A Detailed Guide to Restaurant Financing and Restaurant Loans

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The Complete Guide to Restaurant Financing

Restaurant financing is money a restaurant owner borrows to launch, grow, expand, or rebrand their restaurant business. They are business loans designed to help restaurants make expensive investments, without coming out of their own pocket.

Restaurants are a tough, capital intensive business, but getting financing for them does not have to be. Funding a restaurant takes a unique understanding of the ebb and flow of the business, as well as the seasonality of sales. While many traditional lenders will not lend to restaurants at all or will set up extremely restrictive terms, Neal Business Funding has over 20 years’ experience in the business and can provide the funding when others cannot.

We offer a full menu of loans and financing for established restaurants seeking to remodel, open a new location, or even expand across their region.  Neal Business Funding additionally crafts financing solutions for startup restaurants, with no business or credit history.

This extensive guide provides a detailed overview of types of restaurant loans and restaurant financing available, as well as how they can benefit your business.

What Restaurants are Eligible for Financing?

Any type of restaurant is eligible for financing or a loan. Whether you own a bar, a tavern, a diner, a fast-casual establishment or a bodega, Neal Business Funding does not discriminate as far as the type of restaurant that you own, nor the type of food that you serve. As a lender, our only concern are the numbers; making sure that the business itself and its owner are financially sound.


How to Find the Best Restaurant Loan?

Finding the best restaurant for your business will depend on several key factors:

  • Business Goals: Every business is in its own stage of development, whether just starting out, growing, or simply maintaining its customer base. Knowing what your specific goals are for your restaurant is paramount in determining what loan or restaurant financing best suits you.
  • Desired Use of Funds: Once you have a full understanding of your business’s goals, how you would like to use the financing should become clear. Ultimately, you want to use the funds to free up your cash needs, or to finance capital intensive investments in your business. As certain financing options can only be used for specific uses, the intended use of the loan proceeds becomes very important.
  • Timing: How quickly you will need the funds from a restaurant business loan will also affect what loan best suits you. Established restaurants looking to rebrand will have different timing needs than a startup or struggling restaurant operator with an emergent need for cash. For the latter, Neal Business Funding offers restaurants loans that can fund in as little as 3 days.
  • Loan Amount: If you have your eyes set on securing a large loan into the six digits and higher, naturally there will be certain loans that will better accommodate these goals than others.
  • Financial History: Lastly your personal and business financial history will play the most instrumental role in determining what is the best loan for your restaurant. While having excellent credit will open you to more possibilities, owners with less than stellar credit (or none at all) still have financing alternatives.

What Types of Restaurant Financing is Available?

There are many different ways to finance a restaurant including, bank loans, friends and family, private equity investors, crowd sourcing, and even bootstrapping. The most popular restaurant loans and financing available are SBA Loans, Equipment Financing, Business Lines of Credit, Merchant Cash Advances, Commercial Real Estate Loans, and Franchise Financing.


Top 6 Most Popular Restaurant Loans

#1. Restaurant Equipment Financing

  • Loan Amount: $5,000 to $5 Million
  • Types: Multiple
  • Potential Uses: Equipment, Furnishings
  • Loan Terms: Up to 10 years
  • Rates: Vary
  • Credit Requirements: Poor to Excellent

Restaurant equipment financing is a loan that is specifically designed for the purchase or repair of machinery used in a restaurant’s operations. There are truly few limits to the types of equipment you can finance:

  • Food Preparation and Bakery Equipment
  • Catering Equipment
  • Dining Furniture and Tables
  • Dishwashing Equipment
  • Furnishings (chairs, stools, tables)
  • Kitchenware
  • Pizza Ovens
  • Point-Of-Sale (POS) Software
  • Refrigeration Equipment
  • Restroom Supplies
  • Shelving Carts and Racks
  • Silverware
  • Walk-In Coolers and Freezers
  • Waste Bins & Containers
  • WiFi (routers, equipment)

Pretty much everything you physically see in a restaurant, with small exceptions for lighting fixtures and toilets, can be purchased with restaurant equipment financing.

There are typically three forms of restaurant equipment financing. The first involves a lender buying the equipment up front on your behalf, and the borrowers paying them back overtime in small, manageable monthly payments. Neal Business Funding specifically offers this type of financing in its Sale & Lease-back program. This is an ideal route for restaurants owners with poor credit history or just starting out as it allows them to gain access to necessary equipment, without having to put a lot of their own money in. Once the loan amount is fully paid off, the company gains full ownership of the equipment.

