Once you have a recipe for a successful restaurant, your next effort may be to expand. Unless you’re flush with cash, though, you will probably need to get financing to help fund that expansion. Here’s how a restaurant business loan can help you take your business to the next level.
What is Restaurant Expansion Financing?
Restaurant expansion financing isn’t a specific type of loan. In fact several types of financing— debt financing or equity financing— may be used for expansion purposes. That’s why it’s important to understand your options to choose the right financing for your business needs.
When to Think About Expanding Your Restaurant Operations
There are many times when restaurant business owners may need additional capital to expand. These include when you need to:
- Expand current space, including adding a patio or additional parking
- Acquire or upgrade equipment
- Renovate current space
- Acquire real estate for a new location
- Rebrand or overhaul menu
- Add products such as bottle sauces
Deciding whether to expand is an important decision. You need to make sure your current business is profitable and that the money you’ll invest in expansion will pay off.
What Types of Financing are Best for Restaurant Expansions?
There are several types of financing that may be appropriate for your expansion efforts. These options may be available from traditional financial institutions such as banks, as well as from alternative lenders including online lenders.
If you have a project requiring a specific amount of capital and know how much you need to borrow, a term loan can be an excellent choice. With a term loan you borrow a specific amount of money with a specific repayment period. Interest rates may be fixed or variable.
For large projects involving real estate or equipment, you may be able to secure a term loan with repayment periods of up to ten or twenty years, but many of these loans offer short-term repayment periods of 6—24 months.
Line of Credit
For short-term projects, working capital and emergencies, business lines of credit can prove invaluable. The business will be approved for a specific amount against which they can borrow. Once approved, it’s the fastest and easiest way to get access to capital. However, interest rates may be higher, depending on borrower qualifications. Variable interest-rates are common.
There may be an interest-only repayment period, but eventually the loan must be repaid. Most lines of credit carry short repayment terms of 6 – 24 months though longer repayment terms may be available.
Commercial Real Estate Loan
If your goal is to purchase real estate for your current location or to expand to a new location, you’ll want to investigate commercial real estate loans. These may be available through banks or other lenders.
The Small Business Administration guarantees certain small business loans. Among these, the SBA CDC 504 Loan Program is popular for real estate financing or refinancing.
If your restaurant needs new equipment to expand, equipment loans or leasing may allow you to acquire or upgrade restaurant equipment with little or no down payment. You’ll preserve cash flow and there may be tax advantages as well.
Business Credit Cards
Small business credit cards can provide fast access to cash. They are best for short-term needs. You’ll want to make sure the interest rate is affordable. (Some card issuers offer 0% APR financing a year or longer.) Because the underwriting decision is typically based on the owner’s personal credit scores and income from all sources (not just the business), this may be an option for startups and new restaurants.
Some restaurants have successfully used crowdfunding to raise funding for expansion. Options include debt-based, investment-based, or rewards-based financing. Each of these options carries its own pros and cons. One advantage of crowdfunding is that backers often become fans who will recommend the restaurant to others.
Some restaurants may be attractive to investors (which could include friends and family). Equity financing typically requires you to give up some ownership of the business so it must be carefully considered.
How To Evaluate And Choose The Best Expansion Financing Options
When seeking restaurant financing, you’ll first need to understand how to qualify. Most small business lenders look at several main factors during the application process:
Credit scores. Many lenders check the small business owner’s personal credit scores. Business credit may also be checked. Bank loans and SBA loans in particular often require good to excellent credit. (Here’s to build business credit.)
Time in business. If your business is established and earning revenues, you’re in a better position to get financing when compared to a brand new business. Generally businesses that are at least two years old will qualify for more loan options.
If you are trying to get funding for a new restaurant, you’ll need a business plan that clearly demonstrates a solid plan and, ideally, experience in the restaurant industry.
Revenues. Lenders prefer to see businesses with strong revenues and cash flow. Most lenders will require business bank statements and/or business tax returns. Financial statements may be required, especially by traditional lenders.
Industry can be another important factor. Some lenders are happy to lend to businesses in the food and beverage sector. Others may consider the restaurant industry too risky. You’ll want to confirm that restaurants are not on a lender’s list of prohibited industries.
Once you find a lender that’s a fit, you’ll want to make sure you understand the loan terms to evaluate whether the financing will work for you:
- Loan amount. Can you get enough funding to meet your business needs? If not, how will you meet shortfalls?
- Rates and fees. The interest rate and fees will affect your profitability so make sure you understand how much the loan costs.
- Payment terms: How quickly must the loan be repaid? Some types of financing will require daily or weekly payments, and you need to understand how those payments impact cash flow.
- Funding speed. If an opportunity presents itself and you need to take advantage of it quickly, you may not have time to get a bank loan or SBA loan. (The loan application process for those types of loans can take weeks or months.) On the other hand, online lenders may approve loans in hours or a few days. But fast financing may come with higher costs, so you’ll need to make sure it will pay off.
Entrepreneurs looking for business financing will need to understand which funding options for which they qualify, at a cost that makes sense for their expanding business.
Our Best List Of Financing Options For Expanding Your Restaurant
The best financing is the financing that helps you achieve your goals and for which you qualify. Here are several options restaurateurs may want to consider. They are not restaurant small business loans specifically, but restaurant owners may be able to utilize these financing options for business expansion.