Many entrepreneurs have spent a lifetime dreaming of opening the doors to their very own pizzeria, tavern, or deli. But how many have considered the reality of restaurant business financing? Restaurants are expensive. Restaurant finance is complex. You’ve got physical space to consider, along with employees and their benefits, equipment, inventory, marketing, and more.

Face it: you’re probably going to need to get a loan at some point to help run the restaurant you’ve dreamed of running. But there are so many options. Which ones are best for you?

Before you even begin to look into SBA loans, equipment loans, or merchant cash advances, it’s helpful to truly evaluate where you and your restaurant stand.

Evaluate Your Position

Restaurants, like their employees, have high rates of turnover. That can mean that multiple owners and operators work out of the same space over the course of a few years. A single restaurant can undergo multiple iterations of itself. Employees may not be around for the long term, especially ones who join during peak season.

Because of that turnover, it’s important for the owner to keep a finger on the pulse of his or her business. You should be up to date on your restaurant’s full financial health. You should be aware of the overall trend in sales for your restaurant and also your area as a whole.

Having a transparent and honest idea of where you stand is the first step in acquiring a loan that is both affordable and will take your business to the next level.

Types of Restaurant Business Loans

Once you’ve got a clear picture of your restaurant in terms of the bigger picture, you can decide why you need a loan – and the answer to that question is what will lead to the type and size of loan you apply for.

As you’ll see, the purpose of your incoming capital should be the primary driver of that choice.

Small Business Administration (SBA) Loans

SBA loans are loans guaranteed by the federal government and borrowed from one of many traditional, nontraditional, or online lenders. The application process is typically more rigorous than it is for other types of loans, but there’s a perfect reason for that.

Having the backing of the United States government allows lenders to offer SBA loans at lower interest rates than would otherwise be advisable, meaning that if you’re able to acquire one, the capital will be less expensive than it would be had you gone through a traditional term loan.

But they’re difficult to acquire. You’ll need a high personal credit score, a detailed business plan, a written statement of need for the loan, and to have already invested in the restaurant. They’ll require some form of collateral, and will take some time – months, even – to be approved.

So why seek out an SBA Loan? The answer lies in its chief benefit. SBA loans carry the lowest interest rates of any type of loan you’ll be able to get for your business. As we know, the restaurant business can be tumultuous. Paying less in interest on a restaurant business loan means that you’re less likely to encounter cash flow issues down the line, making SBA Loans particularly enticing to early-stage restaurants. But for all those benefits, it’s still best to manage your expectations when it comes to SBA loans since it can be difficult to qualify and takes a long time to apply.

Equipment Loans

Walk-in refrigerators, professional ranges, industrial-size ovens, code-standard dishwashers, points of sale, seating, and fryers: restaurants require lots of equipment. Unfortunately almost none of it is cheap. Even more so if your restaurant specializes in a particular cuisine or technique. So if you’re considering a loan to pay for a specific piece of equipment, you may want to apply for an equipment loan.

Equipment loans are taken out specifically to purchase or lease some sort of physical equipment to be used in your restaurant. Any of the above options qualify, as do things like a pizza oven, beer coolers, or even transportation. If you’re considering offering catering from your restaurant or taking the show on the road in a food truck, an equipment loan could be a possible option.

When you’re approved for an equipment loan, the equipment in question is held as collateral. That means the lender can offer a lower interest rate, since default would mean that they’d simply repossess the equipment and sell it, minimizing the amount of risk on the lender’s end.

Business Lines of Credit

Business lines of credit operate very similarly to a credit card – you’re given a certain amount of money as a limit and you pay interest on whatever amount of that credit line you use.

For a restaurant owner, a line of credit can be a life-saver. If a supplier comes to you with a limited supply of a rare or coveted ingredient, a line of credit can allow you to make a substantial purchase without compromising cash flow. Similarly, having a business line of credit can help limit stress during emergencies. If equipment breaks or the restaurant itself is in need of maintenance unexpectedly, a business line of credit can allow you to pay for the issue quickly, fully, and without sacrificing cash flow elsewhere.

Business Cash Advance

Often an even better option than a line of credit – which can take a lot of work to apply for – a business cash advance will give you all the same benefits. Cash advances can be particularly helpful for restaurants. In a business cash advance, an advance provider will wire money into the merchant’s account and, in exchange, automatically receives a certain percentage of the business’s ongoing credit or debit card transactions.

For restaurant owners, that’s good news – most transactions in any given restaurant are done with plastic. And because cash advances are repaid with a percentage of the restaurant’s transactions, payments are smaller when sales are lower, helping to avoid cash flow issues.

Cash advances are very quick – many providers can get cash to the business within a few days. Some are even faster than that. That speed makes them very helpful in case of emergencies, but they can also be perfect for purchasing new equipment or even renovating a restaurant.

Find Success with Restaurant Loans

Regardless of which particular type of funding you choose, capital is vital to the success of any restaurant. So make sure you’ve done the research to be successful with your search for funding. Understand where your restaurant is in its lifecycle, and make the informed decisions that will make your business the best possible version of itself.

Tim Kelly

Mr. Kelly is a 20-year veteran in online business and financing.

He has consulted some of the top brokerages, media companies and financial exchanges in the area of finance, online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.

He continues to be a regular market analyst and writer for ForexTV.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA).He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.

In addition to writing about the financial markets, Mr. Kelly writes extensively about small business marketing and finance.

Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.

Mr. Kelly has been a decades-long community volunteer, he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.

Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets.
Tim Kelly