It's your dream to open a restaurant. There’s just one big problem: money. Securing financing for restaurants is one of the biggest obstacles that owners face when trying to launch their businesses.
Fortunately, there are many ways to get restaurant business financing.
How To Finance a Restaurant: 5 Options
Funding a restaurant can be a challenge, but having many avenues to explore can help you get the funding you need for your restaurant business.
Here are five restaurant financing options:
1. Restaurant Business Loans from Banks
Traditional banks can provide a loan for restaurant startup or a loan to buy existing restaurant. The terms for these loans will vary from one bank to another.
Bank loans have advantages and disadvantages for restaurant owners.
One big advantage is that banks will often offer more flexibility when it comes to the length of the loan. Terms can range from 3-10 years, sometimes more. Longer terms give restaurant owners more time to establish and grow their businesses.
Although longer terms will typically come with higher interest rates, they will also come with lower monthly payments.
That said, traditional bank loans also have some drawbacks:
- You will likely need to put up collateral.
- You may have to deal with compounded interest, which can increase the overall cost of your loan exponentially.
- The application process can be lengthy, which will delay the opening of your restaurant.
If you have collateral, great credit and a flexible timeline, then a traditional loan may be a good option for you.
2. Small Business Loans for Restaurant from the SBA
The Small Business Administration (SBA) can help aspiring restaurant owners secure the funding they need for their businesses.
The SBA itself does not lend any money. Rather, they have a vast network of lenders that provide approved business owners with the funds they need.
It can take a few months to get the cash you need.
Here’s how to get a loan to start a restaurant through the SBA:
- You must be a for-profit business
- You must be doing business in the United States
- You must exhaust other financing options
- You must have invested equity
Loans can range from $500 to over $5 million. In addition, these loans often have competitive terms and unique benefits, like lower down payment requirements and no collateral.
There are a few types of loans offered through the SBA:
- Microloans: These provide funding of $50,000 or less to help with startup costs or expansion goals.
- 7(a) loans: The most common loan program, offering financing up to $5 million. Funds can be used to purchase real estate for your restaurant, establish your new business, serve as working capital, and more.
- 504 loans: These are loans with long terms and fixed rates to promote business growth and the creation of new jobs.
No matter which aspects of your business you need financing for, you can find an option through the SBA.
3. Investors
Investors are also among the many restaurant financing options. These are individuals who put money into your business in exchange for a stake in ownership.
Investors may invest in new restaurants or existing ones that need funding to maintain operations. An investor can be:
- Friends or family members
- Venture capital firms
- Angel investors
How do restaurant investors get paid? Typically, the individual’s principal is repaid over an agreed-upon number of years from the business’s cash flow.
4. Crowdfunding
Crowdfunding is a new way to get restaurant loans, and it can be a great option for some owners.
With this financing option, business owners pitch their ideas to a public platform. Individuals can donate funds in exchange for a perk, like a free meal, an invite to the launch or another benefit.
There are several platforms for crowdfunding, including Patreon, Kickstarter, GoFundMe, Nextseed, and more.
The great thing about this financing option is that you can reach a broader audience and even start brand-building before you even launch your business. Locals will be most interested in your campaign and more likely to visit your restaurant once you’ve launched.
You can also use social media to generate buzz about your restaurant and your crowdfunding campaign.
If you decide to go the crowdfunding route, make sure that you understand the rules and regulations to remain compliant.
5. Business Line of Credit
A business line of credit is another option for financing a restaurant business. The concept is very similar to a credit card.
- You are extended a line of credit from a lender.
- Your line of credit will have a limit.
- You’ll need to repay whatever you spend either monthly or annually.
The great thing about a line of credit is that it can provide working capital when you need it. You also have more flexibility in terms of spending, and you can improve your credit score when you make payments on time.
It’s important to know how to manage restaurant finances if you want to make a line of credit work in your favor. The goal is to keep an open line of credit available when you need it. In order to do that, you must budget properly and maintain a healthy cash flow.
Secured vs. Unsecured Debt
When exploring funding options for your restaurant, you’ll find that there are both secured and unsecured debt options.
- Secured debt is debt that is asset-backed (e.g., collateral).
- Unsecured debt is not backed by an asset (think credit cards).
While unsecured debt is less risky for the business owner, it does come at a higher price. Interest rates will be higher. Secured debt, on the other hand, will generally come with a lower interest rate.
Loans and lines of credit can be either secured or unsecured. It’s crucial to weigh the pros and cons of each option to see which one is right for you.
Final Thoughts
There are many ways to finance a restaurant, and these five options are some of the most common. Whether you’re launching a new restaurant or looking to expand your existing one, these financing options will help you reach your goals.