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How to Get a Restaurant Loan: Everything You Need to Know

By John Csiszar

The very thought of opening a restaurant has long been a dream for many. After all, who doesn’t like gathering with friends and eating delicious food? To be able to impart that joy to others — and make a profit doing it — can be the greatest thrill of all. This desire can be kicked up into an even higher gear in this age of countless reality TV shows, with each one extolling the virtues of cooking and holding up chefs as celebrity rock stars.

In one sense, this is a good thing. For far too many years, the restaurant business has gotten a bad rap as a sure money loser. While it’s true that many restaurants don’t make it past the three-year mark, it’s also true that well-planned, well-executed restaurants can thrive for decades to come. In fact, restaurants actually have a huge wind at their back — as of 2018, for the first time ever, the amount of money spent on food at restaurants exceeded the amount spent on food at grocery stores. That’s a huge secular shift that bodes well for restaurants able to tap into this trend.

However, as with most things in life, the actual reality of owning a restaurant can be very different than what’s depicted as “reality” on the small screen. For starters, the restaurant business is very capital-intensive. You could be the greatest chef or restaurant manager in the world, but if you don’t have money to finance your dream, you’re simply out of luck.

Fortunately, there’s a plethora of options when it comes to restaurant financing. Whether you need a loan to get off the ground or you’re looking for some capital to finance an expansion, there are plenty of lenders that offer small business loans for restaurants. Remember that the best loans are the ones that help you accomplish your business needs with the lowest rates and fees. With that in mind, here’s a look at the primary types of funding options you’ll likely need at some point in your restaurant career, along with a financing solution for each phase.

Compare The Best Restaurant Financing Options

Type of Borrower Funding Source Funding Type Loan Amount Fees May Include Rates Down Payment Terms Take Action
Restaurant Initial Financing Friends & Family Equity Variable Typically none Ownership N/A Usually equity is held until bought out
Restaurant Startup Expenses Seek Capital Variable Up to $500,000 Varies Depends on credit 0% Down Options Available Flexible
Restaurant Equipment Loan 0% financing or low-rate lenders Collateralized loan Up to $500,000+ Application fees, origination fees 6% to 9% and up 0% to 50% Typically for the standard depreciable life of the equipment
Restaurant Inventory Financing Line of credit On-demand Up to $1,000,000+ Maintenance fees 0% to 29.99% 0% to 20% As needed
Restaurant Invoice Financing Fast business loan Short-term Up to collateral limit Origination fees 9.99% to 29.99% 15% to 25% Usually very short-term
Restaurant Working Capital Loan Big Bank Business loan Up to $500,000 Up to $1,000,000+ 3.5% and up 0% Typically, as much as 15 or 30 years
Restaurant Expansion Loan SBA Traditional loan Up to $5,000,000 Origination fees, packaging fees, loan guarantee fees 5.99% to 29.99% 10% to 25% For the life of the project

Top 7 Options for Restaurant Financing

1. Restaurant Initial Financing

How to Get Restaurant Financing as a New Restaurant

If you’re a first-time restaurateur, your financing options with traditional lending institutions are likely to be limited. While it’s true that banks and financing companies are in the business of lending money, they’re not charitable organizations. If they can’t turn a profit, they can’t stay in business. Since you have no track record in the restaurant business, you pose a high risk of not being able to pay back your loan. Most banks won’t even consider a loan for a restaurant startup since you don’t already have a proven history of generating restaurant profits — or even revenue. Thus, you might have to dip your toe into equity financing, rather than debt financing.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

Equity financing is the polar opposite of debt financing. With debt financing, which encompasses most traditional loans, you borrow money from a lender and pay back what you borrowed plus interest. With equity financing, the upside is you don’t have to make any interest payments, and you don’t even have to pay back money that you received. The downside is you have to trade away shares in your company. In other words, for the life of the company, you won’t be earning 100 percent of your profits. A portion of your blood, sweat and tears goes to paying returns towards your passive shareholders, who don’t have to exert a finger of effort to suck profits out of your company. In extreme cases, you might end up losing control of your company. If you’ve financed away over 50 percent of your business, you no longer have a majority share, and other shareholders can tell you what to do, even to the point of ousting you from the company

Now, the reality of equity financing usually isn’t as sinister. As a startup company, you’re not likely to generate equity interest from venture capital companies or “shark” investors who only want to tell you to work harder and take larger and larger shares of your company. At this stage, your most likely investors are friends and family. They provide you with the startup capital your restaurant needs, and in exchange, you give them a percentage of your company.

