Restaurant Loans: 4 Options for Your Business

Are you looking at options available for restaurant loans?

Did you find your great grandmother’s long lost lasagna recipe that everyone raves about, and now you want to start a restaurant business?  Or have you been longing to open a restaurant with your own spin on nouveau French?  Whatever culinary specialty it is that drives you to pursue the restaurant business, it’s important to know that you’ll be up against some heavy competition.

Start-up restaurants are popular yet extremely expensive enterprises. Startup costs can vary enormously from one restaurant to another but often range from the tens of thousands all the way up to millions of dollars.

Like most small business owners, most prospective restaurant owners do not have the total sum of cash available right up front.  However, this should not necessarily dash all hope of ever opening your new restaurant. Many people take advantage of one or more borrowing options when planning for their new restaurant.

Starting and maintaining a restaurant is costly. Equipment, staff, licensing, and other related fees are expensive and can add up quickly. Restaurant equipment financing is often necessary to get your business going or to keep it running as it should. During slower seasons, it is always important for your business to have the funds available to deal with the unexpected. Perhaps you want to remodel your restaurant or hire another chef. How about the costs of advertising and promoting your business? Advertising and marketing are essential to your success, and money spent on it is an investment in your future. Restaurant financing offers the working capital you need, when you need it, so you can continue to be successful and stay competitive.

Whether you are just starting out, or are established and looking to expand or renovate your operation, finding the right restaurant financing is an important decision. There are numerous financing and borrowing options available to prospective restaurant owners.  Whether it is starting with money from your own wallet, borrowing from family, or more traditional lending options, there is something for every restaurant business.  One of the more traditional avenues for a restaurant financing is loans. There are many different restaurant business loans to choose from, one of which can help you cook up your dream!

Which Restaurant Loan Should You Choose?

Starting a restaurant is difficult enough; sadly getting a bank loan is often even harder. In fact, this type of financing is one of the hardest to get.  If you are starting a restaurant in today’s uncertain economy, you’re going to have to fight for what you want.  There are a few things that you will need that may give you an advantage with lenders.  You will need to have a substantial amount of collateral, a large down payment, proven restaurant experience, and an almost perfect credit score. Unfortunately, only the lucky few fit this profile, but if you have great ideas, a great business plan, and everything else to back it up qualifying for a loan will be a cakewalk.  If not, this doesn’t mean you won’t have any options or can’t qualify for a loan!  For the most part, if one lender turns you away, another lender is looking for a borrower just like you. It’s just a matter of finding the right one, on your terms.

If you are looking into your loan options for your restaurant it is important to review each available to you then determine which will best suit your personal and business’s needs. With interest rates that vary as well as loan terms certain loan options can be better for your business than others. Three of the most common types of restaurant loans are factoring, equipment and restaurant-specific loans.


You may not be familiar with the term factoring in the realm of financing.  Factoring is growing in popularity amongst businesses.   By definition, factoring is a financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital. Believe it or not, factoring is one of the oldest forms of business financing.  In fact, factoring is the cash-management tool of choice for many companies large and small. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.

Restaurants are not too much different than the clothing industry, in that there is “stock” available that can be used for factoring.  Most restaurants have inventory stock; this inventory can be used in this asset based financing option. Your business can receive a loan using your inventory as collateral ranging from 70% to 85% of the inventories value. This is a real way to turn your businesses inventory into working capital. The money received through a factoring loan is a short-term option that holds higher interest rates. If your business is looking for a fast and easy loan option then factoring could be right for your restaurant.

How does it work?  In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice’s face value less a discount-typically two to six percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (minus the agreed upon discount) when your customer pays.  Because factors are extending credit to not to their clients but to their clients’ customers, they are more concerned about the customers’ ability to pay than the client’s financial status.  That could mean that a restaurant with creditworthy customers may be able to factor even if it doesn’t have the credit to qualify for a loan.

