forecasted revenue boost due to the expansion, a restaurant owner can assure loan repayment effectively.
How to Get
The predominant aspiration for many restaurant and business owners is to secure a low-interest SBA loan. However, a myriad confronts hurdles stemming from a subpar personal or business credit score.
Before Applying
Before embarking on any financing option journey for your restaurant, arm yourself with a robust business plan, financial forecasts, and a comprehensive budget. Well before you engage with potential lenders, these numbers paint a thorough picture of your financial health.
That’s the main course why lenders, be it those who offer business loans or commercial real estate loan providers, will want to delve deep into your business day operations, evaluating your restaurant’s revenue, budgets, inventory financing, and other details before sanctioning funds.
Alternative Lenders
Obtaining business financing from an alternative funding provider allows for flexible terms and flexible repayment options, especially when traditional credit lines become elusive due to bad credit issues.
An online lender can extend funding up to $500,000, yet the cost of the typical small business loan they green-light ranges between $50,000 and $80,000. A few prominent alternatives include Torro, Rok Financial, Biz2Credit, OnDeck, Kabbage, LendingClub, and Funding Circle.
Restaurateurs and restaurant owners can predominantly expedite their online applications and anticipate funding from non-traditional lenders within 24-72 hours. The loan terms can stretch from a couple of months to multiple years, while interest rates swing extensively, pivoting on monthly revenue and FICO credit scores.
Pros: An emergent restaurateur stands a higher chance of procuring funding from a non-traditional lender than a traditional bank, especially if they’ve initiated operations merely from three months to six months prior. Approvals might even bypass the need to require collateral, by calculating loan amounts based on the restaurant’s annual revenue, or the business owner’s personal credit. With a robust 25% approval rate for alternative lender applications, it’s the most straightforward method to acquire a lump sum promptly.
Cons: In the absence of familiarity with the lenient eligibility requirements of top lenders, one might inadvertently align a credit line with other lenders who don’t maintain equitable practices and impose steep interest rates. Some lenders also enforce prepayment penalties or mandate a personal guarantee, risking more than just your business assets in case of default.
Business Line of Credit
“Loans have a non-revolving credit limit, which means the borrower has access to the funds only once, then they make principal and interest payments until the debt is paid off, With a line of credit, the borrower receives a set credit limit – just like a credit card – and makes regular payments that include both principal and interest. Unlike a loan, the borrower has continuous and repeated access to the line of credit while it is active.”
Pros: The fact that a line of credit offers continuous access to funds may be an advantage for some restaurateurs – for example, those who want to make a series of smaller expenditures over a longer period rather than a major purchase on one occasion.
Cons: Keep in mind that lines of credit can be difficult to access in times when your finances aren’t healthy, so don’t wait until you need one before you apply for it. Get your line of credit in advance of any big spending you plan to do.
Working Capital
A Merchant Cash Advance (MCA) is a financial tool empowers restaurants to secure funds by leveraging their future payments. It’s an ideal solution for businesses in dire need of instant working capital to mitigate short-term expenditures or bridge cash-flow deficits.
Through Merchant Cash Advances, lenders offer an upfront cash amount, and in return, you get a loan to repay through a portion of your debit and credit card sales, alongside a fee. Typically, the MCA provider sets up an automatic deduction mechanism that extracts a set daily or weekly percentage from your debit and credit card sales until the merchant cash advance amount is repaid in full.
Pros: The beauty of MCAs lies in their swift approval process. You can gain access to the necessary funds in a timeframe as short as 24 hours. Furthermore, it’s an accessible avenue even if your business is in its nascent phase or if you’re grappling with a compromised credit score—a scenario that’s often a deterrent in other loan setups.
Cons: On the flip side, MCAs come with their set of challenges. Some might stipulate a daily repayment, which can be strenuous to consistently maintain. It’s also wise to steer clear of simultaneously managing multiple MCAs, as this finance method can saddle you with exorbitant interest rates—sometimes shooting up to three-digit percentages.
