Everybody needs to eat. Which is why restaurants, when managed properly, can be a very lucrative business venture. But let’s be honest, starting a restaurant isn’t as easy as people thought it would be. It takes guts, effort, time, and not to mention, a whole lot of cash.
Even if you only plan to start a casual diner, you still need to spend thousands on permits, marketing, staffing, equipment, construction, and food. Unless you can afford to spend hundreds of thousands out of pocket, there’s a huge chance you probably need some funding to start your own restaurant.
There are many ways aspiring restaurateurs fund their new business venture. You can reach out to friends and family; ask angel investors; use a crowdfunding platform, or apply for business loans.
Small Business Loans for Restaurant Businesses
As mentioned, one of the common ways entrepreneurs secure funding is to apply for loans through banks or alternative lenders. However, many business owners prefer alternative lending over traditional bank loans.
Alternative lending has become more popular over the years. With the rise of alternative lenders comes a wide variety of loan options tailored to meet the needs of business owners in every industry. The loan products offered by alternative lenders differ when it comes to payment structures, costs, rates, and application process.
If you need a business loan to fund your restaurant, here are the six most common types of loans for small business owners:
1. Term Loans
Term loans are the first thing that comes to mind when people think of small business loans. With term loans, lenders set repayment terms, the number of payments to be made regularly, and decide on a fixed or variable interest rate.
There are different types of term loans for small business owners. Each type of term loan offers different repayment terms, the frequency of payments, and more, depending on your credit rating, business needs, and other determining factors.
2. SBA Loans
Small businesses, in general, find it challenging to qualify for traditional business loans due to the risky nature of the small business lending. Commercial lenders are often reluctant to lend money to small business owners, especially to new restaurants.
To remedy this situation, the Small Business Administration (SBA) provided a viable solution for small business owners to secure the funding they need. The SBA created a variety of loan programs (SBA loans) – specifically for small businesses – and partnered with select lending institutions to provide funding. The greatest benefit of SBA loans is that the Small Business Administration guarantees up to 80% of the loan principal. This incentivizes lending institutions to approve your loan application because it lessens the risk on their part.
Keep in mind that you need to have experience in the food industry in order to qualify. If you’re looking to apply for an SBA loan for your restaurant, you’ll need to create a business plan and prepare to pledge 20% to 30% of the loan amount in cash.
However, in order to qualify for an SBA loan, you need to have a great credit history and you need to fall within their strict loan criteria. An SBA loan application also involves lengthy paperwork and the process usually takes months.
3. Equipment Financing
If you need to purchase commercial kitchen appliances, furniture, delivery vans, or a point of sale (POS) system for your restaurant, you might want to check out equipment financing. The amount of money you can borrow depends on the price and type of equipment you’re looking to purchase.
With equipment financing, the equipment you’re buying serves as collateral. This means that you won’t have to put up any personal or business asset to secure the loan. Most lenders offer a fixed interest rate (8% to 30%) and fixed term lengths, making it easier for you to manage your finances.
4. Restaurant Cash Advance
A restaurant cash advance, commonly known as a merchant cash advance, is technically not a loan. Instead, it’s an advance against your future credit or debit card sales. Lenders take a percentage of your credit card sales until the loan is repaid in full. A merchant cash advance is a perfect solution for business owners who don’t want to get tied with regular monthly payments. Additionally, you don’t have to provide collateral to qualify. The only downside to a merchant cash advance is that it’s pricier compared to traditional business loans.
5. Short-Term Loans
If your business is in need of immediate funding, short-term loans are a great solution to address short-term business needs. This type of financing is structured similar to a traditional term loan, but you have to pay back the loan within three to 18 months, depending on the conditions set by the lender. With short-term loans, you can borrow anywhere from $2,500 to $250,000.
The interest rates for short-term loans usually go as low as 14%. Once approved, lenders can provide financing within one to days. This makes it ideal for short-term business needs, such as covering payroll, paying suppliers, paying for rent, and other overhead expenses.
6. Business Line of Credit
A business line of credit is one of the most flexible loans available today. With this type of financing, lenders assign you to a predetermined credit limit where you can draw funds whenever you need to. You only have to repay the amount you’ve withdrawn, plus the interest. You can use the funds for almost every business purpose, such as bridging cash flow gaps, paying off other debt, buying inventory, and getting more working capital. Annual revenue, number of years in business, bank balance, and your personal and business credit scores are some of the factors that determine your eligibility to qualify for a business line of credit.