Restaurant Loans: Costs, Financing, Terms & Where to Find

Restaurant loans can be either short or long term and are typically used for working capital needs or to purchase equipment or real estate. These loans are harder to get because many lenders perceive the restaurant industry to be risky. Rates range from 5% – 50% with terms from 3 months to 10 years or more.

OnDeck, which sponsored this article, offers short term financing up to $500k for restaurants, with repayment terms up to 3 years. If you’ve been in business for at least 1 year and have $100k+ in annual business revenue, you may prequalify for rates as low as 9.99%. Apply online within 10 minutes and you could be funded in as quick as 1 day.

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Top 5 Restaurant Financing Options

How We Determined the Top Restaurant Financing Options

While there are plenty of financing options available throughout the industry, we’ve selected the top 5 options that serve a variety of needs for restaurant owners. We chose these 5 options because they’ll likely work for the majority of restaurant businesses that need financing.

When determining which were the best choices, we considered the following:

• Financing amount
• Repayment Terms
• Costs
• Who each option is right for
• Familiarity with the restaurant industry
• Minimum qualifications

Depending on what your personal and business situation looks like, you may find any of these 5 best options a good fit for your business. For short-term needs, we recommend OnDeck. They provide both short term loans and business lines of credit to help restaurants with their funding needs. Through OnDeck you can get up to $500k in as quick as 1 day with an application process that takes about 10 minutes.

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Short Term Restaurant Loans

Short term loans are typically used by restaurants looking for cash to plug short term working capital gaps and to invest in company growth. They’re one of the best short term financing options for restaurant owners because they typically offer loan amounts up to $500k and can fund in as little as 1-3 days. This type of loan is great if you need a lump sum cash injection fast.

What Short Term Loans Offer

Short term loans are offered by online lenders that focus less on personal creditworthiness and more on recent business history than traditional loan options. These loans typically have short terms and expensive interest rates. However, even though the rates are high, you could end up having a lower total cost of capital than a traditional loan because these are typically paid back within 1 year or less.

Loan Terms

Your loan terms will vary by lender but they’ll generally fall into these ranges:

• Loan Size: $5k – $500k
• Repayment Terms: 3 Months – 3 Years
• Payment Frequency: Weekly or Monthly
• Funding Speed: 1 – 3 Days

Minimum Qualifications

Alternative loans are the easiest type of loan to qualify for, with the minimum qualifications generally being:

• Credit Score: 500+ (check your credit score for free)
• Time in Business: 1+ Year
• Annual Business Revenue: $100k+
• Down Payment: None
• Collateral: None

Short Term Loan Costs

Many short term loan providers typically charge an annual percentage rate (APR). This rate typically includes the interest on your loan and all fees required during loan origination or repayment.

• APR: 30 – 50%

Where to Get a Short Term Loan

Our recommended short term loan provider is OnDeck, who offers restaurant loans up to $500k. To qualify you must have a 500+ credit score, 1+ year in business, and $100k+ in annual business revenue. See if you prequalify by filling out an online application that takes about 10 minutes. OnDeck can fund loans in as quick as 1 business day.

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Business Line of Credit for Restaurants

A business line of credit can help businesses that need a recurring financing option. It can help restaurants prepare for unexpected expenses that require quick financing or it can help businesses with consistent short term cash flow gaps like seasonal restaurants. You can reuse your line of credit over and over again and only pay interest on the amount you borrow.

What Business Lines of Credit Offer

Like a short term loan, business lines of credit (LOC) from online lenders focus less on your personal creditworthiness and more on recent business history. These LOCs typically have max lines up to $100k, which is lower than many of the other options on this list, but still good considering it’s typically revolving. Prime borrowers can find a line of credit from an online lender with a total APR similar to the best business credit cards and they can receive funds within 1-3 days.

Loan Terms

Your loan terms will vary by lender but they’ll generally fall into these ranges:

• Loan Size: $5k – $100k (often revolving)
• Repayment Terms: 6 Months
• Payment Frequency: Weekly
• Funding Speed: 1 – 3 Days

Minimum Qualifications

The minimum qualifications for a business line of credit from an online lender are typically:

• Credit Score: 600+ (check your credit score for free)
• Time in Business: 2+ Years
• Annual Business Revenue: $150k+

Short Term Loan Costs

The best borrowers will qualify for APRs that are competitive with the best business credit cards:

• APR: 13.99 – 39.99%

Where to Get a Short Term Loan

OnDeck can help your restaurant get a business line of credit up to $100k. OnDeck can fund lines of credit in as quick as 1 business day. See if you prequalify by filling out their short, online application.