This is where the true upside of equity financing comes in. When you give away shares in your company in exchange for financing, you don’t ever have to pay it back, nor do you have to pay interest. Your shareholders are entitled to their representative share of your profits, but you don’t have to pay any money back to them at all if your restaurant is slow to generate revenue. This can be crucial for a new restaurant, as it’s hard to generate a profit for at least a few months or even years at the outset. Restaurants have to contend with all kinds of costs, ranging from construction and marketing to supply chain expenses and personnel, all the while trying to build up a consistent revenue flow. With equity financing, new restaurants aren’t burdened with interest costs on top of all of these other traditional expenses.

That depends — how close are you with your aunt and uncle?

While that’s not really a serious consideration, it’s true that it helps to have a good relationship with your friends and family if you intend to raise financing for your new restaurant. But beyond that, you have to remember that you can’t just rely on the good will of others and expect to be successful. Approach your equity raise from friends and family like it’s the business relationship that it is. In other words, don’t just ask for money. Develop an effective restaurant business plan that can prove to your investors — yes, even if it’s your favorite aunt and uncle — that you have what it takes to get them a return on their investment. Analyze your expected expenses, map out your projected revenues and chart the path towards profitability in writing. Even if your business plan isn’t enough to raise money from all of your friends and family, it’s a critical step in helping you analyze where your business is on track and where your ideas might be short-sighted.

There’s no real “limit” as to how much you can raise by selling equity in your company. It all comes down to how much you and your investors value your company. Of course, in an equity raise, you don’t want to give away the store. Even if you think your restaurant is fairly valued at, say, $100,000, you don’t want to take $100,000 in capital and give away 100 percent of your shares right off the bat.

With an equity raise, particularly from friends and family, you won’t need the type of financial documents you’d need to present to a bank to get a loan. However, you should still have a well-developed business plan outlining all of your real and projected financials. You’ll need to present your investors with a case in which they’ll be earning a return on their investment, and in how long you project that to occur.

The terms of an equity raise are usually pretty straightforward. You’ll present your investors with an estimate of the value of your company, and the percentage ownership they’ll receive is based on how much money they’re willing to put up. For example, if your company is theoretically worth $100,000 and your investors collectively put up $25,000, you’re giving up 25 percent of the equity in your restaurant.

2. Restaurant Startup Expenses

How to get Startup Restaurant Financing

Many new restaurateurs are neither willing nor able to undergo an equity raise. Perhaps you don’t have enough friends and family to contribute meaningful capital to your endeavor, or perhaps you don’t want to give up shares in your company before you even get off the ground. What are your other options when it comes to raising money to pay for your restaurant startup expenses? Since banks aren’t really an option at this point, your best bet is an alternative option like Seek Business Capital.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

Seek Business Capital is the go-to choice if you’re starting a new restaurant because larger institutions simply won’t deal with you. There’s an old joke in the industry that banks only lend money to people who don’t need it — and while the frustration expressed makes for a good punch line, it’s also based in truth. Large, traditional lenders typically only lend money to businesses they regard as sure things — long-established companies with years and years of consistent revenue and earnings growth. While your restaurant might ultimately turn out to be the biggest thing since Shake Shack, if you don’t already have proven revenue, you’re unlikely to get a dime from traditional lenders.

Alternative lending options like Seek Business Capital specialize in startup companies, which means you’re much more likely to get financed for your restaurant startup costs. This doesn’t mean that Seek Business Capital doesn’t do its own due diligence — if your restaurant doesn’t have a solid business plan or a path to profitability, you might still not get your startup restaurant funding. However, Seek Business Capital works almost exclusively with startup companies and offers fast approval to help these businesses get off the ground.

Startup restaurant financing rates from alternative lenders like Seek can often begin at a promotional rate as low as 0%, with a variable rate thereafter based on your credit profile. Depending on the type of funding you qualify for, there might be rates in the same range as a personal loan, which might start at 5.99% and go upwards from there. As with all things finance, the rates and terms you get ultimately depend on credit. The better your credit, the better rates you can typically expect in the world of finance.

As a startup, you’re likely to qualify for your startup restaurant loan as much on the strength of your own personal credit as the profile of your business. Think about it this way: Your restaurant business — which is just starting out — has no income or profits. Strictly on that basis, you have no way to repay your business loan. However, if you’ve got a high personal credit score and you have never defaulted on any of your debt payments, you’re demonstrating to your potential lenders that you’re responsible with your finances. This credit profile means it’s less likely that you’re simply going to run up bills on your restaurant’s credit and not repay them. Thus, the combination of a solid restaurant business plan and impeccable personal credit are more likely to make you eligible to get funding.

As a new restaurant, you’re not as likely to get a huge loan right out of the gate as a more established business might. That said, alternative lenders that work specifically with new companies can often extend offers of sizeable loans. Seek Business Capital, for example, can provide funding options for startup companies up to $500,000, depending on the borrower’s credit profile and other business information. Again, the amount of capital you can get is directly correlated with the likelihood that you can pay a lender back. A solid path to growing earnings and a spotless credit history can both help in that regard.

