Restaurant Loans: Long-Term, Short-Term, and Flexible Funding Options
Many small business owners love the excitement of running their restaurants, but it does come with financial challenges. However, restaurant loans can help you overcome them and provide you with the cash you need to grow and thrive.
Read on to find out more about what funding and business loan options are available to restaurateurs, what lenders are looking for, and tips on how to apply.
The Major Financial Challenges Faced by Restaurant Owners
As an entrepreneur running a restaurant, you are faced with financial pressures at times.
Common concerns include:
High overheads: Rent, payroll, utilities, and ingredients are expensive, especially if you’re in a high-demand or busy area. While that demand can mean higher revenue, it’s also tougher to manage cash flow and stay profitable.
Fluctuating cash flow: If you’re in a seaside town, you probably experience a boom in summer and a slowdown in winter. All restaurants have to manage cash flow carefully, and you may need extra funds to bridge gaps and cover costs like wages and supplies during seasonal downturns.
Equipment maintenance: High-quality kitchen equipment like ovens and front-of-house equipment like espresso machines or POS systems are essential to keep your business running. However, buying new equipment (or repairing existing equipment) can cost a lot of money upfront.
Business expansion: If you want to open a new business location or expand in your current location, it requires careful planning and significant funding.
All of these challenges can be overcome with the help of a restaurant business loan.
7 Popular Types of Restaurant Loans
There are several restaurant financing options available to restaurateurs. Here are some of the ones you might want to consider.
1. Term Loans
Term loans are the traditional loans you might get from a bank or a credit union.
You apply for the loan amount you want, and on approval, the capital is transferred as a lump sum of money into your checking account. You agree to pay the loan back over a certain length of time, making repayments usually once a month.
You can apply for a short-term loan (repayment period of up to two years) or a long-term loan (more than two years). Longer term loan monthly repayments cost less, but you may pay more in interest over time.
2. Equipment Financing
Restaurant equipment financing can be a good choice if you need to buy or lease kitchen equipment like ovens, refrigerators, or coffee machines. You pay a fixed sum every month to your lender. At the end of the term, you can hand the equipment back or buy it, depending on your agreement.
However, be aware that if you fall behind on repayments, the lender may take back the equipment from you. Depending on what equipment that is, the loss could seriously impact your ability to operate your restaurant.
3. Working Capital Advances
Working capital advances (also called working capital loans) are short-term small business loans that can help you manage everyday costs, like payroll, utilities, or stocking up on supplies.
For restaurants, these loans can be especially useful during slower seasons when income dips but expenses remain high. Many online lenders, like Backd, offer very quick turnarounds on working capital loan applications.
4. Business Lines of Credit
A business line of credit works a bit like a credit card. You get access to flexible funding and only pay interest on what you borrow.
You’ll be given a limit by your lender — the maximum you can borrow at any one time. If your cash flow fluctuates a lot, you keep a business line of credit on hand so you can withdraw funds when cash flow dips..
5. Merchant Cash Advances
A merchant cash advance is an advance against your future credit card receipts. This can make it an attractive option if your restaurant has steady credit card sales, but be careful.
Merchant cash advance factor rates can be high. For example, if you borrow $50,000 at a factor rate of 1.5, you’ll repay a total of $75,000. Your lender will collect a portion of your daily credit card settlement until the loan is repaid.
This form of merchant funding is among the most expensive loan products available, and borrowers should think carefully before applying for one.
6. Commercial Real Estate Loans
Commercial real estate loans, like bridge loans, can help you buy or renovate property for your restaurant. Whether you’re using the loan to purchase a brand-new building or do renovation work on an existing location, the property itself serves as the collateral. So you won’t need to risk other business assets to take out the loan.
For example, if you’re looking to stay in a new location for the long term, a commercial mortgage can make sense. However, you will have to have a large down payment ready upfront, and the approval process can be lengthy.
