How to Apply for a Restaurant Loan in 2022

March 10, 2022

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Business owners have any number of options when they consider how to apply for a restaurant loan. The multifaceted nature of the business means that multiple loan options will make sense for restauranteurs in different contexts. A newly-started restaurant will have different business financing needs than an established eatery looking for additional working capital.

In this article, we’ll look through the questions you need to answer before deciding on financing options, the different financial institutions to look into, and when each type of loan is best for your restaurant.

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Before You Apply for a Loan

Lenders know how risky restaurants can be. So borrowers need to come to the table ready to prove that their restaurant – and their business – is a safe bet backed by well-prepared restaurateurs. 

What does that mean?

It means that no matter what type of loan you’re looking for – a term loan, an SBA loan, equipment financing – you should have a very clear understanding of exactly why you want that specific loan, what you’ll be spending the money on, and how that money will lead to greater profits.

A loan intended to finance a social media marketing campaign will be a very different loan from one intended to buy a pizza oven. Loan amounts, necessary credit scores, and even the type of financial institution can all change depending on your goals, your needs, and your eligibility and credit.

Types of Restaurant Business Loans

Remember that this list is not exhaustive, but will give you an idea of the most common types of loans available to help your restaurant, and how they might be best used.

There’s no perfect loan. Every type of loan has upsides and downsides. It’s a game of give and take. Understanding where your needs, qualifications, and goals fit with a prospective loan’s upsides and downsides is how you find the best possible financing option for your business.

Term Loans

A term loan is, in many ways, what you think of when you think of a traditional loan. You’ll go to a financial institution, you’ll go through an application process that will involve the potential lender doing a deep dive into your company’s financials (and possibly your financials as well). Once a decision has been made, they may or may not offer a lump sum of money that you will pay back using monthly payments with interest. 

These loans are offered by most financial institutions, from massive international banks to small online lenders. Business owners can take the money they’ve gotten from such loans and put them to a multitude of uses in the restaurant industry. That money can be used as working capital, to buy equipment, hire employees, pay off other debt, or buy the food you’re putting on plates. They can last a number of years, or you can find short-term loans which last only a year or two.

Because of the straightforward nature of these loans, lenders will want to make sure that borrowers are in great financial shape. You’ll need to prepare a ton of financial statements. Your interest rates will be dependent on your pristine business plan, your bank statements, high credit scores, demonstrable cash flow, tax returns, and proof of sufficient annual revenue. In some cases, particularly for an unsecured loan (or a loan in which the borrower puts up no physical collateral), your personal credit score will also likely be needed.

SBA Loans

The U.S. Small Business Administration (SBA) has several loan programs in which they guarantee large percentages of term loans given out by traditional lenders. Because the lender has that guarantee, they’re able to offer very favorable terms to small business owners who are able to qualify. If you or your company have got bad credit, it might be wise to search elsewhere.

But SBA loans also come with the most stringent and slow-moving process for any small business loans. While they’re often the most cost-effective loan options, the fact that the loan is guaranteed by taxpayer money means that the loans are only going to the most well-qualified borrowers. New restaurants will not be able to take advantage of many SBA loans either; you’ll need to have been in business for a few years with proof of sufficient cash flow. It will also take weeks to be approved for qualifying restaurants, if you’re lucky enough to be approved.

The SBA is also helpful when responding to world events. They’re currently offering emergency assistance to restaurants affected by the recent pandemic.

Equipment Financing

It’s not until you’re a restaurant owner that you realize just how much stuff is involved with opening and operating an eatery. Points of sale machines and operating systems, tables, chairs, cutlery, dishes, barstools. A cooler for the beer, and the labyrinthian coils and tubes necessary to pour soft drinks and beer. You need ovens and dishwashers and walk-in refrigerators. A freezer, a cook-top, and some serious cleaning equipment. If your restaurant is going to cater, you’re going to need all the mobile equipment needed to set up on the go, along with a vehicle to move. You’re probably going to need computers to keep the books, write schedules, buy supplies, and arrange reservations. Most host stands have a tablet too.

There’s so much stuff.

Equipment financing is a financial product designed specifically for the stuff. In equipment financing, the money you receive from the lender is earmarked for equipment purposes alone. You won’t be taking out an equipment loan to refinance existing debt.

In most cases, equipment loans finance about 80% of the equipment’s cost, with the remaining 20% coming in the form of a down payment by the buyer. If you’re buying the sort of extremely expensive equipment restaurants require, that’s still a substantially smaller financial hit than buying the equipment outright.

Most equipment loans are secured loans, which is to say that the lender holds the newly-purchased equipment as collateral. If the restaurant is unable to make payments on the equipment, the lender will repossess the equipment, and resell it. It’s a lot like SBA loans, except that the loan is guaranteed by the equipment purchased with the funds, instead of being guaranteed by taxpayer money. 

Equipment loans aren’t just for new equipment. They’re also commonly used for upgrading, repairing, or renovating existing equipment. They’re also known to be very helpful to startup restaurants, as the favorable terms can be helpful when you’re just starting out, to say nothing of the fact that newer restaurants often need the equipment to get things started.

If you’re looking to make a ton of equipment purchases, equipment funding might be your best bet.

Business Lines of Credit

Business lines of credit operate much like a traditional bank loan, but in reverse. In a traditional bank loan, after you’re approved, you get a lump sum of money, which you pay back in full, with interest.

In a line of credit, after you’re approved, you don’t pay a cent. You’re instead given a credit limit, much like a credit card. You’ll only begin payments, and only pay interest, on whatever money is withdrawn.

The fact that you only pay interest on what is spent makes business lines of credit a godsend in the unpredictable restaurant industry. Imagine being a fine steakhouse and your broiler malfunctions. You don’t have six weeks to put together an SBA loan application – people are walking into the restaurant tomorrow. With a business line of credit, you could have that broiler fixed and pay interest only on the cost of repairs.

Most business lines of credit will also include origination fees and annual fees, much like a business credit card. And unsecured lines of credit might also require a personal guarantee, meaning that if you default on your line of credit, the lender can come for your personal assets.

Merchant Cash Advances

Merchant cash advances aren’t classified as loans. Instead, a merchant cash advance provider, usually an online alternative lender, will purchase a percentage of future debit and credit card sales. Each day (or week), a certain percentage of every credit card transaction goes back to the provider.

Merchant cash advances are often very quick to apply for and the money hits your bank account very quickly. They’re also more available to companies with lower credit scores than some traditional loans. As a nontraditional lender, they’re also known for fast online applications and quick dispersal of money. However, they can be among the most expensive of all funding options, and because of the fact that MCAs aren’t loans by definition, your payments won’t help boost your credit score.

They don’t have interest rates. Instead, merchant cash advances have repayment terms set up with what’s called a factor rate. A factor rate is a number, typically larger than 1.0, which is multiplied by the principle to determine the total repayment amount. So if you borrow $1,000 with a factor rate of 1.3, you’ll be repaying $1,300. 

Merchant cash advances can be a lifesavers, as payments are by definition smaller when sales are slower. If you make less money today, you’ll pay less. Term loan payments don’t care if you had a slow month. You’ll still need to make that full payment. So an MCA can cover unexpected business needs, and are best suited for expenses that will result in immediate boosts in to income.

On the other hand, cash advance repayment can lead to a cash flow squeeze, since a portion of all incoming cash is being sent away. You’ll need to make sure that your company won’t be prohibitively hamstrung by the additional expense. 

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Applying is free and will not affect your credit score

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