What is a restaurant business loan?
A restaurant business loan, typically offered by traditional banks or alternative lenders, can provide you with the cash you need for large purchases, everyday operations or a variety of other purposes. Generally, your financing options will include term loans, lines of credit, online loans, asset-based financing and merchant cash advances.
The interest rate, loan term, fees and repayment schedule will vary based on the lender you select and factors such as your time in business, credit score and business revenue.
What are restaurant loans used for?
Restaurant business loans can be used for a range of purposes, including:
Opening a new location.
Remodeling, making repairs or expanding an existing location.
Covering everyday expenses, such as rent, utilities and software subscriptions.
Purchasing or upgrading equipment.
Buying inventory and supplies.
Paying your employees and/or hiring new workers.
Managing cash flow gaps during seasonal slows.
Other working capital needs.
Types of restaurant business loans
Restaurant owners can use many different types of business loans to get access to the capital they need. The best choice for you will vary based on why you need financing and your business’s qualifications, among other factors.
Here are some of the most common types of restaurant loans.
Bank loans
Bank business loans will typically offer the most competitive interest rates and repayment terms. However, to qualify, you’ll likely need a few years in business, strong credit and solid revenue.
Also some banks may be hesitant to lend to restaurants, as they perceive the food and beverage industry to be risky to finance.
Business lines of credit
Lines of credit are available from both banks and online lenders. Online lenders will have more flexible qualifications, but higher rates than traditional lenders.
Business lines of credit can be a good option for getting working capital for your restaurant — or serving as an emergency fund.
SBA loans
These loans are issued by banks, credit unions and other specialized lenders that are SBA-certified. SBA loans are partially guaranteed by the U.S. Small Business Administration and tend to have long repayment terms and competitive interest rates.
The most popular type of loan, the SBA 7(a) loan, can be used for a variety of restaurant purposes. Although these loans may be slightly easier to get than bank loans, you’ll still need good credit and strong finances to qualify.
Online term loans
If you can’t qualify for a bank or SBA loan — or you need faster funding — online loans can be a good alternative to finance your restaurant. Online lenders generally have flexible qualifications and some are willing to work with startups or businesses with bad credit.
You may be able to get an online restaurant loan in as little as 24 hours, but interest rates will be higher than traditional loan options. Online loans can be used for a range of needs. Working capital loans, for example, can provide short-term financing to help run your day-to-day restaurant operations.
» MORE: Compare the best online business loans
Asset-based financing
With asset-based financing, you take out a loan or line of credit and the assets you buy or currently own serve as collateral on the loan. Equipment, inventory and accounts receivable are some common business assets used as collateral for loans.
Restaurant equipment financing, a common type of asset-based financing, can be used to purchase large items like an oven or dishwasher. Similarly, inventory financing can be used to buy local produce, meats and other supplies for your restaurant.
Because the assets purchased often serve as collateral, asset-based financing can be easier to qualify for than traditional business loans.
Merchant cash advance
With a merchant cash advance (MCA) you receive an upfront sum of cash and repay it using a percentage of your debit and credit card sales, plus a fee. This type of financing is often popular among restaurants that accept credit card payments.
However, compared to other business loans, MCAs are one of the most expensive funding options, with annual percentage rates — or APRs — that can reach triple digits. You should consider all other options before turning to a merchant cash advance.
How to get a restaurant loan
To get a loan for your restaurant, you can follow these steps.
1. Decide which type of funding you need
You’ll want to determine which type of financing will best meet your business needs. If you’re looking to buy a new refrigerator, for example, an equipment loan may be the right option.
You should also consider how much capital you need, how fast you need it and how much debt you can afford.
2. Evaluate your business’s qualifications
Most small-business lenders will use your time in business, annual revenue and credit score to evaluate your eligibility. They may also consider your cash flow, sales projections, debit and credit cards sales and available collateral.
You’ll want to review your financial statements and credit reports ahead of time so you know where you stand with potential lenders.
3. Compare and research lenders
Once you have an understanding of your funding needs and business qualifications, you can narrow down your lender search accordingly. If you have fair credit and need fast working capital, a line of credit from an online lender such as Bluevine or Fundbox might be a good option.
You’ll want to research and compare multiple lenders to find the right fit for your restaurant.
4. Gather documentation and submit your application
Restaurant loan application requirements will vary based on the lender and type of financing. In general, you’ll need to provide some if not all of the following:
Basic information about you and your business.
Restaurant business plan.
Business and personal bank statements.
Business and personal tax returns.
Business financial statements.
Collateral information.
If you’re applying for an equipment or inventory loan, you’ll likely need to provide details and pricing information about those assets.
Funding times will also vary based on financing type and lender. Bank and SBA loans can take anywhere from a few weeks to a few months to fund, whereas online lenders may be able to offer same-day loans.
» MORE: How to apply for a small-business loan
How to get a restaurant loan to open a business
Getting a startup loan from a traditional lender can be a challenge for an entrepreneur who wants to open a restaurant. Banks often require multiple years in business and excellent credit.
However, microloans, including SBA microloans — with loan amounts generally up to $50,000 — can be easier to qualify for than a bank loan and may be an option to help fund a new restaurant. Also, using an SBA 7(a) loan to buy an existing business could be an alternative if your plan is to take over an existing restaurant.
Other forms of startup funding you may want to consider include alternative lenders, investors, crowdfunding and business grants.
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.
