Business Loans

The 7 Best Loans for Restaurants

Feb 09, 2020 • 10+ min read
Small business owner running her business with a loan
Table of Contents

      If there’s one constant in the restaurant industry, it’s change. Patrons have evolving preferences, suppliers can be fickle, inventories fluctuate, and each season brings new considerations. At the same time, most restaurant owners aren’t in the business for consistency. They’re driven by a passion that never changes.

      When it comes to funding that passion, multiple small business loans can meet the unique needs of the restaurant industry. So whether you want to start your first restaurant, sustain your current one, or expand to new heights, rest assured that you have options.

      All the while, bear in mind that the expenses related to running a restaurant are hard to predict. As Forbes explains, “It almost always costs more than anticipated so a contingency is also a good idea to have in the budget.”

      When starting a new restaurant, it can be tempting to frontload the budget and then assume the expenses will throttle back within the first few months of operation. It’s true that it takes a lot of money to get a restaurant off the ground, but keeping it airborne also requires ample capital. And undercapitalization is a major contributor to restaurant failures nationwide.

      “Knowing how much money you need to launch the restaurant is only the tip of the iceberg,” says Gary Occhiogrosso, an expert of restaurant development. “You must assess ongoing cash needs while the restaurant is newly opened and gaining momentum […] Considering capital needs for the first 12 to 15 months is not only prudent but essential to the success of any new restaurant. You must be prepared to cover the operational costs and expenses as the restaurant ‘ramps up.’ Carefully consider your cash needs and how much working capital you must have on hand, ready to deploy.”

      Top Loans for Restaurants

      Small restaurant business owner benefiting from a business loan

      Given the unique elements of the restaurant industry, not all financing options are on the table. This limitation can work to your advantage, however, because it means you’ll start your funding search with a handful of potential matches, rather than a lengthy list with varying degrees of relevance.

      With that in mind, here’s a curated list with 7 of the best loans for restaurants:

      SBA 7(a) Loans: Some of the most popular financing options for restaurants come courtesy of the US Small Business Administration (SBA). This federal agency is tasked with helping small business owners get as many resources as possible, and they take their mission seriously.

      The first thing you’ll notice about SBA loans is that they’re not funded like other types of financing. Rather than fronting the money itself, the SBA connects you with a third-party lender and then guarantees a portion of the loan for you. If you were to default on the loan and discontinue payments, the lender would still be compensated.

      It’s remarkable what this guarantee does for lenders’ motivations. With their risk mitigated, their purse strings loosen and they’re much more eager to work with small business owners. Borrowers who have faced multiple rejections in the past often find themselves with multiple offers. In some cases, lenders will actually fight for your business, opening the door for even better rates and terms.

      This result is all part of the SBA’s plan, which is to do everything they can to grease the skids for small businesses. Each year, they help facilitate tens of billions in lending. And their prime borrower candidate is someone who is disadvantaged and/or has faced rejection in the past, especially minorities and women.

      While many wonderful things can be said about SBA loans, you also must be aware of some challenges. First, an application usually requires a mountain of paperwork. Second, the approval process can drag on for as long as 3 months.

      If you feel those factors are outweighed by the immense benefits of an SBA loan, then you should consider the agency’s loans. While all of the SBA’s loan products are popular, the 7(a) program rises to the top of the pile. Year after year, small business owners opt for these loans more than any other SBA offering.

      What you’ll find is that this type of financing is incredibly flexible. While some products have strict usage limits, you can use a 7(a) loan on just about anything your restaurant needs.

      And these loans continue to shine as you dig into the small print. They typically have generous interest rates and terms, not unlike those you might find from the best bank loans. For borrowers who have been turned down so many times in the past, this can be an amazing opportunity.

      Your restaurant will most likely qualify for an SBA 7(a) loan if you have solid credit and meet the agency’s size and financial requirements, as well as confirm that you operate for profit and do business in the United States or its territories. 

      Another key element of any application for one of these loans is an airtight business plan. By helping the lender understand how you intend to use the funds, you’ll show your experience and increase your odds of success.

      SBA Express Loans: Remember how SBA loans can be as slow as molasses, taking months to get approved? The agency took that criticism to heart and tried to create a financing option that wasn’t quite so laborious. The result of their tinkering is the SBA Express Loan.

      While these loans are hardly speedsters (they still take 4 weeks to fund), they require less paperwork and deliver money to your account faster than most other SBA loans. As with other expedited loans in the financing world, these loans have some unique characteristics. Chief among them are:

      • The maximum amount of money you can borrow is smaller than with typical loans.
      • The interest rate is almost always higher to compensate for the compressed timeline. 

      Another quirk is that these loans have narrower limits on how you can use the money. While 7(a) loans are like the “cool” parents who let their children do whatever they want on the weekend, an SBA Express Loan is similar to the parents who have strict curfews and require their children to check in throughout the night. This approach may sound frustrating, but as long as you plan to use the money for financing equipment, increasing your working capital, or debt consolidation, you’re good to go.

      To qualify for an SBA Express Loan, your restaurant will need to have been up and running for a couple of years. Your credit score will also be scrutinized, but if it’s above 680, you should be in good shape.

      SBA 504 Loans: If you thought Express Loans were strict, wait until you meet the SBA’s 504 loans. They’re laser-focused on real estate, which is great because it means they’re tailored to the nuances of those kinds of projects. So the narrowness of the usage limits really plays into your favor when your restaurant has these unique needs.

