5 Things You Need to Know About Restaurant Financing in 2023

Restaurant Business Loans: What You Need to Know as a Restaurant Owner

As a restaurant owner, you may need to consider different types of loans and restaurant funding options depending on your specific financial needs and your restaurant needs. Here are some common types of loans and restaurant funding options that may be suitable for restaurant owners:

Business line of credit: A business line of credit can provide flexible access to funds that you can draw from as needed. This type of loan can be useful for restaurant owners who need to cover short-term expenses or unexpected costs.
Business Credit Card: A business credit card is almost identical to a personal credit card, but the business is the account holder as opposed to the individual.
Equipment financing: Restaurant owners often need to purchase specialized equipment, such as ovens, refrigerators, and freezers. Equipment financing allows you to purchase the equipment you need while spreading out the cost over time.
SBA loans: The Small Business Administration (SBA) offers a variety of loan programs designed to help small businesses, including restaurants. SBA loans typically offer competitive interest rates and longer repayment terms than traditional loans.
Merchant Cash Advance: A merchant cash advance or MCA is technically not a loan. It’s a business transaction where a merchant essentially sells a portion of their future sales (particularly credit card sales) to a lender.
Working capital loans: Working capital loans are designed to help businesses cover day-to-day expenses, such as rent, payroll, and inventory. This type of loan can be useful for restaurant owners who need to manage cash flow or make investments to grow their business.
Commercial real estate loans: If you own the property where your restaurant is located, a commercial real estate loan can help you refinance or purchase the property. This type of loan can provide long-term financing with competitive interest rates.

It’s important to carefully consider your financial needs and research your options before applying for a loan. You may want to work with a financial advisor or accountant to determine the best course of action for your restaurant.

Looking at the Popular Financing Options for the Restaurant Industry in Greater Detail

Business owners seeking restaurant financing or loans may wish to look at the details of their borrowing choices.

What is a Business Line of Credit? – A business line of credit is a type of loan that provides a business with access to a set amount of funds that can be drawn upon as needed. Unlike a term loan, which provides a lump sum of money that is paid back over a set period of time, a business line of credit allows a business to borrow and repay funds on a revolving basis.

With a business line of credit, a business can access funds when it needs them and only pay interest on the amount borrowed. For example, if a restaurant owner needs to purchase new equipment, they could draw on their line of credit to make the purchase and then repay the funds over time. Once the funds are repaid, the credit line becomes available for future use.

Business lines of credit are often unsecured, meaning they do not require collateral. However, lenders may require a personal guarantee from the business owner or a lien on the business assets. The amount of credit available, interest rates, and repayment terms will vary depending on the lender and the creditworthiness of the business.

Business Credit Card – A business credit card is a credit card that is issued to a business rather than an individual. Business credit cards are designed to help businesses manage their expenses and cash flow, and offer many of the same benefits as personal credit cards.

Like personal credit cards, business credit cards have a credit limit and can be used to make purchases or access cash. Business credit cards may offer rewards, such as cash back or points, for purchases made on the card. These rewards can be a valuable way for businesses to save money on expenses or earn incentives for certain purchases.

Business credit cards may also offer additional benefits, such as online account management tools, purchase protection, travel insurance, and other perks. Business credit cards can be issued to the business owner, as well as to employees who are authorized to make purchases on behalf of the business.

One advantage of using a business credit card is that it can help separate business expenses from personal expenses, which can be important for accounting and tax purposes. Business credit cards can also be a convenient way for businesses to manage their cash flow, as they can use the card to cover expenses until they have the funds to pay off the balance.

It’s important to note that like personal credit cards, business credit cards charge interest on balances that are not paid off in full each month. Businesses should carefully consider the interest rates, fees, and rewards offered by different business credit cards to find the one that best fits their needs.

What is the Difference Between a Business Line of Credit and a Business Credit Card?

A business line of credit and a business credit card are both forms of revolving credit that offer businesses flexibility and access to funds as needed. However, there are also some key differences between the two:

Access to funds: A business line of credit typically offers a higher credit limit than a business credit card. With a line of credit, a business can access a larger amount of funds, which can be useful for covering larger expenses such as equipment purchases or inventory. A business credit card, on the other hand, may have a lower credit limit and is better suited for smaller, everyday expenses.
Interest rates: Business lines of credit often offer lower interest rates than business credit cards, which can make them a more cost-effective financing option. However, the interest rate a business is offered will depend on factors such as their credit history, business revenue, and other financial metrics.
Repayment terms: Business lines of credit typically have more flexible repayment terms than business credit cards. With a line of credit, a business can draw on funds as needed and make payments on a schedule that works for them. Business credit cards, on the other hand, often require a minimum monthly payment and may have higher interest rates if the balance is not paid in full each month.
Fees: Business credit cards often have annual fees and other fees, such as late payment fees or balance transfer fees. Business lines of credit may have fees as well, but they are often lower and more straightforward.

In summary, both business lines of credit and business credit cards can be useful financing tools for businesses, but the right choice will depend on the specific financial needs and goals of the business.

