Restaurant financing is largely available and dependent upon the specific loan request that is being made. In the past, restaurant owners have relied on banks and institutional lenders for conventional loans, SBA loans and asset based loans to grow their restaurant; however in today's day and age, roughly 80% of all restaurant owners get denied bank financing for one reason or another. As with all the variation of restaurant finance options, there is also a wide range of lending criteria that goes along with each loan type. The restaurant loan options that may seem the most prudent, also come along with the most stringent underwriting criteria. There are various loan purposes to consider as a borrower depending on whether the restaurant owner is looking to purchase an existing restaurant, obtain start-up financing for a new location, seek leasehold improvements, remodel, or acquire real estate. When it comes to restaurant financing, operators will face several decisions in regard to which loan products to target and which lenders to choose from.
Which loan product is right for my restaurant?
There are several restaurant loan and funding programs that have been used to finance all types of restaurants. Traditionally, restaurants have received fairly competitive loan rates and terms, with interest rates generally ranging between 5.75% and 8.75% across most types of financing and structured as fixed, variable or fixed-to-float. There are also quick close products, like a merchant cash advance, cash flow loan or revenue based loan, that have higher effective interest rates, but require minimal paperwork and no collateral. The term and amortization of a restaurant from an institutional lender is often structured anywhere between five and twenty-five years, depending on the assets being financed with the loan. Financing for hard assets, such as real estate generally receive terms between fifteen and twenty-five years, while a loan for working capital or inventory could have a term of one to ten years. There are several loan products that borrowers should consider for restaurant financing, including:
Fully amortizing up to 5 year terms. Ideal for restaurant owners with large single purchases or need to refinance debt. Fund marketing efforts, open new locations, or purchase equipment; all while building your business credit. What’s more, term loans can be funded in as little as 3 days and require less stringent underwriting guidelines than the SBA.
SBA Loans ($350,000 - $5,000,000)
The Small Business Administration's (SBA) 504 and 7(a) loan programs are both popular alternatives to traditional financing options. A percentage, typically 75% of the full loan, is backed by the SBA so banks and lenders assume less balance sheet risk on the loan. However, all lenders utilizing SBA loan programs have to adhere to stringent loan eligibility requirements and SBA Standard Operating Procedures for loan underwriting including the pricing and terms for the loan. For the SBA 7(a) product, loan pricing can be priced using the prime lending index plus a maximum spread of 2.75% - which is maximum allowable rate. Lenders may use variable rate pricing so as the Prime rate goes up or down the interest rate on the loan will move up or down as well. Terms are structured based on the assets being financed. Obtaining an SBA loan to fuel your restaurants growth will offer the most appealing rates and terms available, if you can qualify.
SBA Loans ($50,000 - $350,000)
Small Business Administration Loans are generally the least expensive financing option for small business owners. The SBA 7(a) loan is the Small Business Administration’s most popular product and offers a flexible sum of cash that can be used for anything from managing daily operations to purchasing new products and refinancing high-interest loans.
Least Expensive Financing - It would be tough to beat the low rates of SBA loans. SBA is an excellent option for restaurant owners looking to keep financing costs down.
Great Financing for Growth - If your primary goal is to grow your restaurant, getting an SBA loan is an excellent way to reach that objective. You get the funds you need on manageable terms.
Funds in as fast as 7 days after the application is completed!
Asset Based Lines of Credit
Restaurant owners may use asset based lines of credit for an array of business uses. Asset based financing for restaurants can be either revolving or term loans secured by assets such as accounts receivable, or real estate.
Unsecured Business Line of Credit
Unsecured credit refers to loans or lines of credit where there is no collateral to back the loan. Although this type of lending is possible for a restaurant, it is considered risky for lenders. The restaurant owner's personal financial strength as well as the business cash flow needs to be strong in order to qualify for an unsecured line or loan.
Revenue Based Loans
A revenue based loan could be your restaurant's lifeblood and provide it with several financial benefits. When your restaurant is growing, chances are you'll need an injection of cash to continue its growth. Bank loans are often times too restrictive, time intensive and highly challenging to obtain these days. In this situation, a revenue based loan may be the best solution. If you use it wisely, a revenue based loan could do wonders for your restaurant.
Merchant Cash Advance
A Merchant Cash Advance (MCA) can provide restaurant owners with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and/or bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily or weekly basis until the obligation has been met. An MCA is not technically a business loan, and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity or steady cash flow and need financing quickly.
Cash Flow Loans
Even if your restaurant is growing, you may find yourself needing extra cash to cover day-to-day expenses such as payroll, rent and inventory, or to pay for short-term projects that could grow your revenue in the long run. Uneven cash flow is one of the biggest challenges of restaurant owners. For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.