SBA Loans
The Small Business Administration (SBA) offers many financing options with an average of $417,000 and a range to a maximum of $5 million loaned to small business owners, but its Guaranteed Loan Programs are the most popular type relevant to restaurateurs.
If you’re looking at finance purchasing a building for your restaurant, the SBA’s 7(a) Loan Program is likely your best bet. This is the association’s most popular program. In contrast, if you’re looking to finance a large equipment purchase, the 504 Loan Program is probably your top choice. And, if you just need a small infusion of cash, the Microloan Program for startups provides up to $50,000 to get you going.
Pros: One of the major perks of SBA loans is that they generally offer higher approval ratings than both bank loans and alternative financing and payment options. They also carry reasonable interest rates of between 5.5 and 8%. SBA loans don’t require an overly high credit score for you to qualify, either. You may be able to qualify with a score of 690 or higher.
Cons: Like any restaurant financing option, SBA loans have some disadvantages. If you’re seeking a loan over $25,000, the SBA loan amount will likely ask you for collateral in exchange for the funds, including investment assets. In addition, these loans take longer to get approved than alternative loans. You could be waiting anywhere from 30 to 60 days to find out if your application is approved.
Bank Loans
Navigating the path to securing a bank loan for your restaurant can lead you to either a prominent national bank or a smaller regional bank. These traditional lenders offer an opportunity to borrow a specified amount of money, to be repaid over a defined period, and at a fixed interest rate. Generally, these loan agreements are short-term, wrapping up within a year, with a minimum-credit-only requirement for the loan based on monthly repayments.
Pros: Smaller enterprises stand a chance to secure an average of $150,000 from minor banks, a figure that can skyrocket to as much as $600,000 when dealing with larger banks. The possibility to access hefty sums of capital is one of the notable advantages when considering bank loans. Furthermore, these loans generally offer lower interest rates compared to other options for restaurant companies to get funding.
Cons: A significant downside of traditional bank loans is the low approval rates, more so concerning loans for restaurants. Particularly, large banks show a penchant for declining small business loans, with approval rates plummeting below 14%. The scenario isn’t much brighter with small banks either, boasting less than a 20% approval rate.
Moreover, it is a common practice for banks to ask for collateral from you, the restaurateur, to secure your restaurant business loan. This collateral might be in the form of cash, stocks, or property. Unfortunately, not all aspirants have the means to provide collateral. Also, if you’re in the initial stages of setting up your restaurant business, securing a bank loan can be a daunting task. Brace yourself, as some lenders have strict criteria requiring your business to be operational for at least six months to a year to qualify.
Crowdfunding
In contrast to seeking financial assistance from a single entity, crowdfunding platforms allow you to garner funds from a multitude of individuals, making it an appealing choice for grassroots or community-centric restaurants.
Using an online crowdfunding platform presents a golden opportunity to broadcast and market your company or business pitch to a diverse group of potential investors globally. These individuals can then pledge their financial support directly on the platform.
Pros: Crowdfunding tends to be a more streamlined process compared to securing money through a bank loan. Additionally, it serves a dual marketing purpose by not only securing funds but also marketing your business, helping you to acquire a dedicated customer base early on.
Cons: On the flip side, if the financial goal is not met, the pledged funds may be refunded to the investors. Furthermore, two years in business alone, and not strategizing the rewards or returns adequately can lead to a significant portion of your business being handed over to the investors.
Family and Friends
Raising funds through family and friends is akin to borrowing from one’s own bank account. But, every individual’s comfort level differs when it comes to reaching out to loved ones for financial help. It also hinges on the financial capabilities of those in one’s circle and their willingness to lend or partner.
If you chart this course, finalize a loan amount both parties find agreeable, alongside the term of your loan repay. How long do you need before paying back the sum, and will there be accruing interest? If yes, at what interest rate starting point? Moreover, what’s the plan if the medium-term loan repayment doesn’t align with the primary agreement?