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SBA Loans for Restaurants

SBA loans are the best for profitable restaurants and borrowers with a strong personal credit profile. These loans are typically used to buy long term investments like large equipment or real estate because they’re the most affordable restaurant loan option with the longest repayment terms. These loans take the longest to fund, routinely taking 30 – 90+ days, but if you don’t need access to quick restaurant financing, then it’s the safest loan for your business.

What SBA Loans Offer

SBA loans are the most affordable loan option but they often require you to be a prime borrower with at least 2 years of business history. These are long term government guaranteed loans that generally have interest rates in the range of 7-9%. Restaurants are a good fit for SBA loans and receive more SBA loans than any other industry because SBA loans are great for the large purchases restaurants routinely make (real estate, large equipment, etc.).

SBA Loan Terms

While your terms are going to vary by SBA lender, they’ll typically look similar to these:

• Loan Size: Up to $14 million
• Repayment Terms: Up to 25 years
• Payment Frequency: Monthly
• Funding Speed: 30 – 90+ Days

SBA Loan Minimum Qualifications

An SBA loan is one of the most difficult loans in which to qualify. The minimum requirements will vary slightly by lender but they’ll typically be similar to the following:

• Credit Score: 680+ (check your credit score for free)
• Time in Business: 2+ Years
• Down Payment: 10%+
• Collateral: May be required
• Other Requirements: Must be profitable

If your restaurant is a fairly new business, or just in the startup phase, then you’ll need more collateral and a higher down payment than other businesses. As our article on SBA startup loans says, new restaurants will typically need 25-30% down to get approved.

SBA Loan Costs

SBA loans are one of the most affordable forms of financing available. You’ll typically incur a low interest rate during repayment and loan packaging fees that will vary by lender. There are also other miscellaneous fees like the SBA guarantee fee, which is typically passed on to you by the lender.

• Interest Rate: 5 – 9.5%
• SBA Guarantee Fee: 3 – 3.75%
• SBA Origination Fee: 0.5 – 3.5%
• Broker Fee: 1 – 4%
• Packaging Fee: $2,000 – $4,000

You can learn more by reading our articles that detail how to apply for an SBA loan and special SBA express loans for those who need under $350k.

Where to Get an SBA Loan

SBA loans are originated by traditional lenders like banks. You can find the lenders that originate the most SBA loans by reading our article on the top 100 SBA lenders.

To learn more about all these types of restaurant loans, check out our free webinar. Our small business expert will help you identify the best financing option for your business needs and how to qualify for funding.

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Rollover for Business Startups (ROBS) for Restaurants

A Rollover for Business Startups (ROBS) is best for anyone with $50k+ in a tax deferred retirement account who needs financing to start, buy, or invest in a restaurant. It’s a way to get restaurant financing without your business taking on debt, which means you won’t have to make large weekly or monthly payments. There are also no early withdrawal penalties or taxes with a ROBS and you can use these funds as a downpayment for traditional financing like an SBA loan.

What a ROBS Offers

According to a recent study by RestaurantOwner.com, the majority of first-time restaurant owners funded their restaurants with savings or other personal sources of financing.

Withdrawing funds directly from your retirement account will likely cause you to pay fees or extra taxes. A ROBS allows you to rollover your money from a tax deferred 401k or IRA directly into your business without paying these penalties.

A ROBS can be a complicated transaction with a lot of moving parts because you must follow rules from both the IRS and the Department of Labor. Due to the sensitivity of making sure you follow these rules, we recommend partnering with an experienced ROBS provider who has completed hundreds of ROBS transactions.

ROBS Terms

A ROBS isn’t a loan so there aren’t any traditional terms. With a ROBS, your retirement account owns shares in your company, and you never have to repay it if you don’t want, as long as your business is operating.

A ROBS transaction typically has these terms:

• Financing Amount: $50k+ (not a specific ROBS minimum, but is the required minimum for most ROBS providers)
• Repayment Term: No minimum or maximum requirement
• Payment Schedule: None because it’s not a loan
• Funding Speed: 2-3 Weeks

ROBS Minimum Qualifications

Since a ROBS isn’t a loan you won’t be required to have a minimum credit score or reach a certain revenue requirement. Instead, you’ll need to meet certain ROBS requirements to make sure you’re in compliance with federal laws and rules surrounding this type of transaction.

To qualify for a ROBS you’ll need to meet these minimum qualifications:

• Credit Score: None
• Time in Business: None (great for startups or existing businesses)
• Down Payment: None
• Collateral: None
• Other Requirements: $50k+ in a tax deferred retirement account and your business must be a C corporation.

Rollover for Business Startups Costs

A ROBS doesn’t cost anything to setup unless you use a ROBS provider, which we recommend. They require a small setup fee and monthly charge to maintain the plan and help you administer it correctly.

