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The Complete Guide to Restaurant Financing

By Bond Street

Running a successful restaurant, café or bistro requires a certain passion for bringing people together over a mouth-watering meal. Beyond that, however, it also takes money to make your culinary venture a success. And restaurant loans can help you to cover the gap when you have a short- or long-term financial need.

If you're looking for a way to take your restaurant to the next level, this guide's for you. Keep reading to learn:

  • How a term loan works
  • What needs a term loan is designed to help restaurant owners address
  • The benefits of term loans
  • How term loans compare to other restaurant financing options
  • How to qualify for restaurant financing

Term Loan Basics

If you've ever taken out a mortgage, a student loan, or a car loan you already have some experience with term loans. With this kind of loan, the lender provides you with a lump sum of cash that you repay over a set period of time.

Term loans may be secured or unsecured, depending on how much you're borrowing and what you plan to use the funds for. Repayment can last as little as three months or extend over several years, based on the lender.

Bond Street, for example, offers an intermediate term loan option. You can borrow between $50,000 and $500,000, with a loan term ranging from one to three years. Payments are made on a biweekly or monthly basis. With shorter term loans, you may be looking at weekly or daily payments instead.

Your loan may have a fixed interest rate, meaning the rate remains unchanged for the entire length of the repayment period, or a variable rate, which adjusts up or down with changes in the underlying index rate it's tied to. Be aware that term loans typically have a fixed payment but choosing a variable rate may cause your payment to increase or decrease in correlation with changes in the rate.

What Can Restaurant Owners Use Term Loans For?

A term loan can be used to address a host of issues that are unique to restaurants. Here are some scenarios where a term loan could prove valuable when your cash reserves are running low:

  • Your range suddenly stops working and you need to replace it quickly to avoid any temporary kitchen shutdowns.
  • The holidays are approaching and you need to hire additional staff to handle the anticipated surge in traffic.
  • Alternately, you run a seasonal restaurant that's busiest in the summer and you need cash to cover day-to-day operating expenses through the slower winter months.
  • You want to expand beyond table service and takeout to include full-service catering but you lack the necessary equipment.
  • You're planning on attending a local food expo and you need to purchase extra supplies and equipment for cooking demonstrations.
  • You've decided to revamp your marketing campaign and move into new advertising mediums that your current budget won't accommodate.
  • Your restaurant has taken off to the point that you'll either need to expand your existing premises or open a second location to keep pace with sales.
  • You have a mobile restaurant that's doing well but you're ready to move into permanent digs of your own.

The Benefits of Term Loans

Term loans have several characteristics that make them attractive to restaurant owners. For example, you have some leeway when it comes to your repayment term. You can choose a loan with a longer term if you're borrowing a larger amount or you want to stretch out repayment without straining your cash flow. A shorter term may more suitable, on the other hand, if you're taking out a smaller loan that you can afford to pay back quickly.

Compared to a personal loan or a business credit card, term loans generally offer much higher borrowing limits. If you need $500,000 because you're planning on opening another location across town, you wouldn't be able to charge that to a credit card. With personal loans, the borrowing limit typically tops out at $100,000. Speed is another plus if you're working with an alternative lender versus a traditional bank or the Small Business Administration (SBA). Bond Street, for instance, is able to fund loans in a matter of days. If you come across a great deal on an industrial dishwasher or one of your food suppliers is offering a limited time discount, a term loan could help you get the deal done so you don't miss out on an opportunity.

Are there any downsides to term loans?

While term loans can be a solution for restaurant owners who need cash quickly, there are some potential downsides to consider.

First and foremost, pay attention to the interest rate and fees. If you're getting a term loan through an online lender, there's a chance you could end up with a higher rate or pay a larger origination fee than you might with a traditional bank or through an SBA loan program. As you're comparing online lenders, remember to weigh the cost against the convenience they offer.

Next is the repayment term. This could either be a pro or a con, depending on the details of your situation. If you need to borrow half a million dollars, for example, but the lender expects you to repay it all within three years, you have to be sure that you're capable of managing the payments. A bank, by comparison, may be able to stretch out repayment for five or 10 years, which could give you a little more breathing room.