Even though an alternative lending option that specializes in startup businesses can understand you won’t have a decades-long, spotless credit history, you’ll still have to demonstrate the ability to pay back your loan if you want to get financed. Although you won’t have the extensive financial records that a more seasoned business might, you should still expect to provide as many of these documents as possible to qualify for your loan:

  • Access to your personal credit score, which should be at least 680
  • Evidence of cash reserves in bank accounts
  • Documentation of any industry experience
  • Financial specifics of your restaurant (e.g., outstanding debts, shareholder equity, projected cash flows, etc.)
  • Pay stubs or other documentation of income, in some cases
  • Credit card, loan and other debt documentation, in some cases
  • Bank statements, in some cases
  • Your restaurant business plan, in some cases
  • Personal income tax returns, in some cases

Always highlight your strengths when applying for a loan, particularly as a startup. If you’ve got substantial cash reserves, emphasize how much capital you are willing to provide to back up the business. If you have successful investors on board already, offer evidence of their prior industry success to your potential lenders. If all you’ve got is a great restaurant business plan and a perfect personal credit score, be upfront and honest with your lender and try to work out a deal that offers the best chance of success for both sides of the table.

Terms with alternative lenders are usually quite flexible — that’s why alternative lending exists. Rather than forcing you into a traditional loan structure, alternative options like Seek Business Capital that specialize in startup businesses understand that cash flow can be irregular and slow to start with. That’s why an alternative lender might be able to arrange a 0% promotional rate to begin your relationship. As your business starts to succeed and money begins to tumble in, you can pay back your loan with larger and more regular payments.

3. Restaurant Equipment Loan

How to Get a Restaurant Equipment Loan

One of the most vital areas of financing for a restaurant is equipment. Depending on the type of restaurant you plan to open, you’ll have to get either a commercial lease or a loan to buy everything from stoves and ovens to refrigeration units, freezers, deep fryers and a host of other kitchen equipment. In most cases, you’ll need this equipment as soon as you decide to start a restaurant business. Once your restaurant is an ongoing concern, you’ll often need equipment immediately to replace broken or malfunctioning units. Restaurant equipment loans are therefore usually funded quite rapidly, using the equipment itself as collateral for the loan.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

An equipment loan works like any other type of collateralized property loan. First, you need to find the equipment you want to purchase. Then, you have to decide how much of your own capital you want to invest into the equipment. Whatever amount is left will have to be financed. Some lenders are willing to loan you up to 100 percent of the value of your restaurant equipment, but you might have to pay a higher rate if you aren’t willing to put up any of your own money.

Rates on equipment financing can be reasonably low because lenders have collateral with a specific and knowable value backing up the loan. This reduces the risk to the lender, which in turn typically lowers the interest rate. With reliable equipment from a well-known manufacturer, you might be able to get an equipment loan in the 5% to 7% range. As a new restaurateur, you might face a slightly higher rate, as you would if you have fair to poor personal credit.

Equipment loans can be easier to get than general financing loans for a restaurant because you are collateralizing the debt with an actual machine with a demonstrable worth. If you default on your loan, your lender can simply repossess the equipment and be reimbursed, at least partially. This is in contrast to a general restaurant loan, where a lender might be left holding the bag if the business goes bankrupt. Thus, you might find it easier to be eligible for an equipment loan.

That being said, no lender is just going to fork over money for new restaurant equipment just because it might be worth than the amount lent out. Lenders will still want to see that you’re a viable restaurant company and that you have the knowledge and ability to use your new equipment to turn a profit and pay back your loan, with interest.

With a restaurant equipment loan, you might be able to get up to 100 percent financing. However, if you’re a new restaurateur, this might be harder to pull off. You should expect to put up at least some of the money towards your new equipment, unless you already have a track record of consistent and rising revenue and profits.

The most important documentation you’ll need for an equipment loan is the information about the equipment itself. Is it brand new? If it’s used, how old is it, and in what condition? What is the expected life of the equipment? What are the depreciation rates for this type of equipment? And, of course, how much does the equipment cost?

While your lender likely knows the answers to questions about things like depreciation and expected life, if you don’t know the answers yourself, you’re less likely to convince a lender that you have the industry savvy to make your restaurant a winner. From a strict documentation standard, you should be expected to provide most if not all of these documents to your potential lender:

  • Pay stubs or other documentation of income
  • Credit card, loan and other debt documentation
  • Access to your credit report
  • Bank statements and evidence of cash reserves
  • Evidence of any experience in the industry
  • Your restaurant business plan
  • All relevant information regarding your equipment, from pricing to condition

Not all lenders will require all of this information, but the more likely you can make it appear that you can pay back your loan, the more likely you are to get your equipment financed.

