Restaurant Financing in 2022

Updated January 6, 2022

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Restaurants and hospitality businesses were among the hardest-hit business as a result of the response to the Covid19 pandemic. So, what is the outlook for restaurant financing in 2022 now that most of the government assistance programs have expired? Restaurant operators are still facing major headwinds as the restaurant industry as a whole industry struggles to regain market share and staff.

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Restaurant Business Loans

Restaurant owners looking for business financing are advised to consider a hybrid approach to funding options. This means looking at a mix of working capital loans, merchant cash advance, equipment financing, line of credit, credit cards, and even SBA 7-type loans from the Small Business Administration.

While many loan options are still available, restaurateurs may find it difficult to get business financing from traditional bank loans unless they have a good credit rating (high credit score, above 750), and are willing to make a personal guarantee. The reality is that traditional financial institutions and conventional lenders are not making a lot of loans to small business owners, especially to startups and restaurants.

For loan amounts of $50,000 and above restaurant owners may wish to consider checking with online lenders. Online lenders are among the top sources for restaurant business loans and private loans for restaurant owners.

What Are Your Financing Options?

Borrowers tend to look for one source when seeking financing, but that may not be the best option. Naturally, it would be much simpler to just get one lump sum loan to cover all of your restaurant financing needs. But in most cases, the reality is that eligibility for a single term loan is out-of-reach for many business owners. Not to worry, there are many loan options available if you know where to look. Online lenders offer a wide array of short-term loans and financing options.

Small Business Loans

The first thing you should do is to determine what your needs are for your restaurant. Do you need to purchase new equipment? Purchase real estate? Or, do you just need working capital? You may have answered yes to a few or all of the above.

All business financing is not the same. For example, if you need to purchase new kitchen equipment or furniture for your restaurant, you may be surprised to know that you have several very good options. Furniture or equipment financing is one option.

TIP: Learn What Lenders are Looking For

Take some time to consider what your lender looks for when issuing loans or financing. Here are some tips that might help you appear as a better candidate for financing:

  • Credit Scores – This is a simple one. Does your lender have a minimum lending policy and require a minimum credit score? If so, check your credit score and be sure you qualify.
  • Cash Flow and Annual Revenue – Some lending institutions don’t put too much emphasis on your personal credit score or your business credit score, they just want to know if you have enough revenue and free cash flow to repay the loan.
  • Loyalty – If you do all your banking with one bank, you may have a better chance of getting a loan.
  • Time in Business – there is a lot of data to suggest that companies who can survive past a certain time in business are better risks for lenders.
  • Assets and Collateral – If you own your building, have company vehicles or other assets, your lender may be more inclined to issue a  small business loan if you have considerable collateral.

Equipment Financing

Let’s say you need 50 tables, 200 chairs a fryer, broiler, and stove for your existing restaurant or even a new location. Purchasing these items could cost upwards of $20,000 or more if you pay out-of-pocket. However, almost all equipment and furniture manufacturers and distributors will offer some type of financing or leasing program. 

Furniture and equipment financing is almost always the best option if you are looking to boost free cash flow. Instead of one-time cash payment, you can spread out costs over time with low repayment terms. What’s more, equipment financing or leasing rarely requires collateral or a personal guarantee and can even help your credit rating. In most cases, the equipment that you are financing acts as collateral.

Another benefit of this type of financing is that manufacturers and distributors often offer relatively low or no interest rate financing.

While we use the term “equipment financing or leasing, some refer to this type of financing as “trade financing” or “vendor financing”. Many industries have organizations and resources where you can find financing options specifically designed for your industry.

Business Line of Credit

A business line of credit is a very powerful financing option for a restaurant owner. Historically, these programs have been offered by traditional banks and credit unions. However, many online lenders now offer a business line of credit to their customers.

A business line of credit is essentially “ready cash”. Your lender qualifies you for a certain cash limit they are willing to offer. You can draw the cash as you need it and pay principal and interest on only the amount you borrow. 

