How to Get a Restaurant Loan
Running a food business can require a considerable amount of cash. Restaurants, in particular, are some of the most popular entrepreneurial endeavors, but they come with a hefty price tag. A loan is almost always the avenue restaurateurs use when starting out, but even the leanest pop-up shops may need an infusion of cash from time to time.
See what it takes to find the best loans available, how to ask for the money, and what successful borrowers are doing to make loans work best for their restaurant business.
Know Your Costs
There’s a real danger in not asking for enough money with your first loan. That’s why it’s vital to understand what it costs to start a restaurant business, to keep your doors open once you’re up and running, or to expand to a second location.
Even if you’re not open for business yet, knowing the details of your operating budget can help you plan for the size of loan you’ll need. Include everything from real estate and equipment costs to employee wages and permitting in your estimates.
Don’t hesitate to aim high; it’s better to ask for more money and pay back loans early than struggle through because you didn’t ask for enough.
Create a Plan
Hopefully, you’ve already created a business plan for your restaurant; if you haven’t, consider creating one before you seek funding. Asking an established restaurant owner to act as a mentor, or working with a mentor from an organization like SCORE or a Small Business Development Center can be helpful.
According to the U.S. Small Business Association, you should make sure your business plan has these core components:
- Executive summary: This is the overview of your business, what it offers, and what needs it will serve. Use plain language and make it easy to understand.
- Company description: Use this space to share more about your vision, including any new trends or services you seek to provide. Include details about demographics, pricing, ingredients, and other relevant brand specifics that tell you apart from other businesses in your niche.
- Market analysis: Often the most intense portion of a business plan, expect to show how you’ll achieve success in the industry through three main sections:
- Industry specifics that expand upon what you mentioned in the previous areas, such as the type of people who you’ll serve
- Competitive summary of other businesses that do what you do, how you’ll do it better, and why you’ll be profitable in the face of competing restaurants
- A marketing plan that goes into the specifics of your plans for promoting your business.
- Business operation: Here is where you get into the gritty details of how the restaurant will be run, from where you’ll buy your liquor to how many workers you’ll have.
- Management and ownership: There’s a real danger of having too many cooks in the kitchen–or not enough. Decide now what role owners will take in the business, how many managers can oversee the business, and what contingency planning you’ll need.
Popular Types of Loans for Restaurants
Some lenders consider loans to restaurants as high risk and will impose strict requirements to qualify. You may need to talk with several lenders to find out whether they typically make loans to restaurants, and whether they make loans to a business at your stage—start-up or expanding, for example.
Here are three types of loans that are popular with businesses in this industry:
Banks and credit unions often offer the lowest cost financing, and options may include a line of credit or term loan. Some offer SBA-guaranteed loans with very attractive interest rates. However, it can take weeks or even months to be approved for a bank loan.
Some loans, including many popular SBA loans, will use a FICO SBSS score—a credit score created by FICO to evaluate small businesses—to screen applications. That score takes into account the owner’s personal credit data as well as the credit report of the business.
- Qualifying: Extensive documentation may be required, including copies of bank statements, personal and business tax returns, and a business plan. In addition, the lender will likely check the owner’s personal credit scores, and it may check business credit scores.
Merchant Cash Advances
Also called “business cash advances,” this type of financing is available to businesses such as restaurants that have a high volume of credit card sales. An MCA is technically not considered a loan, but rather an advance against future credit card sales. The advance will be repaid by deducting payments directly out of future credit card sales.
Payments may be calculated as a percentage of sales, which helps cash flow because payments are lower when sales are slow. However, this funding can be very expensive, with APRs of 38% or more.
- Qualifying: Strong personal and business credit scores are not typically required. Instead, the restaurant’s credit card sales for at least the most recent 3 months will be evaluated to determine the amount of the advance.
Because traditional lenders are making fewer small business loans, alternative lenders have stepped in to fill the gap. Many offer fast approval and flexible credit requirements for businesses with strong revenues. Terms and costs vary widely, however. Restaurant owners may want to review offers with their accountant or a business mentor.
- Qualifying: The restaurant owner will likely have to document revenues, either by sharing business bank statements or by linking a business bank account. Lenders may also have minimum personal credit scores requirements and may require the restaurant be in business for at least 6 months to a year or more.
The Pros and Cons of Restaurant Business Loans
While a loan may seem like the perfect solution to your financial challenges or your ambition for growth, make sure you understand the costs and how payments will impact your revenues. Many restaurants have slim margins or experience seasonal fluctuations in revenues. Take those into account to determine whether those payments will create cash flow problems.
In some cases, it may be wiser to scale back plans for expansion, find ways to increase business, or even to seek funding from investors who are willing to invest in future growth without expecting immediate repayment.
It’s often said that the easiest time to get a loan is when you don’t need one. Plan ahead so you are ready to seek funding when the time is right. By completing the above steps and familiarizing yourself with what qualifying for a loan entails, you’ll be one step ahead if you want to expand your restaurant and need extra cash to make it happen.
Proactive Funding Solutions. "The Timeline of Receiving an SBA Loan," Accessed Oct. 2, 2019.
FICO. "FICO Small Business Scoring Service," Accessed Oct. 2, 2019.
Headway Capital. "Merchant Cash Advance," Accessed Oct. 2, 2019.
Focus Merchant Services, LLC. "Merchant Cash Advance," Accessed Oct. 2, 2019.
Kabbage. "Merchant Cash Advance," Accessed Oct. 2, 2019.
United Capital Source. "Merchant Cash Advance Loans to Grow Your Small Business," Accessed Oct. 2, 2019.
Credibly. "Merchant Cash Advances," Accessed Oct. 2, 2019.
Kabbage. "Qualifying for a Kabbage Loan," Accessed Oct. 2, 2019.