Pros: One of the key benefits of sourcing funds from relatives or friends is that many a time, they might offer low-interest rates, or even forgo the interest entirely. But there are exceptions; legally, they can demand higher interest rates, sometimes as steep as 18%.
Cons: Borrowing from loved ones isn’t devoid of challenges. Issues could span from coordinating weekly repayments on minuscule borrowed amounts from several lenders to jeopardizing treasured relationships. It’s risky.
Additionally, from a legal viewpoint, formalizing your loan agreement in writing strengthens its enforceability, ensuring protection for both sides. If a family member opts to gift funds for your venture, remember to address this during your business tax returns based on the sum.
FAQ
Below you’ll find answers to our most frequently asked questions about restaurant equipment financing and business loans for restaurants. The topics include how to get a fixed percentage long-term loan, how to draw funds fund from a credit line, and how to find the right financing option even if you still need help to build business credit.
The restaurant funding landscape is diverse with many forms of financing available. Notable options encompass working capital loans, long-term, loans, business lines of credit, equipment financing, commercial real estate loans, SBA loans, and merchant cash advances. These loans can be a great option for buying inventory, renting spaces, or upgrading equipment. They come with varying term lengths and might have fixed percentages or variable interest rates.
Business loans for restaurants can serve a range of purposes, essential for both budding and established small businesses in the restaurant industry. Common uses for restaurant business loans include launching a new restaurant, sprucing up or expanding an old venue, refinancing debt upgrading equipment, hiring more staff, and navigating the ebbs and flows of seasonal business dynamics. They’re also instrumental in buying inventory or buying equipment to cater to more guests and stay competitive.
While a commendable credit score undeniably bolsters your approval odds, securing financing with fair credit or even a limited, credit check- trail isn’t a far-fetched dream. Some lenders, like Fora Financial, even specialize in offering loans tailored to such scenarios. They might focus their minimum credit score and check even more on your business days’ operational history and other factors.
Primarily, lenders examine metrics like your restaurant’s longevity, annual turnover, envisioned business goals, prowess in management, personal credit score, and how much money you’ve personally invested. They might also review if you have any existing business debt or past debt refinancing endeavors. Lenders often appreciate seeing applicants with a solid business bank account and good credit history.
When comparing loan options, look at the loan amount, how you’ll repay it, interest rates, extra fees, if you need to put up collateral, and if you need to personally guarantee the loan. The APR or annual percentage rate can help you understand the true yearly cost of the loan, including all fees.
Yes. Typically, the laundry list of requisites spans personal financial statements, ledgers, profit and loss and deficit accounts, balance statements, projected financial data, certification and licenses, tax return forms, antecedent loan requests, a professional CV, and an exhaustive business history.
Green light timelines can fluctuate extensively, contingent on the financier’s existing location, focus market, and loan type. Some modern-age lenders might promise instantaneous approvals in a few months or even the next business day. In stark contrast, conventional banks or SBA loans might necessitate a more extended window.
Yes, business credit card can plug short-term expenses and financial voids, like for small purchases or other expenses, bridging transient cash flow chasms. They can let you capitalize on spending rewards and might even permit you to pay interest as a deductible business outlay. Yet, their steeper interest rates and yearly fees render them less viable for prolonged short-term financing undertakings.
Historically, procuring small business loans for restaurants proved more formidable compared to other types of businesses. This notion stems from most lenders perceiving the restaurant arena as more risky. Nonetheless, this same business loan landscape is in a growing phase, especially with the emergence of online lenders like Funding Circle.
Yes, While some restaurant loan types cater specifically to newbies in the dining domain, others are tailored for existing business and restaurant owners, with a track record spanning at least two years up to five years. But there’s a silver lining: you can unearth financing options with lower minimum credit score thresholds or minimum time operational stipulations.