      Here are some examples of qualifying projects:

      • Building a new restaurant
      • Buying equipment for your restaurant
      • Buying an existing restaurant
      • Buying land for a restaurant
      • Improving your property with things like utilities, landscaping, or parking lots
      • Modernizing or renovating your restaurant
      • Refinancing debt to work on real estate projects

      Qualifying for a 504 loan isn’t too difficult. Your credit score and broader financial history will play a role, as will the size of your operations. Remember, the agency is called the Small Business Administration (emphasis added). So be sure to study their size standards to make sure you meet the criteria. As long as the tangible net worth of your restaurant is more than $15 million, while its average net income is at or below $5 million, you should be in good shape.

      Term loan: Some things never go out of style. For example, Levi’s blue denim jeans have been around since 1873, but that hasn’t diminished their popularity. And chocolate chip cookies were invented in the 1930s and remain a beloved treat.

      Term loans also fall into this category. They’ve been popular for generations because of their convenience, utility, and flexibility. With fixed interest rates (or fixed flat fees), these loans let you know up front exactly how much they’ll cost. This information saves you money and helps you plan your borrowing strategy.

      Another benefit of term loans is that the amounts can reach all the way up to $2 million while the interest rates begin as low as 6%. They also are known for funding quickly, with the money hitting your account in just a couple of days.

      To qualify for a term loan, your restaurant usually needs to be in operation for at least two years. If you have excellent personal credit, lenders may be flexible with this requirement. Collateral is typically required with this type of financing, so be prepared to identify personal property that could be used for this purpose.

      Short term loan: With how quickly the food industry moves and evolves, sometimes financing needs to be available in just 24 hours. Luckily, short term loans are designed to deliver this kind of expediency. 

      As far as the nuts and bolts of a short term loan, you’ll find they’re similar to term loans. The main differences relate to the first word in the name: short. Not only is the application and funding process quicker with these loans, but the repayment terms usually last just 1–3 years, as opposed to 5 years on many traditional term loans.

      Another way short term financing options differ from standard-paced loans is the cost. The interest rates usually begin in the neighborhood of 8%, while much higher rates are possible.

      Qualification for a short term loan is similar to a term loan. So as long as your restaurant has been up and running for 2 or more years and you’ve got solid credit, you will stand a good chance of getting the green light from lenders.

      Equipment financing: Running a restaurant has never been cheap, and kitchen and dining room equipment are major factors. For this reason, equipment financing can be a smart way for small business owners to get what they need to be successful.

      This type of financing provides maximum amounts up to $5 million. The funds can be used for all kinds of purchases, including fryers, fridges, freezers, ice machines, griddles, commercial shelving, tables, or chairs. It can also be applied toward less obvious choices, such as software for accounting or a payment processing system.

      The qualification process is easier than most, largely due to the fact that the equipment you’re buying can be used as collateral for the loan. Because there’s a safety net for the lender built right into the loan, they’re more willing to offer substantial amounts of money even when the borrower’s credit score isn’t stellar.

      Line of credit: Restaurants come with their share of large purchases, but there are also the small, recurring expenses to consider as well. This situation is where a line of credit shines because it’s structured in a way that lets you dip into a predetermined amount of money anytime the need arises.

      If this setup sounds familiar, it’s because a line of credit is a form of revolving financing similar to your personal credit card. Rather than receiving a lump sum loan, you simply make purchases when necessary and pay that specific amount of money back.

      Flexibility is a hallmark of a business line of credit. Just about any purchases related to your restaurant are good to go. With maximum amounts reaching $500,000, this type of financing can help you cover a wide array of small- to medium-sized purchases.

      How to Choose the Right Loan for Your Restaurant

      Small restaurant business owner making food for customer

      Doing your due diligence will help you narrow down your loan options to a handful of top contenders. Then it will be time to do some math. Your goal is to use pricing metrics such as Total Cost of Capital (TCC), Annual Percentage Rate (APR), Average Monthly Payment, and Cents on the Dollar to find the loan that’ll give you the biggest bang for your buck.

      If financing math isn’t your strong suit, don’t worry. Plenty of resources are available to help you navigate this process. Basic loan calculators make it easy to see costs in simple terms. This is a great place to start as you compare loans against each other.

      If you’re finding it difficult to line up comparables and see a clear winner, you’re not alone. Many borrowers struggle to translate the inconsistent terminology that various lenders use to describe their loan products.

      To remedy this issue, the Innovative Lending Platform Association partnered with some of the nation’s top lending platforms to create SMART Box™ (Straightforward Metrics Around Rate and Total cost). It’s a user-friendly tool that makes comparing easier, even when diverse metrics and disclosures are involved.

      Putting Your Best Application Forward

      Small restaurant business owner successfully running her business

      When it comes time to apply for your chosen loan, don’t forget the detail-oriented approach you’ve used up to this point. Every lender has specific instructions for borrowers, and they should be followed with exactness. In some ways, you can think of your application as a lie detector test. You may be able to put on a great show with an impressive business plan, but your application is where your true attributes shine. If you miss deadlines or forget to include required documents, lenders will likely see this as evidence that you’re unqualified to handle their money.

      Every lender will ask for specific details in their application, but here are some documents that are often requested:

      • Resume
      • Business plan
      • Details of potential collateral
      • Credit reports
      • Personal and business tax returns
      • Personal financial statements
      • Personal background information
      • Projected financial statements
      • Personal and business bank statements
      • Business licenses and registrations
      • Articles of incorporation
      • Contracts with third parties
      • Franchise agreements
      • Commercial leases

      By taking the time to review each step of the application carefully, you’ll put yourself in a prime position to get approved. It can be a tedious process, but it can pay dividends for your restaurant. And each application you submit is another opportunity to learn more about your financing options and the specific needs of your restaurant, setting you up for sustained success in the future.

      About the author
      Grant Olsen

      Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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