Pros and Cons of Restaurant Financing Options
- Relatively low APR
- Predictable monthly finance payments
- Helps build business credit
- Equipment serves as strong collateral
- Can require high down payment
- Requires strong credit for good terms
- Financed equipment can become outdated, but you are stuck with it at the end of your payment term
Just a note: Before applying for any financing, take care of both your personal and business credit scores first. Too-low scores are the main reason restaurant financing gets denied.
Check your free business credit scores here
What is Restaurant Financing?
Restaurant financing refers to money sourced, borrowed, and/or loaned from an outside partner to help start, expand, or refurbish a restaurant business. This access to vital, working capital provides restaurant owners with a reliable way to put money toward making their short and long term goals a reality.
In this article, we will cover a few restaurant business financing options:
- Business credit cards
- Bank lines of credit
- Traditional bank loans
- SBA loans
- Alternative lending
- Restaurant equipment loans
- Restaurant inventory financing
The type of funding you choose for financing a restaurant will depend on your needs, as well as what kind of offers you are eligible for. The better your credit, the more options you will have.
If your business hasn’t yet established its credit history, know that a lender will assess your personal credit score to determine how much financial risk you present.
Restaurant Financing Options to Consider
If you’re ready to improve cash flow and ensure you have enough money to not only pay your regular expenses but also grow your restaurant, start by considering your needs.
Are you just looking for short-term financing to tide you over until next month? Or is a long-term loan that will help you achieve your big-picture goals more of a fit? If you are a franchise owner, maybe you’re looking for franchise financing to buy your next unit.
What will you use the funding for? Maybe you’ll invest in real estate for your next restaurant, or just make sure that payroll is covered. Perhaps you’ll hire an executive chef or upgrade your stove.
There are different types of financing, depending on what you qualify for. Some will require a solid credit history or high personal or business credit score. Others may require you put down collateral before approval. Some lenders may want to see your financial statements, while others will just want to see your credit card receivables. All of these factors will go into determining a) whether you are approved for financing and b) what your loan terms are.
Business Credit Cards for Restaurants
Best for: unexpected expenses and easy access to working capital.
Business credit cards are useful for those unforeseen costs, like your printer breaking just when you need to print 100 pages. Whether you want to charge an expense or get a cash advance, credit cards are a fairly easy form of financing to obtain.
Just keep in mind business credit cards can have high-interest rates, which can double if you have a low business credit score. Look for rewards cards that can help you earn cashback or travel points.
Check out our business credit card marketplace to find the right card for your restaurant.
Bank Lines of Credit for Restaurants
Best for: access to working capital as you need it.
A bank line of credit can help you get working capital to cover everything from payroll to renovation. You get approved for a certain amount, but can take out less whenever you need it rather than a lump sum. You only pay back what you borrow, not the full amount you were approved for.
Be aware that you may be required to pay upfront fees and provide collateral if your credit score isn’t high enough to qualify for an unsecured line of credit.
Traditional Bank Loans for Restaurants
Best for: established restaurants looking to expand operations.
For larger funding endeavors, look into getting a loan from a bank. These working capital loans, which financial institutions more often grant to longstanding restaurants that want to grow, offer affordable terms and interest rates.
Just check your credit report before applying; 72% of loan applications get denied, so review requirements to make sure you qualify first.
SBA Loans for Restaurants
Best for: young restaurants in need of major real estate or equipment investments.
Another option for financing your restaurant is an SBA loan. Although these funding vehicles require more paperwork and a strong FICO small business credit score, they have beneficial loan terms and rates. Currently, you need a 140 FICO SBSS score to qualify.
Alternative Lending for Restaurants
Best for: working capital, new campaigns, and short-term opportunities.
This option typically carries high interest rates, but you’re usually more likely to get approved for these short-term loans from online lenders. Turnaround on a cash advance can be as little as a few days. Alternative loans are a great choice for fast access to working capital as well as funding for short-term costs and campaigns, especially if you’ve got bad credit.
Restaurant Equipment Loans
Best for: Upgrading outdated kitchen equipment.
If your focus is buying or replacing equipment for your business, restaurant equipment financing could be a good solution. You can get the funds you need to either lease or buy the equipment, or you can choose a sale-and-leaseback option where you sell the equipment to a lender for cash and lease the equipment back from them. At the end of the term, you return the equipment or buy it from the lender.
Restaurant Inventory Financing
Best for: Making sure you can afford to keep inventory stocked.
Another restaurant financing option is inventory financing. You get the cash you need, and your inventory serves as your collateral. Should you be unable to pay back the loan, the lender would seize your inventory as an asset.
How to Compare and Evaluate Restaurant Financing Options
Now that you understand your restaurant financing options, how do you land on the one that is right for you?
Start by considering what you plan to use the money for. Do you want to add a patio to your restaurant? Hire more employees? Or are you simply looking for money to keep you afloat for a few weeks?
How soon do you need the money?
Some financing options, like an SBA or traditional bank loan, will take longer to process and get you funds than an alternative loan or credit card.
How much money do you need?
Some loans (particularly those through the SBA) have certain minimum and maximum amounts you can request.
How much are you willing to pay for financing?
A traditional bank loan will have a lower interest rate (if you qualify) and better repayment terms, but if you don’t have great credit, you may have to opt for a higher APR with an alternative loan.
When you start looking at financing partners, consider their reputation. Do you know anyone who has worked with that financial institution who can provide feedback about their experience? Is customer service available to you if you have questions? Does the lender report back to business credit bureaus (you want them to so you can build your credit history)?
Ultimately, the financing option you choose will be based on your specific situation and needs.
Why Do Restaurant Owners Apply for Financing?
Restaurant financing provides you with the cash you need to do so many things. Whether you’re starting a new business or renovating your existing location, you can get access to the funds to make your dreams a reality.
You can also use your funding options, whether you choose a restaurant loan, line of credit, or credit card, to:
- Invest in new equipment
- Fund operational expenses
- Open another location
- Improve your restaurant’s design
- Add more tables or a patio to accommodate more guests
- Have money set aside for emergencies
- Hire a consultant to help you boost your business
- Market your business
- Get through a slow period
- Buy real estate
There’s really no limit to what you can use your funds for!
Nav’s Verdict: Restaurant Loans
Once you get your money, put it to good use! Avoid the temptation to spend the money without direction. Use the funding to make improvements to your restaurant so that you’ll easily be able to repay the loan.
And though you might think you’re done paying attention to your financials once you get approved for restaurant funding, stay on top of it afterward as well: regularly check both your business credit report and your business credit scores so that you understand your restaurant’s financial health.
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