A restaurant equipment loan is often tailored to match the so-called “usable life” of the equipment you’re financing. Lenders won’t extend terms longer than this useful life because that means their collateral will be essentially worthless before the loan has been paid off, putting them in a precarious financial position. The usable life of a piece of equipment is typically delineated by the Internal Revenue Service, which assigns the lifetime over which a company can depreciate a business asset.

4. Restaurant Inventory Financing

How to Get Restaurant Inventory Financing

Inventory is the bread and butter of the restaurant business — literally. A business without food and beverages to sell isn’t a restaurant, it’s a meeting place. So, you’ll need to build a supply chain and make sure that you’ve got food in your refrigerator, freezer and pantry before you can open your doors.

Since restaurant inventory consists primarily of perishables, you can’t just load up on food and cook it over the next 10 years. While some goods can be frozen, you’ll likely need a constant — but irregular — supply of foodstuffs. For this reason, applying for a business line of credit is usually your best option when it comes to restaurant inventory loans.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A line of credit isn’t a traditional installment loan. Rather, it’s a type of “always-on” loan that only kicks in when you have a need. For example, the first weeks or months that you are working on opening your restaurant, you’ll mainly need to finance startup and equipment costs. You won’t need to buy your actual food and beverages until you are actually ready to throw open your doors. During this time, your line of credit stands at the ready but doesn’t actually go into effect just yet. Only when you apply your first inventory purchases to your line of credit will you actually borrow the money and trigger interest charges.

Rates for a line of credit are generally above those for equipment loans but below those for unsecured personal loans. You are actually using the line of credit for specific, well-defined purchases, unlike an unsecured loan that can be used for anything you desire. However, having food and beverage as collateral isn’t as secure for a lender as, say, equipment, which can easily be repossessed. The viability of your restaurant and your personal credit history are likely to play important roles in your rate, which can often be in the single digits. Still, while you might be able to snag promotional rates near 0%, spotty credit and a short operating history can lead to rates approaching 30%.

IMost new restaurants will be eligible for some type of line of credit to finance their inventory. The reason is that inventory financing is collateral-based. While it certainly helps if you have a stellar credit record and can support the case that your restaurant will be profitable, as long as you have verifiable inventory to back up your line of credit, you’re likely to be eligible.

When applying for a line of credit, try to get the highest limit you can. Unlike a traditional loan, you’re not immediately on the hook for the entire amount. But there might come a day when you need more inventory than usual, say for a private event or a special occasion. In that case, you’ll be happy that you’ve got a larger credit line than you normally work with.

Also, with a line of credit, you can usually pay back what you borrow as rapidly as you like and not face any prepayment penalties, so having a large line isn’t as big a financial commitment as a traditional loan. For example, let’s say your inventory is depleted but a big weekend is coming up. If you run up a $5,000 grocery bill on your line of credit but sell out your restaurant all weekend, you can pay down that debit immediately and only be charged for a few days’ interest.

The point is that having a large credit line doesn’t mean you’re overreaching financially. Think of it as an important backstop giving you the peace of mind that you can fulfill all of your restaurant inventory needs on a daily basis. Although your new restaurant isn’t likely to need nearly this amount, there are restaurant lines of credit that can run up to $1,000,000 or more.

Your line of credit isn’t a traditional installment loan, but you’ll still need to meet a lender’s underwriting requirements to establish one. As a new restaurant, your operating history might be short or nonexistent, so you’ll have to demonstrate strong personal credit and any additional information that can reduce your risk in the eyes of the lender, such as a sound business plan. Additional documentation you might have to provide include the following:

  • Financial specifics of your restaurant (e.g., amount of existing debt, anticipated use of credit line, etc.)
  • Pay stubs or other documentation of income
  • Income tax returns
  • Credit card, loan and other personal debt documentation
  • Your credit report
  • Personal and business bank statements and evidence of cash reserves
  • Documentation of any prior or current experience in the industry
  • Your restaurant business plan

As with installment loans, the more solid a credit profile you provide your lender, the more likely you are to be approved, and the higher your line of credit is likely to be.

A line of credit by its nature is an “on-demand” loan. If you don’t need credit at any given time, your line of credit remains readily available. When you need to draw on your credit line, you can access it at any time. You might be able to contact your bank for an instant cash transfer, or you might be able to use a card to access your line, depending on your lender.

As an “on-demand” type of loan, you won’t have to worry about paying off your line of credit in regular installments over 20 years, for example. You can either keep the line open, paying interest on what you borrow as you go, or you can pay it off whenever you have sufficient receipts to cover your costs. Once you’ve paid off the usage on your line, it doesn’t close out the loan; rather, it frees up more credit on your line that you can borrow again at any time in the future.