• Setup Fee: $4,999
• Monthly Service Charge: $130 – $150 and there is typically an additional charge per employee if you have more than 10 employees

To learn more, read our ultimate ROBS guide.

Where to Get Started With a ROBS

You can complete a ROBS on your own but it can be a complicated transaction that is difficult to navigate without an experienced professional. And you do not want to make mistakes when you’re funding a business with your 401k.  Instead, we recommend you partner with a ROBS provider that has worked through hundreds of ROBS transactions.

Equipment Financing for Restaurants

If you need to buy appliances, tables, chairs, fixtures, or other equipment for your restaurant, then an equipment lease or loan is probably the best way to do it. It’s a good option for all borrowers, even applicants with relatively low credit scores and the loan is secured by the equipment itself.

What Equipment Financing Offers

Equipment financing funds the purchase of large equipment with a long shelf life. The equipment serves as collateral for the loan and you’ll typically get repayment terms up to 6 years. An equipment lease gives you the option to buy the equipment at the end of your term and with a loan, you’ll own the equipment as soon as you pay it off.

Equipment Financing Terms

Equipment financing varies by what type of loan or lease you agree to, but typically you’ll have these terms:

• Financing Amount: Up to $250k
• Repayment Term: Up to 6 years
• Payment Frequency: Monthly
• Funding Speed: 1 – 5 Days

Equipment Financing Minimum Qualifications

The most important qualification is the value of your equipment but you’ll also need to generally meet these requirements:

• Credit Score: 600+ (check your credit score for free)
• Collateral: None except for the equipment itself
• Down Payment: 10%+
• Other Requirements: No bankruptcies, foreclosures, or repossessions on your credit report

Equipment Financing Costs

Equipment financing is an affordable alternative to other loan options. Since the equipment is used as collateral, the interest rate is often less than even an SBA loan. Your interest rate is going to depend on what type of financing you get. For example, an equipment loan is going to cost more than an equipment lease because you’ll own the equipment after you pay it off.

• Interest Rates: 5%+
• Fees: Depends on your lender. Banks will likely charge you a loan origination fee.

Where to Get Equipment Loans & Leases

Equipment financing is offered by a variety of lenders from banks to specialized equipment dealers. To find the right equipment financing for you, read our articles on equipment loans or equipment leasing.

How to Determine How Much to Borrow

Before you apply for a restaurant loan you should determine how much capital you need so you don’t over borrow. Restaurants have thin margins and overborrowing could be damaging to the long term stability of your business. However, knowing how much you need can be difficult if you’re trying to start a restaurant from scratch.

Milena Thomas, an outsourced CFO and Professor of Corporate Finance at Walsh College says:

“If restaurant owners have done things right from the start and have been keeping proper books, the task of determining if and how much financing will be needed in the coming year is greatly simplified. Creating a cash flow projection for the next 12 months will reveal any shortfalls and from that point, based on the amount needed and what it will be for, this will determine the source of funding the restaurant should try to secure.”

She went on to tell us that restaurants need to critically consider any expenditures and ensure they are truly necessary, such that the cost will provide increased revenues in the long run. Her example was to consider if new equipment expands the menu or increases efficiency. You can run the numbers on the potential increased revenues before you make the capital expenditure.

Additionally, breaking even dollar for dollar is not a good enough metric, remember that any loan comes with interest rates that will vary with their types and the creditworthiness of the borrower, so any estimates have to include those interest expenses in any break even analysis.

RestaurantOwner.com has provided some of the primary startup and operating costs that you should consider when assessing how much you need to borrow. Many of these costs can be good to help established restaurants ballpark what you need for working capital, but it would be more accurate for you to calculate your needs based on your current financials.

Common Restaurant Startup Costs

All of the costs above are going to vary based on the type of restaurant operation and your location. Jim Laube, President of RestaurantOwner.com, says he has seen food truckers get into business for as little as $10K, whereas fine dining restaurants can cost millions of dollars.

How to Get Approved for Restaurant Loans

For decades, the conventional wisdom was that restaurants were high risk businesses with high failure rates. However, in the last few years, it’s become more clear that restaurants are not necessarily any riskier than any other business, as long as the owner plans ahead and executes a sound business plan.

However, restaurants have plenty of challenges that prevent this from always happening. They’re in a highly regulated industry and have very thin margins. One big mistake could bring down the whole business if you don’t plan ahead and have access to working capital when you need it. The problem is making sure you qualify for financing when your business needs it.

We’ve put together the top 4 tips from industry experts to help you improve your financing chances.

1. Stay Up to Date With Your Business Finances

Business owners often struggle to find time to do everything that they feel needs to be done. One area of importance is keeping up to date with business financials because cash flow is often king. However, not staying on top of this important task can cost you penalties now and the opportunity to get financed later.

