Restaurants operate on thin margins, requiring many sales to generate healthy profits. They also have higher startup costs than some other industries, and it’s not uncommon to need funds both early on in the business, as well as later on.

While SBA funding is a common choice, it’s not the only game in town. In fact, some restaurants need the flexibility, speed, and approval odds that are available through other options. Learn about the most common restaurant funding options available, as well as how to know which is right for you.

Where SBA loans fit into restaurant financing.

The Small Business Administration (SBA) is often the first option restaurant owners think of when looking for long-term financing. The SBA 7(a) and 504 loans can offer up to $5 million and have lower rates than other types of funding. Because SBA funds can be used for equipment costs and payroll, they may seem like a natural fit for the challenges restaurants face in any economy.

However, getting approved for an SBA loan can be a long process, with slower approval times and rigorous documentation requirements. The large collateral terms may make them out of reach for new or small eateries.

Even if the SBA loan is the ideal pick, the timeline may force restaurants to look elsewhere to cover them while the loan is being approved. If a fryer breaks, for example, it’s not reasonable to replace it in 30 to 60 days, which is how long a traditional SBA loan can take from application to loan disbursement.  

Restaurants must keep their doors open and welcome new customers, so they’ll need the money faster than this. That’s why it’s good to know the other loan types available to owners with urgent cash needs or who want to take advantage of a quick-turn growth opportunity.

Traditional bank loans.

Starting a restaurant is a big undertaking, but if the owner already has a relationship with a bank, they may want to start there. Restaurants aren’t limited to just those banks they know, however, and can search around to find the right lender to meet their needs.

Advantages of traditional bank funding include competitive interest rates and large loan limits, which can help companies expand or refinance costly debt. Banks tend to work best with established restaurants, meaning it may be difficult for new or small businesses (like food trucks) to get the funding they need. Like SBA loans, the longer timelines could shut out restaurants that need quick cash to repair equipment or boost supply inventory during busy seasons.

Equipment financing.

In the case of a broken fryer or outdated appliances, restaurant owners may find equipment financing a suitable solution. These loans are made specifically for purchases of physical goods like ovens, refrigerators, POS systems, or other specialty restaurant equipment.

Anything bought with the funds becomes collateral for the loan money, so the lender gets some assurance of repayment (or they can take back the equipment). This creates less risk for the financing company, making them more willing to work with new or small restaurants, as well as those with weaker credit histories.

Approval can be very quick and allows restaurant owners to update their locations as needed without delay.

Business lines of credit.

A business line of credit is very flexible and gives business owners a set amount of money they can borrow from again and again. Whether it’s for payroll, inventory, marketing, or other needs, the money remains available as long as the account stays open, and the lender only charges interest on what’s used. It’s similar to a credit card in that way, but it can be taken out as cash.

Lines of credit may be appropriate for restaurants that need cash for seasonal swings or don’t need the large one-time lump sums of a traditional bank loan.

Short-term loans.

When a restaurant only needs cash for a short time, and long loan processes won’t do, a short-term loan can fill the gap. These loans are designed to be paid back quickly, within months, and have a higher interest rate than typical funding programs. They can be used for repairs, staffing shortages, when cash flow gaps appear, and when there’s no time to wait for more comprehensive lender underwriting.

Revenue-based financing.

Revenue-based financing, such as merchant cash advances give restaurants access to funds that are paid back incrementally through credit card transactions. They are best suited for restaurants with high credit card volume, as the repayments happen based on daily or weekly sales.

These loans work aren’t different than other cash advance options, in that they are easier to qualify for but charge higher interest rates.

Invoice financing for catering or B2B accounts.

Limited to catering services and those with large corporate accounts, invoice financing converts part of the value of unpaid invoices into a cash loan. The lender then collects on the invoice, taking some or all of the accounts receivable balance.

Costs for these services vary, and lenders may buy the invoices outright or let you continue to collect yourself (taking a portion of what you receive). The financing may appeal to businesses with uneven cash flow situations or that need more money to expand.

How to choose the right option.

All these funding choices have just one thing in common: they can help food businesses survive in difficult times or tap into potential growth opportunities. Beyond that, they are very different and require you to ask questions to know what’s right for you.

Ask these questions before you begin:

  • What do I need money for?
  • How much do I need to borrow?
  • How quickly do I need it?
  • How do I repay the money?
  • Will it impact my daily operations?
  • What does the financing cost in charges, fees, or interest accrued?
  • Can we afford monthly payments?

Since there’s no one-size-fits-all solution, consider bundling multiple funding sources or relying on a different loan type at different parts of your business journey. Lendio can help you cut through the noise and find the lenders best matched to your needs, credit score, and timeline.