For borrowers with more cash on hand, the second form of restaurant equipment financing is when the lender lends you the money to buy the equipment yourself from the manufacturer or dealer. You bring forth a small down payment (typically 10% of the equipment’s value), paying back what you borrowed in small, monthly payments over time. The main difference with this type of equipment financing is you gain full ownership (and its benefits) of the equipment at the beginning of the loan period.

Finally, the third form of restaurant equipment financing is when the lender purchases the equipment that a restaurant owners needs and leases it out to the restaurant in exchange for monthly ‘rental’ payments. At Neal Business Funding we would call these  B, C and D programs, which provide restaurants access to equipment they have no intention to buy, yet still need for generating revenue.

In all scenarios, restaurant equipment financing programs generally require little to no money down, and offer flexible payment structures suitable to a restaurant’s cash flow needs. Loan start for as much as $25,000, and can last 5-7 years depending on the type of equipment being financed.

The largest benefit of financing equipment, especially if you decide to own it from the outset, are the significant tax benefits and write-offs available. Depending, again on how the loan is structured, you may be able to depreciate the restaurant equipment in the first year, and expense the interest payments.

Furthermore, unlike conventional commercial loans, equipment financing does not require personal or business collateral, or a loan guarantee. The security for the loan is the equipment that is being financed, and should a borrower default, the lender will simply repossess the equipment to recoup their loss.

Overall, restaurant equipment financing is the optimal choice for startup restaurants and established restaurateurs with poor finances. Not only does it free up money that can be used for other aspects of the business, but it also unlocks opportunities for owners to build good credit history and become eligible for other, more lucrative financing options available.


#2. SBA Loans for Restaurants

  • Loan Amount: $50,000 to $10 Million
  • Types: SBA 7(a), SBA 504
  • Potential Uses: Real estate, equipment, payroll, working capital
  • Loan Terms: Up to 10 years for working capital and equipment, 25 Years for real estate
  • Rates: Competitive, starting at 4.5 %
  • Credit Requirements: Fair to Excellent

What is an SBA Loan?

The Small Business Administration (SBA) is a department of the federal government that’s sole purpose is to encourage the development of small- and medium-sized businesses across the nation. Since starting a business is tough and requires a lot of cash, the SBA particularly focuses on working with individual lenders and banks, like Neal Business Funding, to extend money to business owners with the guarantee that should the borrower default on the loan, the SBA will pay the lender back, up to a certain percentage of the loan amount.

There are two types of SBA loans that can be used for two distinctive purposes.

SBA 7(a)

The first and most popular is the SBA 7(a) loan program. Funds from this program can be used for a variety of uses including purchasing new equipment, repairing old equipment, buying the actual land or real estate to construct a restaurant space, refinancing existing debt, buying an existing restaurant, expanding your current restaurant, as well as fulfilling any working capital needs, from paying for supplies to making payroll.

The great part about SBA 7(a) restaurant loans is they are among the most versatile and flexible that the SBA offers. They can run for a few years or last as long as 25 years, and the interest rates are mandated to be competitive, and in some cases capped. Furthermore, they are a popular option among restaurant entrepreneurs because the underwriting requirements are straightforward, and applicants can receive approval much more quickly, compared to SBA 504 loans.

One of the main requirements for an SBA loan is the applicant must have either an existing profitable business with sufficient cash flow to prove their ability to repay the loan, or they must have sufficient personal property or assets to act as collateral.

Additionally, lenders will require that loan applicants have already sought other alternative resources before applying for a SBA 7(a) loan, such as family and friends, personal savings account, money market accounts, retirement accounts, or even personal loans.

Surprisingly though, startup restaurants, especially those transitioning from food trucks, street vending, or catering, typically find more success in securing SBA 7(a) loans. So long as they are able to demonstrate some traction, experience and profitability, the SBA will look favorably at even the most early stage concepts.

SBA 504

The second type of SBA loan is the SBA 504 loan, which is traditionally a good source of capital for currently established businesses looking to achieve long term growth. Funds from SBA 504 loans can be used for renovating your existing restaurant space, buying a new location, buying the land to build a new location, as well as kitchen machinery and equipment to run the establishment. Think of SBA 504 loans as financing for real estate, construction, fixtures, furniture and equipment.

The SBA 504 loan program is especially beneficial to established restaurant owners due to its large loan amounts, competitive rates and long repayment periods, in some cases up to 25 years. These allow borrowers to make cash heavy investments in their business only needing to pay them back in small, manageable monthly payments.

