Complete Guide to Restaurant Loans and Financing

Running a restaurant is an expensive business. Between equipment costs, stock, bills, wages and day to day cash flow, there is an awful lot to pay for. Restaurant loans are a common way to make this more manageable.

While many small business owners are squeamish about taking out finance, the reality is that this is often the most prudent way to meet costs. Especially when you consider the alternative.

Without business financing, you have no choice but to meet your running costs up front, and out of your own pocket. This can work in the short term, but even the most cash-rich businesses will then struggle when met with an unexpected cost.

Today, we’re going to look at why restaurant loans and financing are the smart option. We’ll look at the most common types of finance for restaurants, as well as everything you’ll need to consider when shopping around.

But first, let’s start with the basics.

What is Restaurant Financing?

Restaurant financing is essentially any money which is borrowed from a third party. Like any kind of loan or borrowing, you’ll almost always have to pay back more than you received. As we’ll see, this can come from a variety of sources, each with different requirements.

When restaurants borrow money, the actual sums can also vary greatly. This might be a small amount to help meet running costs during difficult periods, or it might be a larger sum to pay for ambitious expansion projects.

As such, before you start thinking about the right restaurant loan for you, the first thing to think about is why you need a cash injection in the first place.

Why are Restaurant Loans Useful?

As noted, there are countless different reasons why a restaurant might choose to take out a loan or finance. The challenge is identifying your core business problem, and deciding which finance option is right for your restaurant.

What works for a Michelin starred bistro might not work for a local takeaway.

The most common reasons for taking out restaurant financing include:

  • Starting a new restaurant,
  • Renovations,
  • Expansion,
  • Equipment purchasing,
  • Seizing growth opportunities,
  • Weathering cash flow problems,
  • Rebranding,
  • Working with contractors and consultants,
  • Expanding into other markets,
  • Funding operational expenses while you build a cash reserve.

In any of these cases, the key thing is that you should be taking out a restaurant loan to fund something which will ultimately provide return on investment. Restaurant loans are only prudence when what you purchase brings in more money than your total amount repayable.

Restaurant financing - typical running costs
Breakdown of typical restaurant costs and spending. Data: 7 Shifts

6 Types of Restaurant Loans and Finance

These days, there are more sources of restaurant loans and financing than ever before. As a small business owner, it can be difficult to know which finance option is the best decision for you.

For example, traditional institutions like banks and building societies all offer loans to banks, but nowadays a range of other organisations are competing in this space.

With that in mind, let’s take a look at six of the main types of restaurant financing, and which situations they are most appropriate for.

1. Bank Loans

For most people, traditional lenders like banks are the first thing they think about when considering a loan. But are banks and credit unions really the best source of restaurant financing in the digital age?

It’s worth keeping in mind that banks tend to be a little bit on the inflexible side, especially when it comes to securing a loan in the first place. In fact, loan applications with most banks can take weeks, or even months.

This isn’t much use if you need cash in a hurry.

Additionally, most restaurant owners use personal assets as collateral to secure a bank loan, which can make it a risky investment. Bank loans also typically feature compound interest, which can mean a higher total amount repayable.

In light of this, bank loans are often not the best option for restaurant financing.

2. Restaurant Loans from Alternative Lenders

Alternative lenders have greatly disrupted the loan market over the past decade, by offering cheaper, faster, and more flexible financing options. While alternative lenders are typically non-brick and mortar organisations, some banks have even started offering alternative finance.

Alternative lenders typically offer a wider variety of application criteria than their traditional counterparts, as well as faster and more streamlined application processes.

For example, where a bank may require a certain credit score, or for you to be in business for a number of years, alternative lenders are more likely to take account of your business’ performance.

Alternative lenders also generally provide more flexible and manageable repayment options, including fixed monthly repayments, or even automatically taking a percentage of your sales.

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3. Merchant Cash Advances

A merchant cash advance is another popular form of restaurant financing. While not quite a loan per se, the principle here is very similar.

Essentially, a merchant cash advance is when you borrow a sum of money from your credit and debit card machine provider. Repayments are then taken as an agreed percentage of your card transactions, until the total amount has been repaid.

This is a popular financing option with restaurants for a number of reasons. For one thing, merchant cash advances are a very quick way to access funds to overcome cash flow problems in a restaurant business.

For another, the amount you repay each month is based on your sales. This means that you can repay more of the advance when your business is thriving, and less when sales are slower. Obviously, this is much more manageable than a traditional repayment schedule.

Restaurant financing via merchant cash advance, money in wallet
Merchant cash advances are a common form of restaurant financing. Image credit: Emil Kalibradov

4. Equipment Loans for Restaurants

Restaurants need a lot of specialist equipment to operate effectively and efficiently. This can include anything from ovens and dishwashers to point of sale machinery and furniture. All of this costs money.

This can be problematic, for new and existing restaurants alike. In the first instance, paying up front for all of the equipment needed to start a successful restaurant is too much for most would-be business owners.

Equipment finance is often the most manageable way to get around this problem, by allowing you to pay for your equipment in more manageable instalments.

New restaurants can take advantage of equipment finance too, especially when it comes time to replace your equipment. For example, if something breaks, it can sometimes be difficult to maintain profitability.

You may even need to close temporarily.

Fast and flexible equipment finance allows you to work around this situation. Rather than dipping into your cash reserves to replace a broken oven, dishwasher or POS system, financing allows you to access this equipment in a more sustainable way.

5. Crowdfunding

In recent years, crowdfunding has exploded in popularity across all sectors, including for restaurant financing. Essentially, crowdfunding is when you attract small investments from members of the public to finance your restaurant.

While some crowdfunding arrangements may require you to pay back your investments, more often crowdfunding means offering some kind of benefit in kind.

