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Small Business Owner's Guide to Restaurant Financing | CoverWallet

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As a restaurant owner, you know all about expenses, surprise and expected: damaged equipment, training your staff, payroll, inventory, renovations, additions, marketing—the costs can seem endless. The consistent and relentless financial demands that you face as an owner make it difficult to stay out of the red, let alone to surmount the hurdle of planning for expansion or long-term growth.

Cue restaurant financing: obtaining business funding can provide you with the extra money you need, giving you room to breath and making it possible to strategize for bigger endeavors like remodeling your existing premises or opening an additional location. A boost of capital can bring you one step closer to financial stability, giving you the ability to improve everything from the food that you serve to the chairs that your patrons sit on.

Restaurant financing: what are my options?

There are plenty of ways to go about obtaining financing: we’ll categorize them under two main umbrellas: debt and equity. The key is finding the right option for your restaurant’s needs.

Here are some examples of debt financing:

Term Loan

A term loan is a lump sum that is borrowed from a lender, and then paid off by the borrower at certain intervals over a set amount of time (the loan term). You can pretty much use term loans for any of your restaurant financing needs, so this flexibility makes them an excellent option if you want to use the money towards multiple projects. Additionally, interest rates for term loans are typically fixed, and tend to be lower than those of credit cards. Plus, with a term loan, your repayment schedule is set at the time that the loan is provided—points for predictability and consistency. However, approval for a term loan often require that you provide proof of your restaurant’s profitability and operating history, so if you’re just starting out a different form of financing will likely be a better fit.

SBA Loans

Applying for a Small Business Administration (SBA) Loan will almost certainly come with a more lengthy application process (60 to 90 days) than, say, applying for a loan from an online lender, but if approved, you can count on some of the most affordable interest rates around. There are a number of SBA loan programs designed to meet a variety of business needs, including those of younger operations who may struggle to get a small business loan from other lenders. Note that these loans usually require a higher credit score for approval, and that the application process is quite laborious.

Equipment Loans and Inventory Financing

Equipment and inventory are two absolutely essential and expensive components of your restaurant —luckily, there are loans available to specifically help you cover the upfront cost for both equipment and inventory.

With an equipment loan, you’ll receive a lump sum of capital (somewhere between 80 to 100% of the cost of the equipment) with the equipment itself serving as collateral. Then, you’ll pay the loan back, and once the debt is repaid, you officially own the equipment.

For inventory financing, the process is more or less the same as taking out an equipment loan. You’ll receive a loan that will help you cover the total cost of your inventory and the inventory then serves as collateral for loan repayment; the difference is that inventory financing typically comes in the form of a short term loan or a business line of credit, so the repayment term is shorter (and therefore, more expensive).

Working Capital Loan

A working capital loan will help you cover your restaurant’s more basic, routine operations such as payroll or rent; you wouldn’t use a working capital loan to purchase long term assets like equipment. Let’s say your restaurant is located somewhere in the Hamptons and winter is generally slow, leaving you strapped for the cash you need to cover expenses: a working capital loan can help keep you afloat until business starts booming again come warmer months.

This type of loan can either be unsecured or collateralized; unsecured loans will require a strong credit history whereas a secured loan will require using an asset as collateral and usually will come with a higher interest rate.

Business Line of Credit

If you want to borrow on an as-needed basis instead of taking out a loan for a fixed amount, you can open up a business line of credit. A major difference between a line of credit and a loan is that with a line of credit, you only make payments (including interest) on the portion of the funds you’ve used. And as most lines of credit are “revolving”, this means once you’ve paid back what you’ve borrowed, your available credit returns to the original amount you were approved for — meaning you can tap into these funds again and again.

That being said, a line of credit is not for the fiscally irresponsible — if you fail to make payments on time, miss a payment, or you go over your limit, it could cost you significantly. And if your line of credit comes with a variable rate, which many do, the cost of borrowing could quickly skyrocket.

Merchant Cash Advance

With a merchant cash advance (MCA), you are advanced cash upfront against your future revenue. You pay back what you borrowed with a percentage of your daily credit card sales. While it’s easier to qualify for than other types of financing, and you can be approved within a few hours, it’s important to note that MCAs tend to be quite expensive. In fact, it’s not uncommon for your annual percentage rate (APR) to quickly skyrocket to 40%, 60% or even over 100% with an MCA.

Alternatively to debt, you can use equity for your restaurant financing needs. Equity differs from obtaining a loan in that, instead of having to repay a debt, you sell a portion of your restaurant in exchange for capital. Here are some examples:


Crowdfunding is a slight departure from the traditional definition of equity we provided above: crowdfunding allows a restaurant to raise capital online from multiple individuals. However, it isn’t necessarily a piece of the business that these donors are after—incentives for donors can vary from a personalized menu item named after them to other perks like free dessert for life or a set bar tab.

Crowdfunding is a great option for restaurants because it requires no approval process, no collateral, no repayment, and no interest payments. All you need is a compelling narrative and a willing group of donors.

Friends and family

The pros and cons of this one are pretty obvious. Pro: your credit history and operating history are irrelevant and the loan will be negotiated on your own terms. Con: mixing money and close relationships is a slippery slope, so if you don’t want to deal with navigating conflicts of interest, an alternative financing option might be the better route.

How to prepare and get a small business loan

There are several steps to take that will help you prepare, and (hopefully) get approved for financing.

Step 1: Determine how much capital you will need, how much you can afford, the return on investment you expect to make, and, especially, what you’ll be using it for.

Having a considered, specific use case is really important for approval from certain lenders. However, even if you don’t need it for your application process, this is really important to iron out so you can make sure financing is the right move for your business, and think through the appropriate amount of capital you will need.

Step 2: Review your credit history as this will help narrow down what types of financing you’re eligible for, and as well as what you’ll likely be approved for. If your credit is not quite up to par, it may be worthwhile to take a few months to invest in improving your score — this will not only help your chances of approval, but also, can result in more favorable rates.

  1. Plan out an ideal repayment schedule and determine what the highest interest rate that you can afford.
  2. Compare rates (and eligibility requirements) from different types of lenders.

Step 3: Gather your paperwork. While different lenders require different documents, many ask for:

  • Your business plan
  • Your professional resume
  • Personal and business tax returns
  • Use of loan
  • Personal credit report
  • Legal documentation

Step 4: Pull the trigger: apply for your loan, open a line of credit, launch your crowdfunding platform or talk to friends and family about investing.

Author bio: Samantha is a content marketing writer covering business and finance for Funding Circle.