The only downside to SBA 504 loans is the inflexibility in how funds can be spent. As a rule, the SBA does NOT allow this type of restaurant financing to be used towards inventory, paying suppliers, marketing campaigns, working capital or other similar operating expenses. Further, as SBA 504 loans heavily involve real estate, the process is much longer and extensive. Not only does the applicant and their business have to qualify, but so does the physical location they are considering buying, renovating, or constructing.

Given these factors startups are typically not drawn to SBA 504 loans, but they nonetheless are a good option for currently established restaurants seeking to gain long term financial independence from landlords and unfavorable lease terms, as well as building tangible equity into their business.

Comparison of Uses

As a quick recap this chart provides an overview of what each loan can be used for.

Restaurant Loan

#3. Business Line of Credit for Restaurant

  • Loan Amount: Unsecured Lines up to $150,000, Secured Lines up to $1 million
  • Types: Secured vs unsecured
  • Potential Uses: Various – equipment, payroll, marketing,
  • Loan Terms: Up to 10 years for working capital and equipment, 25 Years for real estate
  • Rates: 0-10% depending on the size of the credit line
  • Credit Requirements: Fair to Excellent

A business line of credit is when a lender pre-approves a business for a certain amount of funds, which they have access to over an extended period of time. Unlike loan proceeds from a SBA loan or commercial loan, once a business line of credit has been approved, businesses don’t necessarily receive one lump sum payment. In fact, they can hold off on using any of the money at all for several days or even months.

Even then, business lines of credit operate very similarly to a credit card. While borrowers are approved for a maximum loan amount, they retain the option to borrow less than the full credit line. For example, if a bed and breakfast in the Catskills is approved for a $500,000 line of credit, they may wait until the slower, winter months to borrow against their line of credit, and even then they can borrow as little as $10,000 or even less, reserving the rest for emergency working capital needs.

There are two main types of business lines of credit: secured lines of credit and unsecured credit lines. Secured business lines of credit use the borrower’s personal or business assets as collateral, and are typically for larger loan amounts. Unsecured business lines of credit are not tied to any assets, meaning should the borrower default, lenders may not be able to fully recoup their funds. For unsecured credit lines, lenders solely rely on the owner’s personal credit history, and therefore these tend to be much smaller and have higher interest rates.

No matter what type of business credit line you are approved for, both provide a high level of flexibility in terms of use. Funds can be used however borrowers see fit: to purchase of equipment, to hire new employees, to refinance debt, to renovate a restaurant space, to launch a commercial, etc. Buying or building a restaurant space is even an option, should a restaurant be approved for a high enough amount.

The main drawback to lines of credit is the rates charged tend to be higher than other types of restaurant financing available. Since a lender really doesn’t know when a restaurant owner will borrower the money, how much they will borrower, and if they will be paid back, lenders use the higher rates to compensate themselves for all the uncertainty.

That said, the benefits of a credit line can far outweigh the costs for certain business. Restaurant owners with a business credit line are only charged interest on the money that they borrow, not on the full size of the approved amount.

While some lenders focus on one or the other, Neal Business Funding offers both types of credit lines. Established companies able to demonstrate annual revenue between $1 million and $5 million, can be eligible for secured business credit lines up to $1 million.

We offer generous, flexible terms for businesses with an established financial history, don’t require the business to put up any collateral, and offer excellent terms suitable for the restaurant’s specific needs.

For a restaurant startup, who elsewhere may encounter significant obstacles in obtaining a business cred line, Neal Business funding works will all cases to create some type of financing. Qualifying business have to potential to be approved for credit lines as high as $150,000.

Overall, business lines of credit can be a valuable resource for restaurants of any size to engineer smoother, predictable cash flow, to access emergency funds, and to gain a certain level of independence and control as far as how funds are used.


#4. Merchant Cash Advances

  • Loan Amount: $5,000 to $500,000
  • Potential Uses: Various
  • Loan Terms: Until full amount is repaid
  • Rates: Referred to as factors, ranging from 10 – 30%
  • Credit Requirements: Poor to Excellent

Merchant cash advances are the fastest access to capital an existing restaurant can tap into. Merchant cash advance involve a restaurant essentially selling its future gross receipts to a lender, at a discounted rate for an upfront payment of cash. While it is technically considered financing, it more closely resembles an actual sales transaction.

The borrower will essentially give the lender legal permission to process all of its payments and transactions, from the cash register, online orders, everything. The ACH or payment processor directs all sales directly to the lender, who then, after subtracting their own fees and expenses, passes the balance of each sale along to the restaurant.

Due to the nature of such a ‘transactions’ this type of ‘financing’ is exclusively limited to restaurants, catering businesses, food truck operations that are already in business, and have orders coming in.