5. Restaurant Invoice Financing

How to Get Restaurant Invoice Financing

Every business has to deal with the slow receipt of payments, and restaurants are no different. It’s all well and good to make sales, but if it takes days, weeks or even months to get paid, that could be crippling for your business. Especially as a startup in such a capital-intensive business, getting paid rapidly is critical for your restaurant. To get you through the gap times, restaurant invoice financing is often necessary via a fast business loan or a merchant cash advance.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

A fast business loan is a method of financing that lives up to its name. You can usually get a fast business loan the same business day, sometimes in a matter of hours or even less. This is critical because you’ll always need capital, especially when starting out. You might need to be purchasing ingredients or equipment nearly every single day, in addition to meeting other obligations like rent and payroll. If customers owe you $10,000 and aren’t paying on time, your other bills might suffer. This can trigger a chain reaction whereby you ultimately go out of business. A fast business loan stands ready to fill this cash flow gap with nearly immediate funding whenever you need it.

Due to the urgency of these types of loans, fast business loans are often more expensive than longer-term or equipment-based loans. You can expect to pay a double-digit interest rate on many invoice financing loans, but the rates aren’t as significant when you consider that these types of loans are typically of very short duration.

Even if you’re a new restaurant owner or have middling credit, you can often qualify for a fast business loan. This is because your accounts receivable will serve as collateral for your loan. If you’re owed $10,000 in customer payments, for example, a finance company is likely to extend you a loan for at least a significant portion of that, knowing that they’ll be paid off as soon as your invoices get paid.

Even though invoice financing is a relatively safe bet from the perspective of a lender, you’re unlikely to get 100 percent of your invoices financed; that would require the lender to take on the risk that all of your invoices do ultimately get paid in a timely fashion. Banks and finance companies use tables and probabilities to determine how much of your accounts receivable they feel they can safely finance. Over time, as your payment rate gets a track record, you might be able to finance a larger amount of your invoices.

Since invoice financing isn’t a traditional loan, you won’t face the typical business loan requirements to qualify, such as years of income tax returns and cash flow statements. What you will need is documentation of your invoices. Since your lender is advancing you money on the promise that these invoices will be paid, the more rock solid your invoices, the more likely you are to qualify for financing. Understand that if one or more of your invoices come from unreliable sources then you may be denied financing, or at least charged a much higher interest rate. That being said, if you have an exemplary personal credit rating, and your business has never defaulted on any payments, those qualifications should be brought to the attention of your lender.

Invoice financing is somewhat akin to an emergency fund. If you arrive at your restaurant one day and the $10,000 you’re expecting in cash hasn’t arrived, you have an emergency on your hand and will need to turn to the financing market.

The terms of your invoice financing are likely to be simple to understand and extremely short-term in nature. You might be able to pay back your fast business loan within a day of receiving it. If you think that you won’t be able to pay back your invoice loan within a month, you should consider different financing options for your business, as the high interest rates associated with invoice financing could put a serious drain on your operations.

6. Restaurant Working Capital Loan

How to Get a Restaurant Working Capital Loan

Once you’ve established a successful business, you might need a working capital loan to keep everything moving smoothly. If you don’t want to dip into your operating capital to meet your new financial objectives, consider a restaurant working capital loan. These types of loans don’t necessarily need to be dedicated to a specific purpose. Maybe you need to hire a more experienced wait staff or a better manager; maybe you want to move into a partnership with another business; maybe you just need extra capital around to be able to respond more quickly to current business trends. A general working capital loan might be the answer you’re looking for.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

For a large working capital loan, your best bet is to go with a large, multinational bank. These types of banks are familiar with the intricate problems that successful businesses encounter, and more to the point, they’re more willing to work with you once you’ve proven your restaurant to be a successful venture. The process can be as simple as meeting with a banker and explaining what your capital needs are.

Remember that interest rates on loans are tied to the amount of risk that a bank takes on. If your restaurant business is thriving, with consistently rising profits and a history of prudent capital management, big banks will be fighting over themselves to finance you. As such, your rate on a large working capital loan will likely be in the low single-digit range.

If you’ve been in business for a few years, never defaulted on any of your loan payments and show consistent revenue and profits, you’re definitely eligible for a working capital loan. If your restaurant business has simply existed for years but has never demonstrated the ability to turn a profit, then additional funding, particularly from a large bank, is likely out of the question.

You’re likely to qualify for a fairly large loan amount if you’re applying for a working capital loan because you theoretically already have everything lenders are looking for. If your restaurant regularly generates annual revenue of over $1 million, you can probably qualify for at least $1 million in working capital financing, assuming all of your other financials are in order.