Many business owners ask how a business line of credit differs from a cash advance from a business credit card. These two financing options have many similarities. The major difference will be the amount of interest you pay. Credit card cash advances usually carry a much higher rate of interest.

Also, there are two types of business lines of credit. The first is a revolving line of credit. Revolving credit and lines of credit offer borrowers more flexibility than traditional loans. Borrowers can use revolving credit and repay it over and over again up to a certain credit limit.

A non-revolving line of credit is a one-time financial arrangement that is closed when the borrower spends the set amount of credit.

Tip: Start small

You may wish to approach the institution where you have your bank account to open a small business line of credit. This way you will be more likely to qualify. Use the line of credit and pay it back promptly. Over time your bank will likely increase your credit limit. A business line of credit should be viewed as a business asset and should be built up over time.

Business Credit Cards

Most restaurant owners are very familiar with business credit cards since this is one of the most popular ways to finance purchases. In fact, according to some estimates, business owners carry up to 4.75 different business credit cards.

It is important to note that there is a difference between business credit cards and personal credit cards. The major difference has to do with taxes. In some cases using a personal credit card may not allow you to deduct purchases from your business taxes. At the very least, if you are using a personal credit card for business purchases, use it only for that purpose and never use it for personal purposes. Consult your tax advisor to understand how to use your credit cards to comply with the tax laws.

Business credit cards can be the business owner’s lifeline. They can also be a trap if not used wisely. Many companies are competing for your credit card business and there are lots of deals to be found. Here are some tips when opening and using credit cards for business.

TIPS: It’s about Rewards and Interest Rates

  • Rewards – Look for credit cards that offer rewards points, cash back, or credit towards merchandise or services. For example, some credit cards offer airline affiliation points towards frequent flier programs. If you travel for business, you could save thousands on travel expenses by using the right card.
  • 0% introductory offers – This can get tricky, so use this strategy sparingly. Say you have a high balance on a few cards with a very high-interest rate (that’s common), look for credit card offers that allow you to transfer those balances at low or 0% interest rates. These offers are generally good for one year and could save you thousands if used wisely.

    Keep in mind that having too many credit cards, or even closing credit card accounts could have a negative effect on your credit score.

SBA Loans

SBA loans are a type of financing that is given by qualified lenders. The U.S. Small Business Administration then guarantees the loan on behalf of the borrower. Having a guarantee allows the lender to offer very favorable interest rates, high loan amounts (up to $5 million), no origination fees, and favorable repayment terms to the borrower. Term lengths can be as long as 30 years. SBA loans are highly desirable but have fairly strict qualification standards.

Qualification criteria include: submitting a business plan, meeting minimum annual revenue requirements, and submitting your credit report. SBA loans are designed for business owners with a strong personal credit score. The application process and processing time can be a bit of work. If you are considering an SBA 7 loan, find a qualifying institution and ask for assistance. In many cases, they will have dedicated SBA loan professionals that will assist you in the application process.

Merchant Cash Advance

A merchant cash advance or “MCA” should be used as a last resort because of the high cost of borrowing. An MCA is a program where the provider advances a lump sum amount of capital in exchange for a percentage of your future revenue, usually from your credit or debit card sales.

It cannot be stressed enough that most MCA loans are among the most costly ways to finance your restaurant business. However, if you cannot find financing elsewhere and you absolutely need the capital, an MCA may be your only option.

When considering an MCA loan for your restaurant, be aware that you are essentially giving up a portion of your future credit card sales. So, that will reduce your future free cash flow.

If you believe that your restaurant business will maintain or increase its current revenue levels, then you can calculate the effects of the financing will be on future cash flow.

The benefit of this type of financing is that it is based on your restaurant’s credit or debit card sales. There is rarely a credit check so if you have a low credit score, you will likely still be able to qualify. An MCA also does not have a lot of paperwork associated with the application process so it is also known as one of the fastest ways to get financing.

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