The nice part about merchant cash advances, though, is restaurants can use the funds in whatever manner they choose: to buy equipment, to pay employees, to hire employees, to fulfill those orders they need to repay the advance, to launch a huge online marketing campaign, to pay ongoing overhead expenses, to secure a brick and mortar space, or even to safeguard for emergencies and seasonal ups and downs in sales. The cash is theirs and there is truly no limit to its use.

Merchant cash advances are the most ideal financing option if you need immediate access to cash. Neal Business Funding, for example, can fund them in as little as two or three days. Credit history, collateral and many underwriting requirements of traditional loans simply do not apply in the case of merchant cash advances. Lenders will look mostly at current sales and future projections, as well as the company’s plan to fulfill the order.

Here at Neal Business Funding, we make it even easier. The application is fast and simple, our due diligence period is quick, paperwork requirements are minimal, there are no closing costs or fees, payback terms are always straightforward, and we advance as much as $200,000 per restaurant location.

More so, merchant cash advances are automated, meaning owners don’t have to worry about missing payments or defaulting. Additionally, there is no specific loan term. Once the money has been paid back, whether it is in one week or two years, does not matter. The lender is paid back only when you are paid.


#5. Commercial Real Estate Loan

  • Loan Amount: Up to $500,000
  • Potential Uses: Purchase, refinancing, and/or renovation of restaurant’s real estate
  • Loan Terms: up to 10 years, amortized up to 30 years
  • Rates: 5 – 15%
  • Credit Requirements: Fair to Excellent

Commercial real estate loans are a type of financing available to restaurant owners to purchase, renovate, or refinance the actual commercial real estate upon which a restaurant operates.

It is higher level of financing usually used by restaurant owners to buy another existing restaurant; buy land and build a new business location; buy their current location’s building (becoming their own landlord); renovate their current location’s building; or renovate their next location.

While traditional banks, credit unions, and major institutions may require fully documented business and personal financial history and credit standing, alternative lenders like Neal Business Funding offer stated income commercial loan, which focus on the value of the real estate and its ability to generate sufficient amount of income absent of the restaurant’s profitability to make the monthly payments and pay off the loan. Whether it comes from an attached warehouse, office space, apartments above, you name it.

At Neal Business Funding, our stated income loans offer as much as $500,000 and rates are fixed and fully amortizing for periods up to 25 or even 30 years. Meaning that at the end of the loan there is no lump sum payment due, and monthly payments are manageable.

The largest benefit of a commercial real estate loan is borrowers have full access to all the tax benefits of owning property, such as depreciating the entire building, expensing utilities, writing off the property taxes (up to a certain amount) as well as the monthly loan payments.

As a real estate loan though, restaurant owners that seek this option will be subject to certain limitations. For example, the property itself will have a real estate lien until the loan has been repaid. This may prohibit or reduce the owner’s ability to seek or use their real estate as collateral for other types of restaurant financing, such as a secured business lines of credit. Other lenders will be wary of extending a restaurant owner anymore money when there is an existing commercial real estate loan.

Another potential downside is on default of loan payments, a restaurant owner stands to those their entire business. The value of the loan is directly tied to the property, so if a borrower is unable financially to make payments (through their restaurant operations), the lender reserves the options to take ownership of the property and resell it to recoup their funds.

However, unlike a commercial lease where you can be evicted within as little as 30-60 days, foreclosing on a property you own must go through the legal and court systems. It is a lengthy process with ample opportunity for the borrower to become current, or even sell the real estate themselves to pay off the loan.

Overall, commercial real estate loans provide an excellent financing tool for established business to gain full financial independence of their restaurant space, or to launch their next location. As commercial leases and landlords can be one the most crippling aspect of the restaurant business, this type of financing can be a natural next step for restauranteurs with a strong following, well established brand, and cash reserves.


#6. Franchise Restaurant Financing

  • Loan Amount: Up to $1 million
  • Potential Uses: Purchasing a restaurant franchise location, Opening a restaurant’s 2nd, 3rd, or 10th location
  • Loan Terms: Up to 30 years
  • Rates: 4 – 8%
  • Credit: Good to Excellent

For restaurant owners with sufficient capital, sound personal assets, and seasoned business experience, franchise restaurant financing can be a viable option to open multiple new locations or to buy a restaurant franchise.

Franchise restaurant financing can be used to acquire new franchise stores, to buy out a partner, to remodel or refurbish an existing franchise location, as well as the start-up costs for a franchise location (which can range anywhere from $10,000 to $500,000 depending on the business). Loan proceeds can be used to cover land, real estate, construction, and architectural costs as well as FF&E, or furniture, fixtures and equipment.