Even if you think you have the most spotless credit history in the world, potential lenders aren’t just going to take your word for it. Lenders will want to see that information in black and white. Proving that both your personal and business credit is top tier will require lots of documentation. You can expect to be required to show most if not all of the following documents to your lender:

  • Business records for the past three years, particularly regarding both past and current profit and revenue trends for your restaurant
  • Documentation of income you are taking out of the business
  • Three years of business and personal income tax returns, in some cases
  • Credit card, loan and other debt documentation, both for yourself and for your business
  • Access to your business and personal credit reports
  • Bank statements and evidence of cash reserves
  • Your current, updated restaurant business plan
  • A list of current investors and creditors, if any
  • Any additional evidence to support your claims of good credit

Remember, the more positives you can present, the lower you are to qualify for a loan and snag a low interest rate.

Terms for working capital loans are typically relatively flexible. Unlike a real estate or equipment purchase, which are generally long-term in nature, a restaurant working capital loan will likely get paid down relatively quickly through excess cash flow. Most working capital loans are structured as traditional installment loans, with interest and principal paid back over a number of years. It might be possible with some banks to structure a working capital loan as a business line of credit, similar to a restaurant inventory financing loan. In that case, there aren’t any explicit payback terms; your line of credit stands available at any time, and once you draw upon it, you start paying interest until you pay it off.

7. Restaurant Expansion Loan

How to Get a Restaurant Expansion Loan

You’ve done it, you’ve hit the big time! If you successfully navigate the waters of becoming a startup restaurateur, there might come a time when you need to expand. If you prudently opened a small, one-room restaurant when you were first starting out, you might need to blow out some walls and expand your footprint if you now have lines out the door every night. Just like starting a brand-new restaurant, expanding your restaurant is going to take additional capital. The main difference in this instance is that your best financing option is likely to be an SBA loan, also known as a 7(a) loan.

  • How Does It Work?

  • What Are the Rates?

  • Am I Eligible?

  • How Much Can I Get?

  • What Documents Do I Need?

  • What Are the Terms?

As the name implies, the U.S. Small Business Administration, or SBA, is designed to provide assistance to small businesses. In one sense, SBA loans are a win-win for both borrowers and lenders. The SBA doesn’t actually underwrite small business loans; rather, it provides guarantees to banks making loans to businesses. This makes lenders more likely to provide you with small business funding, since the SBA guarantees loans against default. The problem is that while the SBA works with small businesses, it doesn’t generally finance startup loans. When you apply for a small business loan, you’ll need to qualify for an SBA loan just like you would with any traditional bank before you can get a loan that the SBA will guarantee.

Rates for SBA loans are generally quite favorable. Since the loans are guaranteed by the SBA, lenders are more willing not just to work with small businesses but to provide them with a favorable interest rate. If you qualify for an SBA loan, you can expect to receive an interest rate somewhere in the mid-single digits. The SBA also imposes a maximum interest rate on loans, as follows:

Loans Less Than Seven Years
$0 - $25,000 Prime + 4.25%
$25,001 - $50,000 Prime + 3.25%
Over $50,000 Prime + 2.25%
Loans of 7+ Years
$0 - $25,000 Prime + 4.75%
$25,001 - $50,000 Prime + 3.75%
Over $50,000 Prime + 2.75%

If you’re expanding your restaurant, you’re likely eligible for an SBA loan. As a prudent restaurateur, you probably wouldn’t expand your restaurant unless you were already profitable and your new expansion would bring in additional revenue and earnings. This combination is music to the ears of banks, as it means your risk profile is likely low. In this type of financial position, you’re likely to qualify for an SBA loan.

Your goal in a restaurant expansion loan is to get enough financing to cover everything you’ll need for your project, plus a buffer in the case of cost overruns. Many lenders will offer you a loan sufficient enough to cover these expenses because if you can’t complete your entire renovation, your restaurant is more likely to falter, meaning your lender will be taking on more risk. So, in this case, a lender might be more generous to ensure that you get your restaurant functioning the way it needs to be to draw in all that additional revenue and profit. However, your limit will be tied to the current and future profitability of your restaurant, which you’ll have to demonstrate through financial documents and a believable business plan projecting your future gains. There is, however, a set limit of $5,000,000 on SBA loans, with no more than $3,750,000 coming from any one lender.

To qualify for an SBA loan to expand your restaurant, you’ll basically need the same documentation as if you were filling out a loan application for a general working capital loan. To ensure you’ll qualify and get offered the best rates, provide your complete financial picture to your lender. You’ll need to show that you understand the business and can run it successfully, that you have an excellent credit history, and that at least $1 of your own money is at stake for every $3 that you borrow. Documents that can help you get a loan include the following:

  • Current business overview of your restaurant (e.g., how long you’ve been in business, how much money you’re making, what are your revenue and profit trends, etc.)
  • Documentation of earnings, including how much you take out of the restaurant to pay yourself
  • Three years of income tax returns, in some cases
  • Credit card, loan and other debt documentation
  • Access to your personal and business credit reports
  • Bank statements and evidence of cash reserves
  • A restaurant expansion business plan, outlining exactly how you intend to spend/invest your loan proceeds

Just like with a general loan, the higher your credit score and the better the state of your overall business, the more likely you are to get approved.