Alternative Restaurant Financing Options

Term loans, while advantageous, are by no means the only business loan restaurant owners can turn to. Here's a look at four other financing possibilities you may want to think about when you need funding for your restaurant.

Option #1: Merchant cash advance

Merchant cash advances aren't technically loans. Instead, it's an advance against your restaurant's future sales. The merchant cash advance provides you with funding, which you then repay as a percentage of your daily credit and debit card receipts.

Approval for a merchant cash advance doesn't hinge on your credit score so it may be a good choice for restaurant owners who don't have perfect credit. Funding is fast and no collateral is required. Your payments adjust based on your sales so you don't have to worry about getting caught in a crunch if sales are slow.

There is a hitch, however. Merchant cash advances can carry an APR of anywhere from 50% to 250%. That makes them an exceptionally expensive way to finance your restaurant's needs.

Option #2: Inventory financing

Inventory financing is meant to be used specifically for inventory purchases. The inventory acts as the collateral and this kind of loan usually has a shorter repayment term. The idea is that assuming you're able to sell the inventory at a rapid clip, you wouldn't need years to pay the loan off.

Similar to a merchant cash advance, a low credit score may not be a barrier to getting an inventory loan. That being said, the short-term nature of inventory financing may be a better fit if you own a seasonal restaurant and you need to stock up ahead of the rush.

Before you commit to inventory financing, read over the details first. Some inventory loans can come with above-average interest rates. Certain lenders may also require a UCC lien, which could put your restaurant's assets in jeopardy if you default.

Option #3: Equipment financing

As the name suggests, equipment financing can be used to purchase equipment, which the lender uses as collateral. Whether you want to give your kitchen a complete overhaul or just add a few new pieces to the ones you already have, an equipment loan can help you do it.

Approval through an online lender is quick and again, lenders are going to focus more on your restaurant's financial health than your credit rating alone. If you want a shot at the best interest rates, however, you'll need a higher credit score.

One pitfall to watch out for is the down payment requirement. With some lenders, the equipment alone may not be sufficient for collateral and you may be expected to bring some cash of your own to the table.

Option #4: Small Business Administration loans

The Small Business Administration offers multiple loan programs for restaurant owners and other entrepreneurs. SBA loans can be used for a variety of purposes and borrowing limits can be quite generous. For instance, you can borrow up to $5 million with a 7(a) loan.

You can take 10 years or in some cases, longer, to repay an SBA loan and the interest rates are likely to be among the lowest you'll find. If we had to point out disadvantages associated with SBA loans, there are two.

Number one, certain SBA loans require a 10% down payment. That could be a barrier to getting financing if your restaurant doesn't have that kind of money on hand. The other thing to be aware of is the funding speed. Online lenders can put money in your bank account in a couple of business days but a Small Business Administration loan could take weeks or even months to fund.

Qualifying for a Term Loan

When shopping around for a term loan, you should be mindful of the interest rate and fees various lenders charge. Aside from that, one of the most crucial things you can't afford to overlook is what the lender requires to qualify for a term loan. If you want to apply for a term loan with Bond Street, for example, these are the criteria we're most interested in:

  • $150,000+ in annual revenues
  • 640+ personal credit score
  • 2+ years in business

Bond Street also asks for a personal guarantee, which is something other lenders may require as well. When you sign off on a personal guarantee, you're assuming personal liability for the loan if your business were to default.

It's also important to have key financial documents ready to go before you apply. Some of the things your lender may ask for include a recent balance sheet, an income statement, and your personal and business tax returns for the last two years.

Organizing your paperwork, checking your credit report and score to see where you stand, and making sure you meet the lender's minimum qualification guidelines can help to streamline the application process. The more prepared you are ahead of time, the clearer the path to getting a term loan for your restaurant will be.

BIO: Bond Street is a company focused on making small business loans simple, transparent and fair. Small business owners are the foundation for growth in our economy and yet today's banking system has left them behind. Learn how Bond Street has helped Gabriel Stulman of NYC-based Happy Cooking Hospitality, Matt Kliegman of New York City's The Smile and AvroKO Hospitality Group finance their growth here:

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