Alternative Loans and Financing for Restaurants

Updated November 23, 2021

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Whether you own a small burger joint or a chain of four-star restaurants, all restaurant owners agree that the industry is filled with financial challenges. When an infusion of capital is needed, obtaining a loan is usually the best course of action – but what happens if the owner’s credit score is too low for a traditional bank (other traditional lenders) or small business loan?

Restaurant owners cite cash flow as their primary financial challenge, which often creates a shortfall in working capital.

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Fortunately, there are several loan options available to restaurant owners. When a term loan or SBA loan are not achievable, restaurant owners may wish to consult with alternative lenders. Alternative lenders offer benefits beyond a traditional bank loan, such as increased repayment flexibility, loan amounts and a decreased emphasis on credit scores. For small business owners in the restaurant industry, especially a startup with a new restaurant, this may be the only business financing source available.

Online lenders or “alternative lenders” operate differently than a bank- from the application process to managing the monthly payments on a loan. 

Here’s a closer look at some funding options and how to get funding for restaurants, including what options are available and in which situations they work best.

What is Restaurant Financing?

Restaurant financing refers to any type of money loaned, sourced, or otherwise obtained. It can be used for accomplishing practically any short or long-term goal. Some common reasons restaurants need an alternative loan include:

  • Emergency repairs

  • Short-term coverage for routine expenses

  • New equipment purchases

  • Renovations

  • Opening a new location

  • Expanded service offerings

It’s important for the owner to clearly identify why they need a restaurant business loan, as different types apply to different situations. For instance, some restaurant loans only allow you to purchase a specific piece of equipment, while others give you a lump sum you can spend however you wish.

Merchant Cash Advance

merchant cash advance (MCA) is an alternative to a traditional business loan. With an MCA, the business owner receives a lump sum they can use however they like. Unlike a bank loan, the borrower doesn’t repay the MCA lender in installments. An MCA is usually a short-term loan that restauranteurs use for immediate business needs. 

In many cases MCA business funding does not rely on credit history, but on monthly or annual revenue.

Instead, the lender automatically collects a percentage of all future sales until the loan is repaid. The money is collected through an Automated Clearing House deduction from a bank account. Typically, the percentage is taken exclusively from the restaurant’s daily credit card sales. (In some ways, it’s similar to invoice factoring, another type of loan with automatic repayments.)  

The total cost of an MCA is presented as a fixed percentage of the amount loaned to the merchant, instead of as an interest rate. With less emphasis on an individual’s credit rating, an MCA is often a viable option for restaurant owners with poor credit but steady sales.

Business Line of Credit

A business line of credit is functionally similar to a credit card. The lender extends a line of credit that the borrower can tap into as needed. They can take out as much or as little as they wish from the credit line. As with a credit card, the borrower is only charged interest for the money they actually spend.

This type of loan offers two major advantages compared to a traditional small business loan. First, it’s flexible. As needed, the business owner has access to capital, so they won’t wind up with a large loan they can’t pay off. Also, making regular payments to a line of credit helps improve the owner’s business credit score.

Lines of credit can be either secured or unsecured. Secured debt is backed by personal assets, such as a house, or business assets, such as equipment or real estate. Interest rates or fees increase with an unsecured loan, but the borrower faces less risk to their assets.

Equipment Financing

A professional kitchen requires specialized equipment to function properly. If even one component fails, the entire restaurant could potentially stop running. Equipment financing is often an affordable and fast way to replace or upgrade restaurant equipment.

With equipment financing, the lender either purchases the equipment for the owner or loans them money to buy a specific item on their own. Either way, the equipment is up-and-running in the kitchen quickly. Then, the loan is repaid in monthly installments plus interest.

One major benefit of equipment financing is a feature called a sale-leaseback. Once the loan is completely repaid, the borrower can then use the equipment as collateral to take out a second loan to be used for whatever they wish. Sale leasebacks typically have low-interest rates and flexible repayment plans.

Consider How Quickly You Can Get Your Capital

One of the most important factors to consider when applying for restaurant financing is how fast the money becomes available. Generally speaking, if a business owner needs money quickly, the loans available will likely have higher fees or interest rates than loans with longer build-out times.

Restaurant owners will need to determine what works best. For example, if the owner must replace a broken oven or cover immediate overhead expenses, they’ll need capital in their account as fast as possible. But if they want to upgrade or redesign their restaurant, they have time to shop around and find restaurant financing options with better terms.

Final Thoughts

Restaurant owners with poor credit can still find financing. Bad credit loans and loan alternatives such as a merchant cash advance can provide much-needed restaurant financing for repairs, growth, and much more. For many restaurant owners, alternative financing options are a recipe for success!

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Applying is free and will not affect your credit score


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