For example, funders might be invited to your restaurant opening, receive special discounts, have a menu item named after them, or get a guaranteed regular reservation. Crowdfunding allows you to be creative, and offer all kinds of benefits.

You can also choose to offer different types of reward for different tiers of investors. For instance, someone who makes the minimum investment might get to attend the opening party, but the largest investors could be given a private tasting menu with your head chef.

As you don’t necessarily have to offer financial returns, crowdfunding is one of the most affordable kinds of restaurant financing.

However, it is also one of the most unreliable.

Unlike other finance options and restaurant loans, there is no guarantee that you’ll raise the amount of money that you need, especially if you don’t already have a large audience or community of patrons.

6. Refinancing and Equity Release

Refinancing is a popular option for securing restaurant loans, especially among existing businesses, which are asset rich, but lacking in cash flow. Assets here primarily refer to property, vehicles or equipment which you own outright.

This is a form of equity release, where you borrow money against the current value of your assets. In other words, refinancing effectively means selling your assets to a lender, and buying them back in installments.

Of course, you get to keep your assets while you pay back the loan.

This is a particularly popular option with established restaurants who want to reinvest their money, for instance in new premises, renovations, or any other kind of business investment.

As lenders already know that you have the assets you want to refinance, loan decisions are often relatively fast. You’ll typically have a decision within 48 hours. This makes refinancing an excellent option for restaurant businesses which need a major cash injection quickly.

Find out how much you can borrow.

Whether you want to expand your premises, invest in new equipment or complete a renovation, we offer bespoke finance to help your business grow. LoanGuru has worked with a number of different industries to help owners towards their long-term business goals, including takeaways, restaurants, cafes, online retail, fitness businesses and gyms, garages to name just a few.

Fill out the form to the right to start your Business Loan application today.

Find out how much you can borrow

Restaurant financing and loans things to consider graphic
Image credit: Drew Gilliam

4 Things to Consider When Applying for Restaurant Financing

Of course, within each of these categories of restaurant loans and financing, there are a multitude of different lenders, supporters and funders. So how do you choose between these?

As with any business decision, the right option for your restaurant depends greatly only on our own individual circumstances, goals and financial situation. What works for a five star restaurant in Dublin might not be right for a new gastropub in Belfast.

With that in mind, here are the four most important variables you should consider when shopping around for restaurant financing.

1. Turnaround Time

There are three important factors which determine the turnaround time for any kind of loan or finance. These are:

  1. How long it will take you to apply,
  2. The time needed for the lender to reach a decision,
  3. When you’ll have the money in your bank account thereafter.

When considering your options, pay close attention to the application process. What documents will you need to secure? Do you need to submit these electronically, or as hard copies? How long will the application realistically take you to complete?

Keep in mind that your application may be refused if it is not completed correctly, especially with traditional lenders.

Decision times can vary greatly from lender to lender. As noted, loan applications with traditional lenders can take months, while newer alternative lenders may give you a decision within days.

If you need funds in a hurry, it’s obviously preferable to borrow from a lender which clears payments quickly. Be sure to research this thoroughly when considering your various restaurant financing options.

2. Total Amount Repayable

When applying for finance, many people mistake low monthly payments for good value. While your repayment schedule is a good measure of the affordability of a restaurant loan, it doesn’t tell you much about whether or not you’re getting the best deal.

Instead, it’s important to focus on the total amount repayable, and compare this with the value of whatever you’re borrowing money to finance.

The total amount repayable is the overall sum of money which you’ll pay to the lender, over the life of your finance agreement. This can be expressed as either a raw number, or as a percentage of the borrowed amount.

To ensure that you make a prudent business decision, your goal should be to achieve the lowest total amount repayable possible. Of course, this still has to be balanced with affordability, in the form of a manageable payment plan.

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3. Time Frame and Interest Rates

To assess the affordability of restaurant finance plans, you’ll need to consider two factors:

  1. The repayment period,
  2. The interest rate.

These are what will dictate the size and frequency of your repayments. Generally speaking, loans with longer repayment periods have higher interest rates. This means that the shorter the period you borrow for, the higher your regular payments will be.

However, the total amount repayable will still be lower, provided that you pay your loan back on time.

As such, you should normally choose the restaurant loan with the lowest borrowing period which you can sustainably afford, in order to save yourself money in the long term. It’s important to be realistic here, so seeking out expert loan advice is a good idea.

4. Terms and Conditions

Finally, it’s worth thoroughly assessing the terms and conditions offered by various finance streams. In particular, look out for:

  • Whether or not collateral is required,
  • Charges for late repayment,
  • Charges for early repayment,
  • Administrative fees,
  • Fixed or variable interest rates,
  • Grace periods,
  • Exit clauses,
  • Application criteria.

Hidden fees, clauses and requirements can create unnecessary stress and financial burdens for restaurant owners, so it’s important to know exactly what you’re getting into. Additionally, if collateral is required, you’ll need to think hard about what happens if you don’t keep up with your repayments.

One way to do this is to research your lender’s reputation. Are they known to be an honest dealer, or have others been caught out while seeking restaurant financing? Having a clear idea of how a loan works will save you both time and money.

How to Secure Profitable Restaurant Loans and Financing

Choosing a restaurant loan or financing plan is an important business decision. Most often, restaurants choose to borrow money to help meet their day to day running costs, or to finance a new investment of some kind.

While there are a number of different finance options available to hospitality businesses, it’s important to choose the one that’s right for you.

In other words, you’ll need to first consider your business goals and resources, before you can find a finance package which will deliver profitability.

Of course, the easiest way to do this is by working with experienced restaurant loan experts. Use the contact form below to speak to LoanGuru today.