Although most SBA loans are limited to 10 years, loan terms for real estate acquisition or construction loans can run as long as 25 years.

FAQ: Restaurant Loans

Raising capital to open up a new restaurant can bring up a lot of complicated questions. If you want to improve your chances of success, it’s important to do your research. To help, we’ve answered some of the most common questions that new restaurateurs often have, particularly regarding financing.

How Much Does It Cost to Open a Restaurant?

To get a real-world sense of how much it costs to open a restaurant, it pays to look at actual restaurant data. According to RestaurantOwner.com, the average median total restaurant startup cost is $375,000. The highs and lows of the range are $750,500 and $175,500, respectively. Of course, restaurant costs are highly variable, and your restaurant might fall outside of that range. The median cost is a good ballpark though when you start thinking about how much money you might need to open a restaurant.

How can costs add up so high? Here are some sample costs you might expect to pay when you open a restaurant, in addition to the price you pay for rent, a mortgage or an outright building purchase:

  • Inventory: $5,000
  • Security deposit: $10,000
  • Utility deposit: $5,000
  • Escrow fees and closing costs: $1,500
  • State Board of Equalization deposit: $10,000
  • Business license: $500
  • Health department fees: $300
  • Department of Alcoholic Beverage Control fees: $2,000
  • Working capital reserves: $90,000

Those sample costs already total about $125,000, and you haven’t yet hired any workers, bought any furnishings or secured a location. The point is that a range of costs between $175,000 and $750,000 is a totally reasonable working range of what it takes to open a new restaurant.

How Can I Determine Food Costs and Price My Menu?

Determining food costs and pricing your menu are two sides of the same coin. However, the equation that they are part of can make or break your restaurant. You have to find a way to cover all of your costs of preparing a meal while still building in a generous profit margin. Otherwise, you’ll drive your restaurant into the ground.

Start with the cost of your food items. To use a simple example, let’s say you are pouring a customer a neat shot of Scotch. If a 750ml of the Scotch costs you $30 and you use 45 ml in one shot (about 1.5 ounces), you’re pouring $1.80 in Scotch into that drink. Most restaurants will need to make a 75 percent to 80 percent margin on liquor, so you’ll need to charge about $7.20 to $9 to generate a suitable profit on that drink.

Go through this process with every item on your food menu. For example, if you serve ham & cheese omelets, break out the cost of every component, from eggs and cheese to oil, ham and whatever vegetables you put in. Don’t forget to include all the ancillary expenses that go into the preparation of your food, from worker salaries to energy costs, and distribute them into the cost of your food as well.

What Types of Expenses Should I Expect When I Open a New Restaurant?

Every restaurant is unique, and many have different pricing structures from one another. However, most new restaurant operators need to consider some if not all of these expenses when launching a new business:

  • Building expenses — rent, buy or build? Where?
  • Interior expenses — signs, lights, music, furnishings, etc.
  • Equipment expenses — stoves, ovens, refrigerators, freezers, storerooms, vehicles, etc.
  • Supplies — cups, water pitchers, plates, napkins, etc.
  • Personnel expenses — worker salaries, staff wages, benefits, health and worker’s comp insurance, etc.
  • Marketing — flyers, mailers, web advertisements, newspaper and television ads, etc.
  • Capital reserves — some form of financing or cash to get you through your daily expenses
  • Licenses and permits — all the necessary legal and regulatory filings
  • Restaurant insurance
  • Utilities
  • Professional consultants
  • Technology and processing expenses — credit card payment machines, cash registers, tablets/ordering systems, POS technology, etc.

These are just generic categories, and your restaurant might have additional expenses as well; however, most restaurants have to take at least these basic costs into account.

How Long Does It Take to Receive Funds From Credit Card Processors?

Credit card processing is a way of life for a restaurant, with some patrons unwilling to even visit a restaurant that won’t accept credit cards. The good news is that credit card processing is an extremely efficient way to get paid at a restaurant. Although the actual process is a bit complex — money is transferred back and forth between various banks, with an interchange fee being taken out of the equation along the way — you can generally expect to be paid within 24 hours of a credit card transaction, and no longer than three business days.

Can Any Type of Restaurant Obtain Financing?

Depending on the type of loan you choose, you can finance essentially any restaurant with some type of loan or line of credit. Since lending is such a competitive field, with alternative lenders and online lenders now going toe-to-toe with the mainline, traditional banks, there’s lots of financing to be had at competitive rates.