Christian Moreno from GoKapital says:

“Factors such as timely filing taxes, paying licensing fees, staying up-to-date with your rent or mortgage, managing payroll, and maintaining positive cash flow will better position owners to qualify for a restaurant business loan. Common financial trip-ups that hurt an establishment’s chances of obtaining funding include tax liens, late rent/mortgage payments, and excessive overdrafts in bank statements.”

For this reason, having an automated accounting software, or even a bookkeeper/accountant overseeing the financial side of the business will ensure that your restaurant easily qualifies for working capital whenever you need it.

2. Be Able to Show Your Capital Needs in Detail

Many long-term lenders are only going to lend what they think you need because they don’t want you to take on more debt than necessary. Instead, they’ll want to ensure your ability to pay them back. Having a detailed list of necessary expenses over the next year and being able to back it up is key to negotiating a higher borrowing amount.

Travon Jackson, Analyst over small business lending at High Impact Financial Analysis, says:

“Working capital, construction, and disbursement are the biggest trip-ups in capital deals. Many borrowers seek “working capital”, or cash, to cover operating expenses like salaries and wages, insurance, and others. Unfortunately, this working capital need is often sized to an LTV (collateral) requirement or specific purchases instead of the actual business need. Many lenders will loan more money than expected to Borrowers if they can demonstrate a need. This is why you should prepare a list of potential unexpected expenses.”

He went on to tell us to consider how much more money would be needed if the business was rapidly successful and required more employees, supplies, etc. Further, due to significant overhead, many restaurants start off losing money in the initial months as operations scale up to cover expenses.

These anticipated losses should be included in the working capital need as well. It is unrealistic to expect a restaurant to be fully operational on day one (1) of opening and declining losses during start-up are understandable in many markets. Be sure to ask for the total working capital needed when you open, not just what you think will be needed at the time of application.

3. Preserve Operating Cash

If you’re going to apply for long term financing then you’ll have to convince the lender that you can sustain your business with or without capital for the short term. This gives them confidence in your ability to pay them back and will increase your chances of getting funded. Obviously, this isn’t applicable to short term loans, but SBA or other traditional lenders will want to see this type of preparation.

According to Lee Speronis, JD, CHE, CHIA, Associate Professor at Husson University:

“In order to raise capital, restaurant owners will need to demonstrate that they have 90 days operating cash. This is considered a minimum safe level. If the owner does not have 90 days operating cash, raising capital could be problematic. Credit is also an important issue that could trip restaurant owners up. If a restaurant owner has not established credit or has overextended himself or herself on credit, getting additional capital will be more difficult.”

4. Separate Your Business & Personal Expenses

One of the biggest mistakes small business owners make is merging together their personal and business finances. If you have a legal entity for your business then you likely created it to protect your personal assets from anything that happens in that business. The problem is that when you decide to co-mingle funds between your business and personal accounts then you’re “piercing the corporate veil” into your personal life.

Essentially, this means that you and your business are one, and that any liability your business has can become your own personal liability. You don’t want to get sued because of your business and you don’t want to put your personal assets at unnecessary risk.

Instead, you should make sure you have a business checking account and business credit card that is separate from your own.

Buying an Existing Restaurant or Franchise

Buying an existing restaurant is often easier to finance because you can use seller financing. This means the current owner will provide you with a loan to cover the full or partial cost of the restaurant. Seller financing can be combined with an SBA loan, ROBS, or pretty much any other type of financing in this article.

If you buy an existing restaurant you’ll want to protect yourself by making sure you either have 5-7 years left on your lease or by negotiating a long term lease before closing. Restaurants are so dependant on location that you don’t want to jeopardize the current business you’re buying by having to move shortly after you take over.

Purchasing a restaurant franchise is yet another possibility. It’s often less expensive than buying an independent restaurant because the parent company will provide your concept, marketing plan and materials, and brand recognition. If you go this route, make sure you carefully read through the franchise disclosure document, which will lay out your estimated startup and operating costs.

You can also check out our list of the best and worst franchises by SBA default rates, which contains many restaurant franchises. This should give you a good starting place to find the perfect restaurant franchise for your geographic location.

Restaurant Business Loans for Small Businesses

Bottom Line – Restaurant Loans

Restaurant loans can be a good way to get your new business off the ground or to provide some working capital to buy new equipment and keep you operating during a cash flow gap. A small term loan or business line of credit is great for short term needs. An SBA loan is good for prime borrowers looking for long term capital.

OnDeck can help established restaurants looking for working capital. They offer both short term loans and business lines of credit and will work with you to determine your needs. You could prequalify for up to $500k in financing by filling out a basic online application that takes about 10 minutes. If approved, you could be funded in as quick as 1 day.

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