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Restaurant Loan Types, Strategies, Facts, Figures and more
November 14, 2019
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Restaurant Loan Types, Strategies, Facts, Figures and more

A restaurant is a great business for people who love to please others by providing wonderful food experiences.

It’s a fast-paced business and one that tends to be cutthroat. However, the rewards can be substantial. It is a capital-intensive business that requires the right funding choices as most budding restaurateurs do not have the cash needed to get started. Therefore, some form of financing or restaurant loan will be needed to help get the restaurant going. There are several components to financing a restaurant, and that is what will be covered in this article.

Restaurant Startup Costs

The costs of starting a restaurant are significant. These costs will be a consideration for a restaurant loan. The location is a big factor as it will cost more to set up and operate restaurants in larger cities than it will for smaller towns. The rents charged in large cities are high, but there is more potential for customers, which should theoretically make up for those higher costs. 

The land and building are the highest initial costs for restaurants, followed by equipment and furniture. Plates, glasses, and silverware are usually one-time costs, and the costs will depend on the capacity of the restaurant. The following is a breakdown of some of the startup costs to consider:

  • The total average cost is roughly $275,000 for the business in a leased building. Buying the building will bump up that number to approximately $475,000. It depends largely on the location, too. (Source: Sage Accounting Software)
  • Kitchen and bar equipment costs an average of $115,000. (Source: ShopKeep)
  • Tables and furniture cost an average of $40,000. (Source: ShopKeep)
  • Liquor licenses. Costs depend on state and type of operation. It can be as low as $3,000 on up to hundreds of thousands of dollars. (Source: Upserve Restaurant Insider)
  • Payment and ordering systems are likely to cost $20,000, depending on the set up of the restaurant. (Source: Sage Accounting Software)

RestaurantOWNER.com published a more detailed resource showing low, medium, and high estimates of the costs.

Finding the right loan for your business can be confusing but we can help you get a quick and safe business loan.

Different Restaurant Loan Types

Some restaurant business loan types are better suited for the restaurant business model than others. Business owners who wish to retain 100% equity should choose loans over equity financing. This prevents family members from becoming unwanted partners. It is possible for restaurant owners to obtain financing from traditional commercial lending institutions such as banks. Small business lending options are available, as well. For working capital, restaurants can obtain business lines of credit, as this will help during cash flow shortfalls that are common in the restaurant business. Loans backed by the Small Business Administration are also an option for some restaurant owners.

People working in the kitchen

Traditional Commercial Lending

Contrary to popular belief, banks will lend money to fund a restaurant business. It won’t be the quickest way to obtain the capital, however. It could take months for a bank to approve the loan, and this approval is not guaranteed. 

The advantage of this type of loan is the interest rates are likely to be attractive. It’s possible this option will offer the best rates out of all the options. It will require the potential restaurant owner to have good-to-excellent credit, though. Depending on the circumstances, the bank may also require personal guarantees or collateral.

Banks considering lending to restaurant owners would prefer that the owners have experience in the industry. While this isn’t essential, it can boost the chances of getting funding. Therefore, if you are not experienced in the restaurant industry, consider starting your business with catering to get the experience you need. There are companies that rent commercial kitchen space for caterers and other food businesses. It’s a perfect way to get started while learning how the industry works. It’s also a way to expand networking opportunities. 

At Fora Financial, we published an article about the pros and cons of opening a food truck business. As the capital requirements are less intensive than a full-scale restaurant, it is another alternative to gain experience in the food industry.

Business Line of Credit

When running a restaurant, erratic cash flows are the norm. It goes with the territory. This makes it difficult to meet short-term obligations like payroll and supplier payments. It also can hinder a restaurant owner’s ability to take advantage of opportunities that could help the business. A business line of credit can fill in the gap of erratic cash flows with much-needed liquidity.

A line of credit is a short-term loan for an agreed-upon amount of money. The restaurant owner can tap into the cash up to the maximum amount but is not required to use all of it. The advantage is that interest is only charged on the amount borrowed at that moment in time. When the owner pays back the loan in full, it is once again available to be used at a later date. 

The few disadvantages of this type of loan are the interest rates tend to be higher than alternative loans, and it may be tempting for restaurant owners to overextend which could hurt the business if these funds are not paid back in a timely manner.

Small Business Lending

At Fora Financial, we offer small business lending to help business owners who are experiencing cash flow shortages. This type of loan is a short-term loan for businesses that reasonably expect to receive payments from customers in the near future. It can help them get through the business cycle and repay the loan when they finally receive their payments. There is usually no collateral needed for this type of loan, and it can be used to borrow money for up to fifteen months. There are discounts for paying the loan off early, too. If you need $5,000-$50,000 to help with your cash flow management, this may be the right loan for your business.

The above is different than a small business loan available from the Small Business Administration (SBA). Since an SBA loan has the backing of a government entity, this type of loan helps lower the risk for qualified lenders. A qualified lender is approved by the SBA to offer small business loans.

The SBA was created to help small business owners and startups get the funding they require. Even business owners with less-than-perfect credit can qualify due to the loan being backed by the agency. SBA-approved lenders may have higher standards during the approval process, however.

Infographic about costs of opening up a restaurant

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Things Needed for Applying for Restaurant Loans

Each of the items in this section will vary by lender, but many will ask for several of them. Lenders may require personal financial statements from all potential partners and owners and will consider the credit rating of each owner. They may also require a personal guarantee or collateral of personal property as a condition of funding. The lenders will ask for personal tax returns for several years. Lenders may also request resumes of the owners to gauge industry experience.

On the business end, a detailed business plan will be requested, specifying the following:

  • Sales forecasts or projections.
  • Break-even analysis
  • Marketing plan on how customers will be acquired
  • Projected startup costs, with detailed schedules for implementation
  • Projected operational costs, including salaries of staff, inventory, and training
  • Lenders may ask for a breakout of fees and licenses required to run the business. Most restaurants require food permits and liquor licenses if alcohol is served. A music license may be required if music will be played in the restaurant to ensure compliance with copyright laws. It is prudent for potential restaurant owners to discuss the business plans with city or town officials to learn of other provisions and avoid any negative surprises.

The owners or partners should expect to answer tough questions from the lenders about the need for the loan and how the cash for it will be used to grow the restaurant.

At Fora Financial, we can help you find the perfect funding solution for your restaurant. You’ll have the liquidity you need to ride out any temporary cash flow issues. We have helped many businesses that continue to fund with us. You can request a free quote below.



Frequently Asked Questions

Which is the best loan type for a restaurant business?

Due to a variety of factors in the restaurant business, it’s difficult to declare one loan type as being the best. It requires evaluating each circumstance to see which options make sense. The good news is Fora Financial has the expertise to help you figure out which one is right for your business. Our experts are ready to take your calls.

How Can I Use the Money I Receive?

It will depend on what you ask for when requesting the loan. A traditional commercial lender may be strict on how you spend the money based on the original requirements that you specified. Working capital loans are a bit more flexible but should be restricted to the needs of short-term core business functions. At Fora Financial, we wrote a helpful article about some of the use cases for working capital loans for restaurants.

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Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].