Restaurant Loans: Costs, Terms & Requirements

Restaurant loans are offered by both traditional and online lenders and often are used for working capital expenses like payroll, utilities, and inventory. Restaurant financing can also be used for large projects like new locations, equipment, and renovations. Average rates range from 6% to 50%, with repayment terms ranging from three months to 10 years.

Top 5 Restaurant Financing Options

How We Determined the Top Restaurant Financing Options

To help business owners apply for a small business loan that’s best for their restaurant, we evaluated what restaurant owners considered most important: the amount of financing borrowers can receive and the costs and terms of repaying the borrowed funds. We also evaluated what kinds of businesses each option is right for, how familiar lenders are with the industry, and how difficult or easy it is to qualify.

Short-term Loans

Short-term loans typically are used by restaurants looking for cash to plug working capital gaps and invest in growth. They’re one of the best short-term financing options for restaurant owners because they offer loan amounts up to $500,000 and can get you funded in as little as one to three days.

Short-term Loan Terms

• Loan size: $5,000 to $500,000
• Repayment terms: Three to 36 months
• Payment frequency: Weekly or monthly
• Funding speed: As quickly as one to three business days

Short-term Loan Minimum Qualifications

• Credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000
• Down payment: None
• Collateral: Blanket Uniform Commercial Code (UCC) filing
• Personal guarantee: Required

Short-term Loan Costs

• Starting interest rate: As low as 9% simple interest
• Average APR range: 30% to 50%
• Origination fees: 0% to 5%
• Additional fees: None

Best Short-term Business Loans

Business Line of Credit for Restaurant Financing

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

Business Line of Credit Terms

• Loan size: $5,000 to $100,000
• Repayment terms: Up to 12 months
• Payment frequency: Weekly
• Funding speed: As soon as one to three business days

Business Line of Credit Minimum Qualifications

• Credit score: At least 600
• Time in business: At least one year
• Annual business revenue: At least $100,000

Business Line of Credit Costs

• Starting interest rate: As low as 13.99% simple interest
• Average APR range: 20% to 40%
• Origination fees: None
• Additional fees: $20 per month maintenance fee

Best Small Business Lines of Credit

Small Business Administration (SBA) Restaurant Loans

SBA loans are best for profitable restaurants and borrowers with a strong personal credit profile. You can use these loans to buy large equipment or real estate because they’re the most affordable restaurant loan option with the longest repayment terms. However, SBA loans can take 30 to 90 days or longer to fund, so they are not a good source of quick funding.

SBA Restaurant Loan Terms

• Loan size: Up to $5 million
• Repayment terms: Up to 10 years for working capital and up to 25 years for real estate
• Payment frequency: Monthly
• Funding speed: 30 to 90 days or longer

SBA Restaurant Loan Minimum Qualifications

• Credit score: At least 680
• Time in business: At least two years
• Down payment: At least 10%
• Collateral: Typically required
• Other requirements: Must be profitable

SBA Restaurant Loan Costs

• Interest rate: 8% to 11%
• SBA origination fee: 0.5% to 3.5%
• Packaging fee: $2,000 to $4,000

Best SBA Lenders

Rollover for Business Startups (ROBS) for Restaurant Financing

ROBS is best for anyone with at least $50,000 in a tax-deferred retirement account who needs financing to start, buy, or invest in a restaurant. 401(k) business funding through a ROBS is a way to get restaurant financing without 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 down payment for traditional financing, like an SBA loan.

ROBS Terms

• Financing amount: At least $50,000, 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: Two to three weeks

Although there is no minimum financing amount required for a ROBS, most of the top ROBS providers will require that you roll over at least $50,000. If you rollover less, the costs of the transaction typically are higher than a business loan would be for the same amount of funding. There’s no repayment obligation with a ROBS, leaving your restaurant business with more working capital. Funding typically takes two to three weeks.