Equipment Financing – Restaurant equipment financing is a type of loan that helps businesses purchase or lease equipment, and it can be a useful financing option for restaurant owners. Here are some common uses of equipment loans for restaurant owners:

Kitchen equipment: A restaurant’s kitchen is often the heart of the business, and it requires a variety of specialized equipment to function properly. Equipment financing can be used to purchase or lease commercial-grade kitchen equipment, such as ovens, refrigerators, dishwashers, and cooking utensils.
Furniture and fixtures: Restaurant owners may need to purchase or replace furniture and fixtures, such as tables, chairs, bar stools, and lighting. Equipment financing can provide the funds needed to make these purchases and keep the restaurant looking its best.
Point-of-sale (POS) systems: Many restaurants use a POS system to manage orders, payments, and inventory. Equipment financing can be used to purchase or lease a POS system, which can be an important investment for the restaurant’s efficiency and customer service.
Audio and video equipment: Restaurants may also need to invest in audio and video equipment, such as speakers, microphones, and televisions, to create a pleasant atmosphere and provide entertainment for customers. Equipment financing can help restaurant owners make these investments and improve the overall dining experience.
Outdoor equipment: Restaurants with outdoor seating or spaces may need to purchase equipment such as umbrellas, tables, and heaters. Equipment financing can provide the funds needed to make these purchases and expand the restaurant’s seating capacity.

Overall, equipment financing can help restaurant owners make the necessary investments in their business without putting a strain on their cash flow. By spreading out the cost of equipment purchases over time, restaurant owners can manage their expenses and keep their business running smoothly.

Small Business Administration Loans (SBA Loans) – The Small Business Administration (SBA) offers several loan programs that can be suitable for restaurants. Here are some of the SBA loan programs that are commonly used by restaurant owners:

SBA 7(a) loans: SBA 7(a) loans are one of the most popular SBA loan programs and can be used for a variety of purposes, including purchasing or renovating a restaurant. These loans can be used to finance up to 85% of a project’s costs, and the repayment terms can extend up to 25 years.
SBA 504 loans: SBA 504 loans are another option for financing the purchase or renovation of a restaurant. These loans are typically used for larger projects and can finance up to 40% of a project’s costs. The repayment terms can extend up to 25 years.
SBA Express loans: SBA Express loans are designed to provide smaller businesses with quick access to capital. These loans can be used for a variety of purposes, including working capital and purchasing equipment or inventory. The maximum loan amount is $350,000, and the repayment terms can extend up to 7 years.
SBA Microloans: SBA Microloans are designed to provide small businesses with access to smaller amounts of capital, up to $50,000. These loans can be used for a variety of purposes, including working capital, purchasing equipment or inventory, and refinancing debt. The repayment terms can extend up to 6 years.
SBA Disaster Loans: SBA Disaster Loans are designed to provide low-interest loans to businesses that have been affected by natural disasters or other emergencies. Restaurant owners who have been impacted by a disaster may be eligible for these loans, which can provide funds to repair or replace damaged property, inventory, or equipment.

Each SBA loan program has its own eligibility requirements and application process. Restaurant owners should consult with a qualified SBA lender to determine which loan program is best for their business and to obtain guidance on the application process.

Working Capital Loans – This type of loan refers to the use of small business loan. Working capital loans are a type of business loan that can help restaurants cover their day-to-day operating expenses, such as payroll, rent, inventory, and utilities. These loans provide short-term financing to help businesses maintain their cash flow and keep their operations running smoothly.

For restaurants, working capital loans can be particularly useful during slow seasons, when revenue may be lower than usual. These loans can also be used to take advantage of growth opportunities, such as expanding the menu or adding new locations.

Working capital loans may be structured in a variety of ways, such as a line of credit or a term loan. A line of credit provides businesses with access to a pool of funds that can be drawn upon as needed, while a term loan provides a lump sum of money that is repaid over a set period of time.

Working capital loans typically have shorter repayment terms than other types of business loans, ranging from a few months to a few years. Interest rates and fees can vary based on the lender and the borrower’s creditworthiness.

To qualify for a working capital loan, restaurant owners may need to provide financial statements, tax returns, and other documentation that demonstrates their ability to repay the loan. Lenders may also consider the restaurant’s credit history, cash flow, and other factors when evaluating loan applications.

Working capital loans can be an important financing option for restaurants, helping them manage their cash flow and maintain their operations during both slow and busy periods. However, as with any type of loan, it’s important for restaurant owners to carefully consider their financial needs and their ability to repay the loan before applying.

Commercial Real Estate Loan – A commercial real estate loan for a restaurant is a type of financing that is used to purchase or renovate commercial real estate, such as a building that will be used as a restaurant. Commercial real estate loans can be used to finance a variety of restaurant projects, including:

Purchasing property: A commercial real estate loan can be used to purchase a property that will be used as a restaurant. This can be a good option for restaurant owners who want to own their own building rather than leasing space.
Renovating a building: A commercial real estate loan can also be used to renovate a building that will be used as a restaurant. This can include upgrades to the kitchen, dining area, and other areas of the building.
Building a new restaurant: If a restaurant owner wants to build a new restaurant from the ground up, a commercial real estate loan can be used to finance the construction.