If you thought opening a restaurant is capital intensive, opening up multiple new locations or buying a corporate franchise restaurant, like a McDonalds or a Taco Bell, is even more so. In the case of the latter, franchise fees can start anywhere from $50,000 to $500,000, on top of advertising fees, royalty fees, service fees, and more. Build outs for franchised restaurants must be done to exact specifications by pre-approved contractors, and equipment must frequently be upgraded according to constantly changing corporate standards, all of which can add up and potentially cripple even the most experience restauranteur.

As such, franchise financing is a type of business loan specifically tailored for restaurant owners looking to buy or build multiple locations, whether under their own name or under a corporate brand.

There are very few options in terms of lenders that specialize in franchise financing. Traditional banks are a potential option, however. the documentation they require can be overly cumbersome, and the actual processing of an application can take up to several months.

Neal Business Funding happens to offer franchise financing with rates as low as 6 percent. With 25 years’ experience lending to restaurant owners, single unit franchise operators, and multi-unit operators, we tailor our programs to meet your needs.


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Frequently Asked Restaurant Financing and Loan Questions

Who offers restaurant financing?

There are many different options to seek restaurant financing. If you are an established owner traditionally banks, credit unions, alternative lenders (like Neal Business Funding), and private investors will provide restaurant financing. However, if you are just starting out, your options are more limited to alternative lenders, manufacturers (for equipment financing), or online lenders. However, with little to no business experience even then they may charge hefty rates and high loan processing fees.

Why you should be cautious of restaurant loans from banks?

While you may instinctively want to seek restaurant financing at your local bank, there are specific aspects of their loans you should be cautious of. Large banking institutions, like Chase, Bank of America, Citibank, are all FDIC insured, meaning they have a federal duty to audit their business loans made with customer deposits.

As such, banks will translate these tight regulations on them into strict terms in your loan agreement. Some banks may require annual audits of your restaurant’s financials to ensure business is always the same or improving, while others will order regular appraisals of real estate if it acts as security for a loan.

If at any point they see a significant drop in sales, or a decrease in the property’s value they may require the owner to make higher monthly payments or call the entire loan balance due within 30 days. Unfortunately, there have been many cases where even the most established restaurant operators have been caught in this limbo and have been forced to close their doors.

Don’t let that happen to you. As a restaurant owner you should be seeking financing that will be a relief for your business, not a shadow hanging over you ready to pounce at the faintest sign of an off season. At Neal Business Funding we like to consider ourselves the former. We are here to structure loans that are flexible, suitable and align with the nature of the business.

What do you need to qualify for restaurant financing or a restaurant loan?

What you will need to qualify for restaurant financing will greatly depend on the type of loan that you’re looking to secure. These will typically be:

Restaurant Equipment Financing

  • Make, model, age, serial number of the equipment
  • Condition of equipment
  • Intended use of equipment (existing or future business)

 

SBA Loans

  • Business Plan
  • 2 – 3 Years’ Personal tax returns
  • 2 – 3 Years’ Business tax returns (if available)
  • 2 – 3 Years’ Financial Statements (such as Profit and Loss Statements)
  • Operating history
  • Cash reserves
  • Number of years in business
  • No more than $5 million in revenue in the previous 2 years
  • Business owner must have invested money
  • The owner has exhausted all other options to securing financing
  • Owner must be a U.S. Citizen
  • Business must be located within the U.S.

 

Business Lines of Credit

  • Proof of financial ability to repay
  • Proof of personal assets (if any)
  • Proof of business assets (if any)

 

Merchant Cash Advances

  • Current Sales
  • Future projected sales
  • Existing Financial Reports

 

Commercial Real Estate

  • At least 3 months business experience
  • Personal credit score of minimum 550
  • Documentation of at least $10,000 a month in revenue
  • 3 months of bank Statements
  • 2 years of personal tax returns
  • Any business tax returns
  • Documentation of existing personal and business assets

 

Franchise Financing

  • Established business experience
  • Personal credit score of minimum 600
  • 2 years of personal tax returns
  • 2 years of business tax returns
  • Documentation of minimum $500,000 cash reserves

Closing Thoughts

Seeking restaurant financing becomes imperative for restauranteurs looking to stay relevant to customers. The dining out experience is becoming elevated in terms of décor, food experience, food quality, and technology. Paying to implement these items on your own dollar, may take too much time or place too much financial stress on your business.

Neal Business Funding provides a full course menu, if you will, of restaurant loans and restaurant financing for established restaurant owners or restaurants getting ready for launch. Getting started is as simple as giving us a call to build a personalized plan right for you.

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