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It can be overwhelming to consider all the costs involved in running a restaurant. Most restaurants go through periods of financial precarity, largely due to thin profit margins and ever-increasing operational overhead. The cost of running a restaurant has gone up significantly in the past several years due to nationwide minimum-wage increases, the short life-cycle of restaurant equipment, and rising rent. You may also feel the pull to expand, improve, or renovate your restaurant, which costs even more money.
The easing of COVID-19 restrictions and gradual ramp-up to full capacity may come alongside a new set of significant upfront and ongoing costs as well. Beyond scaled-up food and payroll costs, you may need to pay for protective barriers and sanitation supplies to help protect your customers and employees.
A business loan can be a financial lifeline in the restaurant industry. A business loan is when a lender – either a financial institution, company, the government, or a person – gives an approved candidate money to be used to support business initiatives.
If you need a little extra funding to help with operational expenses or to pull off a project you’ve been planning, a business loan could be your best bet. Some restaurants that can afford to use cash flow to fund new projects like renovations or expansions still seek out business loans in order to keep a financial cushion in the bank.
Many business loans have multi-step application processes, and we know you already have your hands full running your restaurant. We’re here to walk you through everything you need to know to do your research, pick the lender that works best for your restaurant, and apply for a business loan so that applying for funding doesn’t become your second job.
New development for 2021: On March 11, 2021, President Biden signed the $28.6 billion Restaurant Revitalization Fund into law as part of the American Rescue Plan Act. This fund provides much-needed support for the food and beverage industry in the form of grants — unlike loans, the government’s Restaurant Relief Fund grants don’t need to be paid back and are not counted as taxable income. Learn more here ⟶
The information discussed in this article is provided for informational purposes only and should not be relied upon as financial or legal advice. For financial or legal advice, you should consult a professional financial advisor or your attorney.
How to Apply for a Business Loan
Step 1: Figure out your budget and timeline
Before you even think about applying for a loan, it’s crucial to plan out your project, timeline, and budget.
First, you need to scope out your project costs to determine how much cash you’ll need to accomplish your goals. Make some calls or hop online to research local vendors, assess your costs, and create a budget for your project. Make sure to account for how much capital you have on hand and how much outside capital you’ll need to borrow.
Then, scope out your timeline for the project and determine when you’d need to receive the funding so that you can execute according to your timeline. If you have an urgent need for cash, like to fix a broken piece of crucial equipment, you’ll want to look for a lender with a shorter application process.
Make sure to research the steps for getting approved for a loan and how long it typically takes before you sink your time into an application.
Next, you’ll want to decide how much you’re willing to pay for the capital in the form of interest rates and fees. Overall cost is not the only measure to consider when evaluating rates and terms. It can help to calculate how much you can afford to put towards paying back a loan each month so you can gauge which loan will allow you to make payments while keeping a cushion of funds in your account.
Another factor to consider is how long you’ll be repaying your loan. Would you make lower payments over a longer period of time, or make bigger payments over a shorter period of time?
If your restaurant is highly seasonal, or gets more traffic on weekdays than on weekends, you might want to look for a lender offering flexible daily repayments based on a percentage of your restaurant’s sales, rather than a lender requiring a fixed daily or monthly payment. This will help you ensure that you can afford repayment on both your busy and slow days.
Step 2: Research Business Loan Lenders in Your Area
Once you’ve figured out the key criteria you’re looking for in a lender, it’s time to start researching your options. Here are some of the most common types of loans:
SBA (Small Business Administration) Loans. Fundera describes these loans as “long-term, low-rate government-guaranteed business loans.” They’re often competitive and only given to those who are most qualified. They come with a long application and approval process, and typically require business owners to put down a significant amount of collateral to back the loan.
Traditional Bank Loan. A traditional business loan is provided by a “brick and mortar” bank. These bank loans are typically hard to get for small or new businesses, but an established business — with a proven track record — may have more luck. Rates and repayment terms vary, so talk to your local bank.
Alternative Loans. Most business owners immediately think of going to a brick-and-mortar bank to get a loan, but there are many alternative options out there from other bank and non-bank lenders. Some lenders offer more flexible payment terms and a faster approval process than brick-and-mortar banks, making them an attractive option to business owners with a tight timeline or seasonal sales cycles.
Once you’ve researched all of the options available, you can lay out the terms and costs of all the loans you’ve been approved for and start to compare your options.
What’s right for you and your business will become very clear once you’ve mapped out how much you’ll have to pay back, the amount you’re able to get, how often you’ll have to make payments, and for how long.
Other Types of Financing
Lines of Credit. A commercial line of credit is a revolving loan from a financial institution that allows a business to borrow up to a predetermined sum of money. The borrower can take out as little as they want, and only pay interest on the amount that has actually been borrowed, not on the total available amount.