Restaurant Equipment Loans

Maybe you don’t need working capital, but just need to get the right equipment to make your restaurant modern and efficient.  To make your dream of that Italian pizza oven or twelve burner cooktop a reality, you’ll likely need a loan to pay for it.  Restaurant equipment is expensive, and can seriously take a bite out of your capital.  Luckily, there are special loans for restaurant equipment.  Equipment loans are a type of restaurant business loan designed specifically to cover the cost of equipment purchases for your restaurant. Some lenders may offer restaurants 100% financing, but depending on your business’s credit history (or lack of) you may only be offered 80% to 90% financing. The money received through an equipment loan will only cover the cost of equipment and taxes.  Any additional costs like delivery, handling, and installation will need to come out of your business’s personal finances.  Equipment loans are usually at average interest rates, and most loans will be at a fixed rate, so you can plan your payments accordingly.  Equipment loans are a shorter term loan with the average loan spanning 3 years.  That should give your business more than enough time to satisfy your customers with great food and repay the loan.

Leasing is another way to finance your business equipment. Equipment such as commercial ovens, sinks, refrigerators and other needed tools of the trade can be leased. This requires qualifying and personal guarantees to be approved. You will pay a fixed amount per month for the use of the equipment that you will not own until you pay the lump sum at the end of the lease. This can be a viable option for funding restaurant equipment, but the fixed monthly payment and personal guarantee add some risk to this financing option.

Restaurant Specific Loans

Restaurant specific loans are what their called, a loan specifically designed for a restaurant; typically they are offered by banks and other traditional lending institutions. These are more general business type loans, usually not bound to a specific need.  Your restaurant can use a restaurant loan for any financial needs within the restaurant such as new furnishings, remodels, investments, restocking inventory and more. The interest rate and loan term will be determined by the size of the loan.  Just like other business loans, smaller loans will have shorter loan terms with higher interest rates and larger loans have longer loan terms with lower interest rates.

Small Business Administration Loans

Restaurant loans backed by the Small Business Administration are another common way to finance a restaurant. Believe it or not, over the past decade, more SBA backed loans have gone to full size restaurants than any other type of business.  Not far behind were limited-service restaurants including take out restaurants and fast food.  But, even with a large number of restaurants receiving loans, SBA backed loans are exceedingly difficult to qualify for.  If you are one of the lucky ones and get approved, your personal guarantee and collateral will be required to close the loan. SBA lenders are required to go after all available personal assets from the buyer as collateral.  This will mean that you will are personally at risk for the success of your restaurant. Of course, when your personal finances are on the line, it will make you work much harder to succeed.  But, if your business does not succeed, it can cause irreparable harm to your personal finances, and make any type of future financing that much more difficult to secure.

Perhaps you are not ready to take on a large (or small) restaurant business loans from a financial institution.  For some people, obtaining a restaurant loan from an investor is a perfect fit.  In fact, investors are a common way to finance a restaurant. Individuals with high net worth or high income might invest in your restaurant if they like your concept and believe in its potential for success. A full or limited partnership can provide an infusion of cash, as well. The downside of using investors for restaurant financing is that you will generally lose some control over your restaurant.  Most investors will ask for a large equity stake in return for their money at risk.

If you are fortunate enough to have supportive friends or family who can and will back your restaurant, this can be a great source of financing. Family and friends may provide loans or investment funds to help you get started.  Unfortunately, borrowing money from friends and family is like walking on a tightrope.  You may end up with the money that you need, under terms that you can agree too, but you can end up falling down and hurting the relationships you value the most.  You should think long and hard before borrowing money from friends or family, you don’t want to end up without friends, with a family that hates you and no money. Be cautious when working with investors!

Finally, alternative business loans may be an option for restaurant funding.  Kabbage is one source of business loans that many growing businesses are now using to help them buy equipment, hire help, or invest in additional marketing efforts.  This source of funding can provide the upfront funding required without adding personal risk and difficult qualifying criteria. In the fast-paced restaurant business, having money in five minutes instead of weeks or months can make a big difference.

Whether it is pizza and pasta or burgers and fries, there are financing options available for restaurants, including restaurant loans in all shapes and sizes.  Opening a financially successful restaurant requires much more than simply having a good recipe, and there are many lenders out there ready to help!

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