Change is the only constant in the restaurant industry. Customers’ tastes change, suppliers’ stock levels fluctuate, and seasons bring new considerations. Most restaurant owners aren’t in it for the long haul.
Multiple small business loans can fund that passion and meet the specific needs of the restaurant industry. So whether you want to open your first restaurant, maintain your present one, or grow, you have alternatives.
Also, keep in mind that operating a restaurant comes with unpredictable costs. According to Forbes, “it almost always costs more than expected, so a contingency should be budgeted for.”
It’s tempting to overspend on the budget while opening a new restaurant, hoping that expenditures will fall within the first few months. It takes a lot of money to start a restaurant, but it also takes money to keep it flying. And undercapitalization is a significant cause of restaurant closures.
It’s not enough to know how much money you’ll need to start a restaurant. When the restaurant is new and gaining momentum, you must assess cash flow needs. A new restaurant’s success depends on anticipating capital requirements for the first 12 to 15 months. As the restaurant ‘ramps up,’ you must cover operational costs. Consider your cash needs and how much working capital.
Positive Economic Trends
Restaurants provide financial burdens but also thrilling income prospects. And the good news is that consumer spending is up nationally. Full-service restaurants were expected to rise 3.3%, limited-service restaurants 5%, and fast-casual restaurants 8%.
“Overall, more people are eating out,” says food industry expert Joe Pawlak. “They like the economy. They spend their extra cash at restaurants.”
Getting more customers in the door has always been the most excellent strategy to bring more customers in. With increased revenue comes more money for marketing, upgrading your restaurant, and sourcing high-quality ingredients. Aside from these costs, money is required to maintain or replace equipment, including freezers, refrigerators, ovens, and fryers.
Top Restaurant Loans
The restaurant business is unusual in that not all financing solutions are available. Instead of a long list of prospective matches, you’ll start your financing quest with a handful of potential partners.
With that in mind, here are 7 of the most acceptable restaurant loans:
SBA 7(a) Loans
The US Small Business Administration offers popular restaurant financing alternatives (SBA). This government agency is charged with assisting small company owners in obtaining as many resources as possible.
SBA loans are financed differently than other sources of borrowing. SBA links you with a third-party lender and then guarantees part of the loan for you. The lender would be rewarded even if you defaulted on the loan and stopped paying.
It’s fantastic what this assurance accomplishes for lenders. They release their purse strings with less risk and are willing to cooperate with small company owners. Borrowers who have been rejected many times typically get various offers. The best lenders will often battle for your business, resulting in even better rates and conditions.
This outcome is part of the SBA’s aim to help small companies. They enable tens of billions in financing each year. And their ideal borrower is someone who has been rejected in the past, notably minorities and women.
While SBA loans provide numerous benefits, you should be aware of potential drawbacks. A lot of documentation is required for an application. Second, the approval procedure might take three months.
If you think the advantages of an SBA loan exceed the drawbacks, you should look into them. The 7(a) program is the most popular SBA lending offering. These loans are the most popular among small company owners.
This sort of funding is quite flexible. While some products have stringent use restrictions, a 7(a) loan may be used for almost anything.
These loans sparkle even more when you read the fine print. They usually have great interest rates and periods, like the most acceptable bank loans. This might be an excellent chance for borrowers turned down before.
You may get an SBA 7(a) loan for your restaurant provided you have good credit, fulfill the agency’s size and financial standards, and operate for profit in the US or its territories.
A solid business strategy is also required for every loan application. Helping the lender comprehend your plans will demonstrate your expertise and boost your chances of success.
SBA Express Loans
Remember how SBA loans might take months to be approved? The agency took this criticism to heart and worked to simplify the funding process. Their fiddling yielded the SBA Express Loan.
However, they require less paperwork and fund faster than most SBA loans. These loans, like other accelerated loans, have certain unique features. Among them:
- The maximum loan amount is lower than ordinary loans.
- The interest rate is virtually always higher to compensate.
Another oddity is that these loans have stricter use restrictions. Unlike “cool” parents who let their kids do whatever they want on weekends, SBA Express Loans have stringent curfews and compel their kids to check in throughout the night. You’re set to go if you intend to utilize the funds for equipment financing, working capital expansion, or debt restructuring.
To be eligible for an SBA Express Loan, your restaurant must be open for at least two years. Your credit score will be checked, but anything above 680 should be OK.