7. SBA Loans
Small Business Administration (SBA) loans are government-backed small business loans that provide capital on favorable terms to entrepreneurs, including restaurant owners.
Small businesses get these loans from traditional banks, credit unions, and financial institutions, but they’re guaranteed by the SBA. This guarantee means that, in many cases, a lender will approve your application if you don’t meet their standard eligibility criteria for traditional loans.
SBA 7 (a) loans can be used for working capital, purchasing and renovating property, buying equipment and machinery, and refinancing existing borrowing. The same is true for SBA 504 loans, except that they can’t be used for working capital.
What Are the Eligibility Criteria for Restaurant Loans?
The type of borrowers accepted for restaurant loans will vary depending on the lender and the type of loan. However, here are some of the typical requirements you should be aware of:
Operating history: Some lenders may have requirements for how long you’ve been in business. For example, for Backd’s Working Capital Advance, you need to have been in business for one year. For Backd’s Business Line of Credit, you need to have been in business for two years.
Credit score: Traditional lenders prefer personal credit scores of around 680 or higher, but some alternative lenders will consider applicants with lower credit scores. For example, Backd accepts applicants with credit scores as low as 625.
Revenue requirements: This varies greatly depending on the type of loan you’re applying for and your restaurant's annual revenue. When working with Backd, you’ll need a monthly revenue of $100,000 or more.
Collateral: Collateral is property, equipment, or other valuable items, such as accounts receivables, that borrowers offer lenders as security. Lenders will repossess and sell off your collateral if you’re unable to keep up with repayments. Because of this, you can generally borrow more at lower rates by offering collateral, but you run the risk of losing assets. Remember that, on equipment loans, the equipment itself is the collateral.
Personal guarantee: With a personal guarantee, lenders can hold you personally responsible for repaying an outstanding balance if you default on your loan. Normally, the sale of assets you’ve offered as collateral will cover this, but if it doesn’t, the lender will approach you for the remainder.
Financial documentation: Be ready to provide financial statements, bank account records, tax returns, and a solid business plan to your lender. Many lenders will also require recent bank statements so they can assess your cash flow and financial health. Some alternative lenders need much less paperwork, but be prepared to provide documentation if asked.
Industry experience: Some lenders may prefer that you have experience in the restaurant industry. This shows them that you understand the challenges of the sector and have the skills needed to keep your business running smoothly.
Tips for Applying for Restaurant Loans
Each lender has their own application process, but by following these steps, you may improve your chances of acceptance:
Figure out what you need: Don’t borrow any more than you need and know exactly why you need the money. If you borrow too little, you may need to apply again. If you borrow too much, you could struggle with paying it back.
Get your documents ready: Locate and file your important business and financial documentation to streamline the loan application process. The quicker you can get the paperwork to the lender, the faster they can turn it around.
Compare your options: Every bank, online lender, and credit union has different rules, and it’s a good idea to explore different providers to find what works best for you.
Check the terms and fees: If you’re accepted, examine everything from the interest rate and repayment terms to the size of monthly payments and any extra fees.
Get a Flexible Loan Solution for Your Restaurant
When it comes to restaurant loans, traditional bank loans aren’t your only options. Whatever your restaurant business needs, whether it’s purchasing new equipment or plugging gaps in cash flow, there may be more flexible options open to you.
The key is knowing why you need the money, borrowing the right amount, and making sure the repayments are affordable. The next step is to find a lender ready to support your vision as a business owner and restauranteur.
Backd is a fast-growing online alternative lender. We work with thousands of companies across multiple lines of business, and we take extra care to understand you and your business needs.
Talk to us about one of our two funding options:
Working capital advance: Borrow between $25,000 and $2 million.
Business line of credit: Access between $50,000 and $750,000.
To apply for a facility, you need to have established business credit with another provider, have a credit score of 625 or higher, a minimum monthly revenue of $100,000, and be based in the U.S. at a brick-and-mortar address.
Apply now and be funded within as little as 24 hours.
