Best Restaurant Loans for Small Businesses | Credibly

2015-02-22

Jeffrey Bumbales

Restaurant Loans: Best Types of Loans for Restaurant Businesses

As a restaurant owner, you probably spend a portion of your time looking for ways to grow your business and improve customer service. It is more than just a dream. Growing your customer base and daily sales creates a solid plan for your future. In today’s business environment, one of the sure-fire ways that restaurants can increase profits is to offer more to customers and keep up with any changing demands for services.

Seeking some working capital for your restaurant may be the best way to fund the new equipment, space, supplies, or employees required to reach your goals. But first, you need to create a plan of action.

Top Reasons for a Restaurant Loan

The most basic reason to expand your business is your customers. Basically, to be successful now and in the future, you must increase or improve on what your restaurant offers to better fit your current and potential customers’ desires. Here are the top reasons that restaurant owners require cash:

Real Estate

Perhaps you have outgrown your space, want to expand your menu, or maybe you need to increase seating capacity or want to offer outdoor dining. Whatever the reason for a move, it could be the key to growing your customer base and your business.

Whether you’re just starting out or are running an existing restaurant, real estate costs never really go away without purchasing a location outright. Small business or commercial real estate loans can help cover the purchase or leasing of a space, or the cost of a location change to help expand your operations. 

While operating on good real estate can be key to attracting customers and maintaining success, finding a cost-effective financing option for your business is equally important. Before taking a loan to change locations and expand your business, carefully consider your market and confirm the demand for your food going forward; without a big enough customer base to warrant the location change, you could struggle to cover the additional property costs and loan repayments. While loans can help your restaurant grow, you should establish your brand’s profitability and longevity before taking on long-term financial obligations and expenses.

Equipment

Another common growth expense for restaurants is supplementing or improving existing kitchen equipment. Reaching more customers and growing a business usually means expanding output capacity or improving distribution, so it’s only natural that restaurants looking to grow often need to finance any range of equipment from delivery cars to brick ovens. 

To cover the high cost of some of these materials, many owners pursue equipment loans or equipment financing. Banks may lend you money to cover the cost of the equipment, or equipment lenders may lend the machinery directly, using its inherent value as collateral for the loan. Before taking an equipment loan, make sure that your improvements are targeted toward profitability, or else you may not be able to repay the loan and retain the equipment. For more information about equipment financing, click here. 

Renovations

Similar to an equipment overhaul, completing design updates and other renovations to your physical space is a good way to expand and develop your business. Well done renovations can not only improve your seating capacity but attract customers based on ambience and convenience, driving profits in the long term as your brand and reputation improve. These changes often come at a high cost, and may require business owners to take out a loan in order to make the necessary improvements, but can be well worth it for your business.

Operations

As a restaurant owner, you might also need to pursue financing, not for improvements or expansion but to simply cover the operational costs of running your business. If your revenues fluctuate by season or due to an economic downturn or emergency, you might take out a working capital loan to cover operating expenses like paying staff salaries, completing supply-chain payments, and submitting rent. An operational loan can help stabilize your business and keep things running smoothly until a crisis or slump passes. 

Expanded Hours or Employees

Changing or extending your hours of operation can help attract more customers, and accommodating a busier atmosphere often requires hiring additional staff to fill new or extended shifts. To cover the costs of new employees or longer shifts for existing staff, many restaurant owners take out some form of small business loan in order to stabilize their finances while accounting for the wage increases. In this case, small business loans can help restaurants rise to the demands of the market without worrying about whether or not they will be able to keep the needed staff on hand. 

Best Types of Loans for Restaurants

The most common solution for businesses seeking financing for growth or improvement is to apply for a loan of some sort, usually through a bank. However, an expanding array of alternative lending options, offering more flexible requirements and terms than traditional sources of financing, has become a main source of funding for small businesses, and restaurants in particular. 

If you’re starting from scratch, or trying to recover a hurt operation, it may be hard to qualify for a bank loan due to a low credit rating or outstanding debts; here are some alternatives that you could consider if you’re looking for small business loans to cover any restaurant expenses. 

Working Capital Loans

Many of the issues outlined above, such as seasonal slumps or staff increases, can be addressed by a working capital loan. Many alternative lenders offer short term loans meant to sustain your cash flows and ability to operate in the near future. Working capital refers to the funding you need to support your day-to-day operations, so many lenders offering this type of financing are willing to specifically tailor the agreement to your business needs. 

Where bank loans might require lengthy application processes, rigid terms, and tough requirements for financing, alternative lenders are usually more favorable to struggling or new owners. Working capital lenders are usually more focused on the overall health of your business than your past history or balance sheets; if you’ve built a solid business and brand, or if you seem truly willing to put the effort into it, a working capital lender might give you a chance and help you keep things running. 

Lines of Credit

A business line of credit, which allows owners to withdraw necessary funding on a rolling basis, is one of the most flexible financing options available to restaurant owners. With a line of credit, owners are able to provide funding to support their business on short notice, down to the exact dollar amount they need to get through the moment. Though there’s a limit on the credit you can use, you will only be charged interest payments on the money that you use up to the line of credit’s maximum. A business line of credit, in other words, is a great way to obtain short-notice financing at a flexible level, without being saddled with unnecessary interest charges. 

SBA Loans

Another financing option that is uniquely suited to small businesses and restaurant owners is lending from the Small Business Administration (SBA). The SBA does not itself provide funding to businesses but instead securitizes loans issued by partner banks and lending institutions across the country. In other words, an SBA loan offers funding from traditional lending sources, but with added security from a third party. 

Where traditional bank loans may ask borrowers to offer some assets as collateral in case of default, SBA loans are pre-secured and can be extended from banks without fear of lost funds. Generally, SBA loans come with lower interest rates and less up-front obligations for small business owners. However, because they’re government-administered and highly sought after, they can come with longer wait periods and approval times than alternative lending options. 

Merchant Cash Advance

Another flexible financing option that doesn’t require you to repay or pay interest for unused funds is merchant cash advances or MCAs. MCAs are lump-sum payments made to businesses by lenders, in exchange for an agreed-upon percentage of future revenues. As a restaurant owner, you might need to cover the high, one-time cost of a new dishwasher for your kitchen. To do so, you could take out an MCA and agree to pay, for example, 3% of your next quarter’s profit to the lender. Rather than take on financial obligations in dollar amounts, owners repay their funding with their future success.

Conclusion

As a restaurant owner, you must be able to seize opportunities and protect against crises at a moment’s notice in order to stay in business. Often, that task can take outside financial help. Any of the above alternative lending options are well-suited to help your business survive an emergency or prepare for an expansion. As long as you’ve put the effort into making your restaurant a viable operation now and in the future, small business loans can provide much-needed help in the short term.

Author Bio:

Jeffrey Bumbales
Director, Marketing & Strategic Partnerships