SBA 504 Loans
Just wait till you fulfill the SBA’s 504 loan requirements. They specialize in real estate, which means they understand the subtleties of such projects. When your restaurant has these specific requirements, the tight use limitations work to your advantage.
Examples of qualified projects:
- Opening a new eatery
- Buying restaurant equipment
- Buying a restaurant
- Buying restaurant land
- Adding utilities, landscaping, or parking lots to your property
- Renovating your eatery
- Refinancing debt for real estate
A 504 loan is easy to qualify for. Your credit score, financial history, and business size will all be factors. Remember, it’s called the SBA (emphasis added). So make sure you examine their size requirements. Your restaurant should be OK if its tangible net worth is above $15 million and its typical net income is under $5 million.
Some things are timeless. For example, Levi’s blue denim pants have been popular since 1873. And chocolate chip cookies, created in the 1930s, are still a favorite.
Term loans are included here. Comfort, usefulness, and adaptability have made them a generational favorite. They set interest rates (or flat fees), so you know how much they will cost. Save money and plan your borrowing strategy.
Term loans may also be up to $2 million in size and have interest rates as low as 6%. They are also recognized for financing swiftly within a few days.
A restaurant must be open for at least two years to qualify for a term loan. Lenders may be more lenient if you have great personal credit. This form of loan often requires collateral, so be ready to identify unique items that might be used as collateral.
Due to the fast-paced nature of the food sector, money is sometimes required within 24 hours. Fortunately, short-term loans are meant for speed.
Short-term loans are structured similarly to term loans. The most significant distinctions are in the name’s initial word: short. These loans have shorter repayment terms (1–3 years) than many traditional term loans (5 years).
The cost of short-term loans is another way they vary from regular loans. Interest rates typically start at 8% but may go considerably higher.
Short-term loan qualification is comparable to term loan qualification. So long as your restaurant has been open for two years or more and you have good credit, you will be approved by lenders.
Kitchen and dining room equipment are high costs in running a restaurant. Thus, equipment finance may help small company owners receive the equipment they need to succeed.
This sort of funding gives up to $5 million. To buy fryers, fridges, freezers, ice makers, and grills. It also applies to less apparent options like accounting software or a payment processing system.
The qualification process is straightforward because the equipment you buy can be used as collateral for the loan. Because the lender has a built-in safety net, they are more prepared to grant large sums of money without any checks even if the borrower’s credit score is low.
Restaurants need significant purchases, but also minor, ongoing costs. A line of credit excels because it allows you to draw on a fixed amount of money whenever you need it.
If this sounds familiar, it’s because a line of credit is identical to a personal credit card. Instead of having a flat sum loan, you just make purchases as needed and pay back the precise amount.
A company line of credit is flexible. Almost all restaurant transactions are approved. This financing may help you finance a broad range of minor to medium-sized items.
How to Choose the Best Restaurant Loan
Due diligence can help you restrict your loan alternatives to a few excellent candidates. Then comes the math. Use pricing parameters like Total Cost of Capital (TCC), Annual Percentage Rate (APR), Average Monthly Payment (AMP), and Cents on the Dollar to locate the best loan for your needs.
Don’t worry if you’re not good at numbers. There are several resources to assist you through this. Simple loan calculators help visualize expenditures. This is a fantastic location to start comparing loans.
You are not alone in your struggle to locate comparables and a clear winner. Many borrowers struggle to understand the varied terms lenders use to explain their loans.
To address this, the Innovative Lending Platform Association teamed together with leading lending platforms to produce SMART BoxTM (Straightforward Metrics Around Rate and Total cost). It’s an easy-to-use tool for comparing metrics and disclosures.
Presenting Your Best Application
When it comes time to apply for your selected loan, remember your meticulous process thus far. Each lender has distinct guidelines for borrowers, which must be strictly followed. Consider your application as a lie detector exam. Your company strategy may be excellent, but your application is where your genuine abilities shine. If you miss deadlines or fail to provide essential paperwork, lenders may assume you are unqualified to handle their funds.
While each lender’s application may differ, the following papers are often requested:
- Business plan
- Collateral information
- Personal and corporate taxes
- Statements of income
- Background facts about you
- Financial projections
- Personal and corporate bank records
- Business permits and licenses
- incorporated articles
- Third-party contracts
Taking the time to examine each application stage can help you become authorized. It’s a long process, but it pays well for your establishment. And each application you submit is another chance to learn more about your financing alternatives and your restaurant’s particular requirements, ensuring future success.