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Guide to Restaurant Financing

By OnDeck

Running a successful restaurant includes all the challenges faced by other small businesses, plus, every meal has to be perfect, every time. As a result, accessing capital can be a challenge for many small restaurants. Fortunately, there are more options available than ever before to help you build a successful eatery.


Restaurant Financing Options

A Term Loan at the Bank: The bank has been the traditional financing partner for small businesses (including restaurants) for over 100 years. And, it could still be a good option if your restaurant has been around for several years, has annual revenues approaching a million dollars or more, and the owner has an impeccable personal credit history with a strong business credit profile.

Small business loans and lines of credit are available at the local bank with competitive interest rates and terms for those that qualify. The bank will usually require some form of collateral and will also likely require a personal guarantee from the business owner. Banks are usually hesitant to offer a loan to a new business with only a year or two under their belt.

An SBA-Guaranteed Loan: The Small Business Administration (SBA) is not a lender, but rather works through banks, credit unions, and other lenders and promotes small business ownership in many different ways-including their loan guarantee programs. If you apply for an SBA loan, you will be working with a participating lender and they will make a lot of decisions regarding whether or not you qualify for a loan.

Qualifying for SBA-guaranteed financing is considered easier than a traditional bank loan-for example the personal credit score threshold is lower and the collateral requirements aren't quite a strict-in some cases they will even work with a startup, provided certain criteria are met. Interest rates are usually very competitive and terms will be very similar to those found at the bank.

Short- or Long-Term Financing Options: In addition to traditional small business financing offered by the SBA, banks, and credit unions, in recent years online lenders like OnDeck are making financing available online with loan terms and products designed to meet some of the particular needs associated with restaurants like financing for purchasing inventory, bridging a seasonal cash flow gap, ramping up a new marketing campaign, or some other working capital need.

One way these lenders are addressing these divergent needs is by reconsidering loan terms (or the length of a loan). In other words, the financing required to fill a short-term need like purchasing inventory is very different than financing the construction of a new building, expanding into a new location, or purchasing heavy equipment.

By matching the loan term with the loan purpose, restaurants can better control their cash flow and better leverage the borrowed capital to fuel business growth. In other words, a short-term loan (with a three- or six-month term) might be better suited to meet a short-term need than a longer-term loan (with a four- or five-year term).

The application process is typically a simple online application, approvals usually happen the same day, and funds are sometimes available as quickly as within 24 to 48 hours (depending upon the lender). Interest rates may be higher than those of traditional loans and the periodic payments will likely be more frequent than monthly, but many borrowers find that spreading the payment burden throughout the month is easier to manage from a cash flow perspective.

A Business Line of Credit

A business line of credit is offered by many traditional lenders, as well as online small business lenders such as OnDeck, but rates and terms will vary from lender to lender. Lines of credit are typically reserved for more creditworthy borrowers because of the flexibility of a credit line.

Many of the same requirements will apply when applying for a loan or a line of credit, but the advantage of a credit line is the ability to access credit as needed, repay the line, and access the credit again.

Equipment Loans, Inventory Loans, and Other Special-Purpose Financing

Additional financing is available for special purpose needs like purchasing equipment (like a new pizza oven) or ramping up inventory (like restocking a wine cellar for the holiday season). Terms for this type of financing are usually consistent with the loan purpose or anticipated life of the asset being purchased. For example the loan term associated with purchasing a new pizza oven will likely be longer than the term associated with purchasing a few cases of wine.

It's common for equipment finance companies to require the equipment being purchased be used as collateral for the loan. These lenders will likely also require a personal guarantee. Interest rates and terms will vary depending upon the individual lender. Both traditional and online lenders offer financing for these special purpose loans.

A Merchant Cash Advance

Another option available to restaurants that accept credit cards is a Merchant Cash Advance (MCA). An MCA is not really a loan, but rather an advance based upon your regular credit card deposits, sold at a discount to the MCA provider. Qualifying for an MCA is possible for those business owners with a lower credit profile, but the interest rates can be very high-sometimes in the triple digits.

Many MCA providers will require access to your business' Merchant Account at the bank to withdraw an agreed-upon percentage of your daily credit card receipts. They often will also require you to install new hardware to process your credit card transactions.

Picking the Right Financing for Your Restaurant

With all the options available it can be challenging to determine which type of financing is the best for your business. With that in mind, here are four questions you should ask yourself:

1. What is the loan purpose? In other words, what are you borrowing for? Are you trying to meet a short-term need or a long-term need? It might be an oversimplification, but you can think of it in terms of borrowing to buy a new car vs. borrowing to buy a new home. Most people would never take a 30-year auto loan even if the interest rate were lower. Understanding your loan purpose will help you determine where to look.

2. How much money do you need to meet your loan purpose? There are costs associated with borrowing regardless of where you borrow, so borrowing more than you really need can become expensive. Your loan purpose will likely give you the number your looking for.

3. Have a plan should something not go as planned: Lenders want to know that you can repay a loan (that's why they look at your revenues), that you will repay a loan (which is why they consider your track record and credit history), and that you will make each and every payment regardless of what happens within your business. A plan demonstrates that intention to a lender-which will make them more likely to offer a loan to you rather than any of the other businesses that are applying for a loan.

Improve the Odds Success for Your Restaurant Loan

"Dig in" to your credit profile: A blemish or two on your personal credit score or your business credit profile won't make it impossible to qualify for financing, but taking action now to better understand your credit profile will help you take action to improve any areas where your profile needs improvement. It's human nature to impact those things we pay the most attention to, so regularly reviewing your profile on a monthly basis is not too frequent.

Know your budget before your "order." Take into consideration the costs of borrowing before you sign on the dotted line. Make sure you understand all the loan terms, the interest charges, and any fees associated with the loan. And don't seek more money that you really need.

Make sure you can "cover the check." It's important to make sure you have the regular monthly cash flow to make all of the required periodic payments. Make these calculations based upon your slow times as well as your busy times.

Don't rely exclusively on your menu to build a successful restaurant and compete with your bigger competitors. Our data suggests that the top 25 percent of restaurants make up roughly 56 percent of all restaurant revenues, so you'll need an edge to successfully compete. Preparing now will likely make it easier when you need additional capital to expand or fuel growth; and will help you know where to look for the right business loan for your restaurant.

If you'd like to learn more about all the financing options available for your restaurant, please visit the Resource Center.


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