Loan Types for Restaurants

The restaurant business is fast paced and rewarding but cutthroat too. It requires the right funding choices as most restaurant business owners do not have the cash to get started. Some form of loan or financing to get the ball rolling. There are several components to financing a restaurant which is what we will be discussing in this article.

Restaurant Startup Costs

There are lots of costs involved when starting a restaurant business. some of the costs include equipment, furniture, and location. The rent is high if you want to be in a large city but there is more potential for customers who will make up for the high costs.

Finding the right loan for your business can be confusing but the following different restaurant loan types will help you choose. Business owners that want 100% of their equity should choose loans instead of equity financing. This prevents unwanted partners such as family members.

For working capital, restaurants can use a business line of credit which will help during cash flow shortfalls that are common in the restaurant business. Loans backed by the Small Business Administration are also an option for some restaurant owners.

Traditional Commercial Lending

Banks will lend money to restaurant businesses, but this process is not a quick way to obtain capital. It can take months for a bank to approve the loan and this approval is not guaranteed. The advantage of this type of loan is the interest rates are low. However, this requires the business owner to have good or excellent credit. The bank might also require personal guarantees or collateral.

Banks considering lending to restaurant owners would prefer that the owners have experience in the industry. It is not essential, but it can boost the chances of getting funding.

Business Line of Credit

A line of credit is a short-term loan for an agreed upon amount of money. The restaurant owner can tap into the cash up to the maximum amount but is not required to use all of it. The advantage is that interest is only charged on the amount borrowed at that moment in time. When the owner pays back the loan in full, it is once again available to be used at a later date.

The disadvantage of a business line of credit is that the interest rates tend to be higher than alternative loan and it might be tempting for restaurant owners to overextend. This can hurt the business if they are not paid back in a timely manner.

Things You Need When Applying for Restaurant Loans

The things you need when applying will vary by lender, but the following items might be required. They might require a personal guarantee or collateral and personal tax returns for several years. Lenders might request resumes of the owners to see how much experience they have in the industry.

The following might be requested when you apply:

  • Sales forecasts or projections.
  • Break-even analysis
  • Marketing plan
  • Projected startup costs
  • Projected operational costs such as inventory and staff training
  • Lender might ask about breakout fee and license to run the business.