ROBS Minimum Qualifications

• Credit score: No minimum requirement
• Time in business: No minimum requirement
• Down payment: No minimum requirement
• Collateral: No minimum requirement
• Other requirements: At least $50,000 in a tax-deferred retirement account, if working with a ROBS provider, and your business must be a C corporation

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 must meet certain ROBS requirements to make sure you’re in compliance with federal laws and rules surrounding this transaction. A ROBS provider can help you stay in compliance both when setting up the ROBS and for maintenance once it’s active.

ROBS Costs

• Expected setup fee: $5,000
• Monthly service charge: $130 to $150, and there is typically an additional charge per employee if you have more than 10 employees

A ROBS costs nothing to set up unless you use a ROBS provider, which we recommend. Most ROBS providers charge setup and monthly fees to maintain the plan and help you administer it correctly. This setup fee is around $5,000, with a monthly service charge up to $150 for maintenance so that your ROBS remains in compliance. Although this is the only funding option with a maintenance cost, it also has no interest, making it very affordable.

Best ROBS Providers

Restaurant Equipment Financing

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.

Equipment Financing Terms

• Financing amount: $10,000 to $500,000 (up to 95% of equipment costs)
• Repayment term: Two to seven years, based on the expected useful life of the equipment
• Payment frequency: Monthly
• Funding speed: Two to five business days

Equipment Financing Minimum Qualifications

• Credit score: At least 600
• Collateral: Equipment being financed
• Down payment: At least 10%
• Other requirements: No bankruptcies, foreclosures, or repossessions on your credit report

Equipment Financing Costs

• Interest rates: 6% to 9%
• Fees: Varies by lender, but there is typically an origination fee

Best Equipment Financing Providers

How to Determine How Much Restaurant Financing Is Needed

Before you apply for a restaurant loan, you should determine how much capital you need so that you don’t overborrow. Restaurants have thin margins, and overborrowing could damage 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.

RestaurantOwner.com provided some primary startup and operating costs you should consider when assessing how much you need to borrow. Many of these costs can be good to help established restaurants estimate what is needed 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 the costs above will vary based on the restaurant, operations, and location. For example, food trucks can often start their business for as little as $10,000 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 clearer that restaurants are not riskier than any other business as long as the owner plans and executes a sound business plan.

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

Four tips for improving your odds of receiving restaurant financing are stay up-to-date with your business finances, be able to show your capital needs in detail, preserve operating cash, and separate your business and personal expenses.

1. Stay Up-to-Date With Your Business Finances

Business owners often struggle to find time to do everything 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 secure financing later.

Having automated accounting software, or even a bookkeeper or accountant overseeing the financial side of the business, will ensure that your restaurant qualifies for working capital whenever you need it.

2. Be Able to Show Your Capital Needs in Detail

Many long-term lenders will only lend what they think you need because they don’t want you to take on more debt than necessary. Lenders want to ensure your ability to repay the loan. 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.

It is unrealistic to expect a restaurant to be fully operational on day one of opening, and declining losses during startup are understandable in many markets. These expected losses should be included in the working capital need. Be sure to ask for the total working capital needed when you open, not 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 must convince the lender you can sustain your business with or without capital for the short term. This gives the lender confidence in your ability to repay the loan and will increase your chances of getting funded. This isn’t applicable to short-term loans, but SBA or other traditional lenders will want to see this type of preparation.

4. Separate Your Business & Personal Expenses

One of the biggest mistakes small business owners make is merging 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 commingle funds between your business and personal accounts, you’re “piercing the corporate veil” into your personal life.

This means 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, make sure you have a business checking account and a business credit card 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. You can combine seller financing with an SBA loan, ROBS, or pretty much any other restaurant financing in this article.

If you buy an existing restaurant, you’ll want to protect yourself by making sure you either have five to seven years left on your lease or by negotiating a long-term lease before closing. Restaurant success depends on location, so you don’t want to jeopardize the current business you’re buying by having to change locations 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.

Bottom Line

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.