Restaurant Financing: 6 Funding Options for Operators
The restaurant industry is constantly changing – some restaurants make it, others don’t. One fixed variable in this equation is that new restaurants always seem to pop up. How do these establishments get funded? While some operators may pour their savings into running a restaurant, others rely on funding from elsewhere.
According to a RestaurantOwner survey, the median cost to open a restaurant is $275,000 or $3,046 per seat. If you also own the building, the median cost jumps up to $425,000 or $3,734 per seat. When opening a new restaurant, you’ll need to consider equipment cost, technology, remodeling/decorating costs, food expenses, and sales/marketing expenses. How do restaurants make it with so many expenses in the beginning?
If you’ve ever looked into financing options for restaurants, the number of choices can be overwhelming. Which option is best for your restaurant? With the right type of financing, restaurants can afford to keep their restaurants open – even if they hit a rough patch. When choosing a loan for your restaurant, you’ll want to take in account the application process, maximum loan amount available, funding time frame, and term lengths. We’ve compiled a list of restaurant loans and financing options, as well as questions to ask yourself to prepare for applying for a loan. Use this as your guide to choosing financing that’s best for your restaurant.
Restaurant Equipment Loans
The type of kitchen equipment you’ll need is determined by the kind of cooking you plan to do. Some larger kitchens can cost up to $500,000 to outfit. Restaurant equipment financing allows you to purchase the necessary machines for your kitchen without coming completely out of pocket. Some loans will allow you to finance 100% of the equipment’s value. Collateral for default payments is usually the equipment, so you don’t have to put personal assets on the line. Unfortunately, in some cases, you will need to put down a down payment.
If you prefer not to purchase the equipment outright, there are leasing options available, taking away the commitment of owning. However, you will likely have to keep the equipment until the end of your lease term and will have to replace it with new equipment right after.
When planning for your restaurant equipment, remember to also consider what you’ll need in terms of restaurant hardware and software. Nowadays, SaaS pricing, where you simply pay a subscription service to access centrally located software, is increasingly common in restaurant technology products and can help you save money in equipment costs.
Restaurant Inventory Financing
Inventory financing is strictly meant for inventory purchases. This can come in the form of a loan or even a line of credit. Since the idea is usually to sell your inventory quickly, inventory financing tends to have a shorter repayment term. The actual inventory acts as the collateral and you won’t need a perfect credit score to be a candidate for this loan either. This loan type could be perfect for a seasonal restaurant that needs to stock up on inventory before the rush starts.
There are two things you should look at for when shopping for inventory loans. First, inventory loans sometimes come with a very high-interest rate. Also, some lenders require a UCC lien, putting your restaurant in jeopardy if you miss payments.
This loan can be used for any expenses. These are short-term loans that typically have a maximum loan amount of $250,000. If you need a larger loan amount, as many restaurant operators might, this wouldn’t be the best option for you.
Small Business Administration Loans
A Small Business Administration Loan (SBA) can be used in various ways. It has a very generous borrowing limit (sometimes up to $5 million!) and has one of the lowest interest rates you can find on a loan. Occasionally you’re given up to 10 years (sometimes more) to pay off the loan too.
There are two large disadvantages to this type of loan. Certain SBA loans require you put down a 10% down payment, which can be quite substantial depending on the overall loan amount. Also, unlike many loans which take only a few business days to receive the money, an SBA loan can take weeks or even months to process into your bank account.
Merchant Cash Advance
Rather than an actual loan, a Merchant Cash Advance is an advance against your restaurant’s future sales. This provides you with funding, which you then repay as a percentage of your daily credit and debit card receipts. Funding for these loans are typically pretty fast and your credit score isn’t a major determining factor in qualifying, making it a great option for people with less than perfect credit. There is also no collateral required for this loan. Another great factor is that your payments adjust based on your sales. So, if your restaurant is having a slow month, your payment amount will be modified to reflect your decline in income.
One drawback is that merchant cash advance carries an APR of 50% to 250%, making it a very expensive financing option in the long run.
Lines of Credit
Similar to a business credit card, a line of credit is a set pool of funds that you can access whenever you need it (i.e. when business gets slow and you need to cover expenses). This can be a great option for restaurant owners because you only pay interest on capital you take out of the line of credit. Once you pay what you take out, your line of credit will be replenished with the original amount of money.
You can establish a line of credit through a bank or online lender. You’ll have to choose between a secured or unsecured line of credit. A secured business line of credit has to be backed by an asset and an unsecured does not. This usually makes unsecured lines of credit harder to obtain.
Applying for a Loan
Now that you have information on some of the business loans available, consider a few of these pointers before applying for a loan.
- When do I need the money? – This is important so you can search around for the best loan for you.
- Why do I need the money? – Important to know before you get yourself in more debt than necessary.
- How do I look on paper? – List out the types of things in your past that could affect your credit.
- Am I ready to apply? – Processing your loan can take a while. It’s important that you are completely ready to apply before moving forward.
- Have I fully considered my options? – Don’t go through the trouble of applying for a loan until you’ve weighed out all your options.
Also, make sure you can answer the following questions lenders will typically ask you.
- How long have you owned your restaurant? – Be ready to present a business plan. Lenders view new restaurants as a little risky. You’ll want to show that you have a plan in place and are endure any challenge that might come your way.
- Do you manage your own money well? – Expect to present bank statements, P&L statements, personal and business tax returns, etc. This will help lenders decide if you’re a good candidate for a business loan.
- What are you like as a borrower? – Lenders will be looking at your personal and business credit score.
Ultimately, your restaurant is unique, as are the circumstances which will lead to its success. By determining your initial setup costs, as well as a solid, measurable plan for paying it back, you can determine the best funding option for your restaurant.
You have the information to get your restaurant up and going but how can you make it succeed? Read our 5 point checklist for why restaurants fail and how seasoned and rookie restaurant owners can sidestep these common quandaries.
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About the Author
Emily Wimpsett was a Content & Social Media Specialist at QSR Automations. Emily was born and raised in Louisville but considers herself a die-hard University of Kentucky fan. For college, Emily attended Indiana University Southeast and obtained a degree in Communications with a track in Advertising. In her free time, Emily enjoys just about every water related activity but she is partial to kayaking and whitewater rafting.