Restaurant Business Loans
When to Consider a Loan for your Restaurant
If you think you might want a loan for your restaurant, there are a few prerequisites to understand. First, assess your business prospects. Lenders want to place their money with businesses that are in good health and have a high likelihood of paying them back. You’ll need to assemble financial information to prove you meet that standard.
Do you have a record of recent profit? Can you demonstrate through your books that you take in more than you spend on a regular basis? Your cash flow statement is a good place to look for this information. Once you can demonstrate that you have a profitable operation, turn your attention to the future. What projections can you make for your grow over the next one to five years? Let’s assume you have both solid profitability and encouraging growth prospects.
The next step in preparing to take out a loan is to understand your credit worthiness. In the US, this is handily encapsulated in your credit rating, a single numerical score provided by the three major credit rating bureaus. A credit rating above 670 is typically considered good, while scores above 740 are very good, and above 800 is excellent.
A second factor to consider is your collateral. What valuable assets could you offer to a lender to secure your loan? The better the collateral you post, the more likely you are to find a lender.
Major Types of Loans
There are four major types of restaurant loans to consider: small business loans, a business line of credit, a traditional commercial loan, and business credit cards.
Small Business Loan
The US government supports credit provision to small businesses through the Small Business Administration (SBA). The SBA will guarantee eligible loans, thereby reducing risk for lenders and incentivizing them to work with small businesses. The process to secure an SBA loan begins with making an application to a private lender that partners with the SBA—which in the US is most banks and credit unions. If you can show strong personal and business finances and are willing to personally guarantee the loan, SBA affiliated lenders are likely to work with you. There are many types of SBA loans, ranging from SBA microloans (below $50,000) to the more common SBA 7(A) loans of up to $5 million.
Business Line of Credit/Working Capital Loan
Working capital or business lines of credit are intended to help cover regular operational expenses such as payroll, rent or inventory costs. You wouldn’t use them to finance large one-off expenses like a land purchase or expansion to a second location. The lending standards for lines of credit vary by lender, but in general you should be able to demonstrate a strong financial position that gives them confidence you’ll have the cash available to meet your loan obligations. One nice feature of a line of credit is that it functions like a credit credit, allowing you to spend more as you repay previous balances.
Traditional Commercial Loan
The most common loan offering from banks and credit unions is the commercial loan. The amount and repayment period depend on your negotiations, but the basic structure is consistent: the lender will go through a careful inspection of your finances to assure themselves that you are credit worthy, will demand collateral, and will offer a modest interest rate that averages 6 to 8%, while accommodating large loan totals. The commercial lending process demands high credit scores and the patience to wait for up to six months for a loan to close, but if you can met this bar, the terms are attractive.
Business Credit Cards
We’d be remiss not to mention one of the most common sources of financing for small businesses: the credit card. Business credit cards are widely available and offer quick and easy access to moderate sums of money. Their major downside is that the interest rate is typically high, making credit cards an expensive method of financing. If you have to cover a short term expense and will quickly be able to repay the balance, a credit card can be a convenient option. Be careful though not to fall into the trap of carrying large ongoing balances at high interest.
Specific Capital Needs for Restaurants
Restaurants have characteristic financing needs that can be met with specific restaurant loan products. Here we’ll cover them in brief.
If you’re replacing your ovens or refrigerator, you may want to secure an equipment loan. These are specifically designed to cover one-off expenses at favorable terms.
Financing is available to help with inventory purchases like large food orders. While it’s better to be able to cover these costs from your operating revenue, new restaurants might not yet have reached that point. In that case, inventory financing is your friend.
Regular expenses like payroll and rent can be supported by a working capital loan. See the section on lines of credit for more information.
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Get to Know your Capital Lenders
One of the most common lenders available to the restauranteur is the local bank. These come in many flavors and varieties, yet tend to structure their lending in similar ways. For small businesses, they will often offer SBA-backed loan products that carry a partial government guarantee. Note that you will have to post collateral and personally guarantee the loan as well. The local bank is always worth checking out as a lending option. If they like your business plan and cash flow, your terms may be favorable.
The credit union is highly similar to a local bank, with the structural difference that a credit union is owned by its members. In practice, they have similar products and lending standards to small and regional banks. They are worth a visit on your tour of lenders, and can sometimes offer better terms than comparable banks.
Banks with hundreds of branches spanning multiple states qualify as large banks. These institutions may have greater appetite for large loan amounts than your local banks, if you can satisfy their lending criteria. Be prepared for a bureaucratic process and long closing times.
Specialized and Alternative Lenders
The advent of the internet has opened up lending to many new entrants. You can find a wide diversity of online lenders who specialize in certain types of businesses or financial products. RASI can vouch for the expertise of Adesso Capital. They understand the needs of restaurants and offer a variety of loan products such as SBA loans, equipment financing, and lines of credit.
Find the Right Lender at the Right Terms
As we’ve seen there are several types of restaurant loans and lenders. It pays to determine your capital needs in advance, and go to the lender that offers a matching loan product. With any lender, the attractiveness of the product and terms you are offered will be a function of your credit worthiness. This is largely determined by the health of your balance sheet, specifically free cash flow. Lenders want assurance that you can afford to service the debt you wish to take on from available operational cash.
When assessing a given credit product, pay attention to the loan size, repayment terms, closing process, collateral, and guarantees (if any). Note that it may be better to take on a smaller loan amount if that reduces the burden of interest to a point where you have greater confidence in your ability to support the loan from free cashflow.
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What types of restaurant loans are available?
There are loan products for working capital (payroll, rent), equipment expenses, inventory, and major moves like opening a second location or purchasing your land. Consult your lender for specifics.
How do I qualify for a restaurant loan?
Much as in any business, your eligibility for a loan will be based on the credit worthiness of the business as demonstrated by the balance sheet. Lenders want to see you have the free cash to easily afford repayment.
What documentation do I need to apply for a restaurant loan?
Bring your balance sheet and cash flow statement, along with a summation of your plans for the business. You may also need to demonstrate you have valuable assets to serve as collateral.
How long is the repayment period for a restaurant loan?
Repayment terms will be negotiated with your lender. Standard periods range from 1 to 5 years—shorter for small loans, longer for large. If you’re buying real estate, terms can be much longer.
How do I compare different restaurant loan options?
The best way to get to know the options is to talk with lenders. Consult your local banker and credit union, and do research online. There are online products that will give you quotes from multiple lenders at once.