Commercial real estate loans are typically secured by the property being financed. This means that if the borrower is unable to repay the loan, the lender can foreclose on the property to recover their investment. The repayment terms for commercial real estate loans can vary, with some loans offering terms of up to 25 years.

To qualify for a commercial real estate loan, restaurant owners will need to provide a variety of documentation, including financial statements, tax returns, and a business plan that outlines the proposed use of the property. Lenders may also require an appraisal of the property to determine its value and ensure that the loan amount is appropriate.

Overall, a commercial real estate loan can be an attractive financing option for restaurant owners who want to purchase or renovate a building for their business. However, as with any type of loan, it’s important for restaurant owners to carefully evaluate their financial needs and their ability to repay the loan before applying.

Merchant Cash Advance – A merchant cash advance (MCA) is a type of business financing that is often used by small businesses, including restaurants, to obtain quick access to cash. In an MCA, a lender provides an upfront lump sum payment to a business in exchange for a portion of the business’s future sales. Rather than paying back the loan in fixed installments, the borrower agrees to repay the loan through a percentage of their credit card or debit card sales until the loan is paid off.

MCAs can be useful for restaurants that have uneven cash flow or that need to make a large purchase quickly, such as a piece of equipment or a renovation project. They can be approved quickly and require minimal documentation, making them an attractive option for businesses that need fast access to cash.

However, MCAs can be expensive and may have high interest rates and fees. The repayment terms can also be unpredictable since the amount of the repayment is based on a percentage of the restaurant’s future sales. This can make it difficult for businesses to accurately forecast their cash flow and budget for future expenses.

Another potential drawback of MCAs is that they can be a debt trap for small businesses. Since the repayment amount is based on a percentage of sales, businesses with slow sales can end up repaying the loan for a longer period of time than expected, which can result in a cycle of debt and financial instability.

Overall, an MCA can be a useful option for restaurant owners who need fast access to cash and have a steady stream of credit or debit card sales. However, it’s important for restaurant owners to carefully evaluate the costs and risks associated with MCAs before deciding to use them.

Online Lenders Versus Traditional Bank: What Are the Best Loan Options for Small Business Owners?

The answer to this question will depend on your business needs and type of restaurant you are operating. There are many loan products available from literally hundreds of financial institutions. Here are some things to consider:

When it comes to obtaining financing for a small business, there are several options available, including online lenders (sometimes referred to as alternative lenders) and traditional banks. Each option has its own set of advantages and disadvantages, and the best option for a small business owner will depend on their specific needs and circumstances. Here are some factors to consider when deciding between online lenders and traditional banks:

Speed of funding: Online lenders can often provide funding faster than traditional banks, since they typically have streamlined application and approval processes. This can be an advantage for small business owners who need cash quickly.
Loan terms: Traditional banks often offer longer repayment terms and lower interest rates than online lenders, which can result in lower overall costs for the borrower. However, traditional banks may also have more stringent requirements for loan approval.
Collateral requirements: Traditional banks may require collateral to secure a loan, which can be difficult for small businesses that do not have significant assets. Online lenders may offer unsecured loans, which do not require collateral, but may have higher interest rates.
Credit score requirements: Traditional banks typically require a high credit score for loan approval, which can be difficult for small businesses that are just starting out or have less established credit histories. Online lenders may be more willing to work with borrowers who have lower credit scores.
Customer service: Traditional banks typically offer in-person customer service and may have more personalized relationships with their clients. Online lenders may offer less personal service, but may provide 24/7 access to customer support.

In general, online lenders may be a good option for small businesses that need quick access to cash and have less established credit histories. Traditional banks may be a better option for businesses with established credit histories and significant assets, as they may offer lower interest rates and longer repayment terms. However, it’s important for small business owners to compare their options and evaluate the costs and benefits of each option before making a decision.

Best Business Loans for Restaurateurs with Bad Credit?

If you have bad credit and are looking for a loan to finance your restaurant business, it can be more difficult to obtain financing, but it’s not impossible. Here are a few options that you can consider:

Alternative lenders: There are alternative lenders who specialize in providing loans to businesses with bad credit. These lenders typically have more relaxed credit requirements and may be more willing to work with borrowers who have a less than perfect credit history. However, these loans may come with higher interest rates and fees.
Merchant cash advance: A merchant cash advance (MCA) is a type of financing that provides an upfront lump sum payment in exchange for a portion of the business’s future sales. Since MCAs are based on future sales, they may be easier to obtain than traditional loans. However, MCAs can be expensive and may come with high interest rates and fees.
Equipment financing: Equipment financing is a type of loan that is used to purchase equipment for your restaurant business. Since the equipment itself serves as collateral, these loans may be easier to obtain than other types of loans, even with bad credit.
Personal loans: If you have bad credit, you may still be able to obtain a personal loan to finance your restaurant business. However, personal loans may come with higher interest rates than traditional business loans.

Regardless of which option you choose, it’s important to shop around and compare the costs and terms of different loans. You may also want to work on improving your credit score over time to increase your chances of obtaining financing in the future.