For more traditional financing outlets, you might be more limited as to what type of restaurant you can finance, depending on your lender. Some lenders might not lend at all to startup restaurants, while others will only charge exorbitant interest rates. Particularly in the startup world, you’ll likely have to shop around various online or alternative lenders to find one who will both work with you and provide value-added services to help your restaurant succeed. Remember, just because a lender is willing to work with you doesn’t mean you have to work with them. Take the time to find the right fit for your business.

Are There Additional Fees Involved in Taking Out a New Restaurant Loan?

As with any type of loan, the answer to the fee question is, “it depends,” both on the type of loan you choose and your lender. Some lenders have no fees at all, except interest.

Other types of financing can be costly. In addition to interest costs, some loans have application fees, origination fees, service fees, closing fees, maintenance fees and other various types of costs, some of which can run into the thousands of dollars.

When taking out a new restaurant loan, it’s important to analyze the total cost of your financing, not just the interest rate you’re paying. If you can get a low rate on a loan but have to pay $3,000 just to get it, it might not be worth the total cost when compared to other options.

What Are Some Common Mistakes Borrowers Make When Taking Out New Restaurant Loans?

One of the primary mistakes that new restaurant borrowers make is to underestimate their need for capital. Restaurants are known devourers of capital, and as the segments above reveal, there are numerous costs you’ll have to anticipate as a new restaurant owner. Although you never want to take on more debt that you can handle, if you don’t get a large enough loan to cover all of your costs, you’re setting yourself up for failure. One of the keys to success is to make a thorough and accurate analysis of all of your potential expenses so that you can raise the needed financing to keep your restaurant an ongoing concern.

Another reason why restaurants fail is that new restaurateurs fail to build in enough profit margin to their restaurant costs. As outlined above, simply charging 10 percent more than your costs for a meal is not a way to earn a 10 percent profit on your business; rather, it’s a formula for disaster.

What Are Some of the Risks Involved in Borrowing to Open a New Restaurant

Television shows make it seem easy to become a celebrity chef, but the reality of “reality TV” leaves much to be desired. The truth of the matter is that without sound financial preparation, it can be easy to lose money on any investment, especially a new restaurant.

The sad truth is that many unprepared entrepreneurs fail to account for all of the costs that accompany the opening of a new restaurant, a mistake that can consume all of the profits of a new business.

Another common mistake is to for new restaurant owners to accept they first loan they’re offered, overlooking important details such as an exorbitant APR or other onerous terms, such as large prepayment penalties.

Still other restaurateurs underestimate the amount of work that goes into the opening of a new restaurant. There are so many moving parts in the restaurant industry that if you don’t have a handle on everything it takes to succeed, you might have to pay outside consultants or other experts to come in and do all the heavy lifting for you. All of that costs money, cutting into your potential profits.

Of course, one of the biggest risks for any restaurant is that people won’t come, or you won’t get any good reviews, or you simply don’t execute. If you price your food too high, you might not have any customers; if you price your food too low, you’ll never turn a profit. And if your restaurant is simply not on-point or on-trend, it might take months to chart a new direction. In the meantime, you’ll still be paying interest on your loans, along with all the day-to-day expenses involved in keeping a restaurant’s doors open.

What Are Some Ways I Can Improve My Credit to Get a Better Interest Rate on My New Restaurant Loan?

Your credit score might be more important than you think if you’re opening a restaurant business for the first time. While long-time restaurateurs might be able to rely on the strength of their past restaurant businesses to get easy access to capital, as a startup business, that asset is nonexistent. Lenders that will consider financing you will have to rely on your personal credit, as it demonstrates your willingness and ability to handle your personal debt. Bad credit or fair credit scores are likely to hold you back in the loan application process. Thus, improving your credit score should be a priority for nearly all financing situations.

If you want to improve your credit score, you’ve got to understand its components. A FICO score, which is one of the most commonly used credit scores, has five components, each with its own weighting:

  • Payment History: 35%
  • Amounts Owed: 30%
  • Length of Credit History: 15%
  • New Credit: 10%
  • Credit Mix: 10%

Time is an asset when it comes to good credit scores. The length of your credit history alone comprises 15 percent of your entire score. For an even bigger punch, make on-time payments throughout your entire life, as your payment history counts for more than one-third of your entire score.

The most significant move you can make to boost your score over the short term is to pay down your debt. The amount you owe counts for nearly one-third of your FICO score, and it’s one of the only factors you can change rapidly.

If you’ve got a chunk of money saved up to invest in your restaurant, consider whether you’d be better off using at least some of that money towards paying down your outstanding debt. You can use a credit score simulator to see how much of a jump your score might take under that scenario. You might be able to find this type of service for free on the website of your credit card issuer. If your score would go up to the point that you could lower the interest rates on your restaurant loans, it might be a wise course of action. If you have a tax or financial advisor, run this idea past them to get their input as well.