Equipment financing. This is a type of loan that can only be used to buy physical equipment. The equipment becomes collateral for loan repayment, so it can be seized if you don’t pay the amount back, explains Nerdwallet.
Merchant Cash Advance. According to Fundera, a merchant cash advance is an agreement where “a financing company advances you cash in exchange for a percentage of your daily credit card and debit card sales, plus a fee.”
Whether you’re opening a new restaurant, expanding your concept, or renovating within your existing four-walls, you’re going to need capital to make it all happen.
Step 3: Compile the necessary information and legal documents
To apply for a business loan, you’ll need to know information such as: your desired loan amount, your reason for borrowing money, how long you’ve been in business, what industry you’re in, and what type of business entity you run.
Some loans, especially those from brick-and-mortar banks and the SBA, can involve a lot of paperwork and a lengthy application process that can extend for weeks or months. Depending on the lender you choose, it may take you a few days or weeks to get all of the proper documentation ready to submit with your business loan application.
Here are the legal documents needed to apply for a business loan from most brick-and-mortar banks and lenders on SBA loans. This very thorough list is from Fundera, and it’s pretty exhaustive. It’s possible that the loan you apply for won’t require all of these but it should provide you with a ballpark estimate of the kinds of legal information you’ll need to get access to:
Personal credit score
Business credit score
Social security card
Business licenses and permits
EIN (Employer Identification Number)
Proof of collateral
Annual business revenue and profit
Personal and business tax returns
Copy of your commercial lease
Disclosure of other debt
A/R (Accounts Receivable) and A/P (Accounts Payable) Aging
Proof of ownership and affiliations
Legal contracts and agreements, like leases or partnership agreements
Depending on the type of loan you apply for, some or all of this information might need to be presented in person to a loan officer and/or in a packet of documents supporting your application.
Many business loans rely on your personal credit score, especially if you’re starting a business or if your business is less than three years old, explains The Balance SMB. If your personal credit score is very good — which usually means 700 or above, out of a possible 850 — you’re more likely to get approved for a loan.
To make sure your credit doesn’t lower your chances of getting approved for a loan, make sure there are no errors on your credit report artificially bringing your score down. To begin, get a credit report from all three major national credit reporting companies: Experian, Equifax, and TransUnion. If you find any errors in any of your credit reports, contact the creditor directly and learn how to fix them, because these errors may be found by your lender and could influence their choice to extend you a business loan.
If you’ve got a low credit score, there are a few things you can do to improve it.
According to FICO, you can improve your credit score by
Paying off credit card debt (starting with high-interest cards first)
Keeping credit card balances low relative to their credit limits
Paying bills on time
If you’re looking for a speedier business loan application process, you may want to explore alternative loans or focus your search on a lender with whom you have an existing relationship. Some lenders on alternative loans don’t take your personal credit score into account, and instead base their approval on factors such as your business’s current sales volume. For example, your point of sale provider, credit card processor, or accounting software provider will already have access to your business’s sales history and financial statements. If any of these vendors offer a lending platform or access to capital, they may be able to offer your restaurant access to a faster application and approval process because you may not need to submit as much information as you would to a lender that’s learning about your business for the first time.
For example, Toast Capital offers Toast customers access to fast, simple funding that can be used for any restaurant need. With repayment that flexes with sales, no compounding interest, and no personal guarantees, Toast Capital Loans provide restaurants with access to funding from $5K to $250K. Additionally, Toast Capital Loans have one fixed fee - with no compounding interest and no personal guarantees. Better yet: Once approved, you can receive your funds as soon as the next business day.*
*Toast Capital Loans are issued by WebBank, Member FDIC. Loans are subject to credit approval and may not be available in certain jurisdictions. WebBank reserves the right to change or discontinue this program without notice. Toast Capital Loans have either a target maturity of 90 days and a maximum term of 150 days or a target maturity of 270 days and a maximum term of 330 days, based on eligibility.
It’s worth noting that if you have an established business, you may also be asked to provide your business credit score. You can find your business credit score at Experian, Equifax, and Dun & Bradstreet. According to Nerdwallet, a high business credit score comes from paying your business’s bills on time consistently, and this makes you a better candidate for business loans. Business credit scores range from 0-100.
Step 4: Fill out and submit your business loan application
Applying for a business loan is largely done digitally nowadays. Some business loan providers facilitate their application process entirely online — from application, to approval, to signing the terms of your agreement.
Regardless of whether you are submitting a physical application or applying for funding online, you will want to follow the guidelines provided by your lender closely.
Step 5: Put your capital to work
Once you’ve been approved or denied, the next step forward can vary widely among lenders. However, if you’ve been approved, it’s time to put your capital to work. Start that renovation, shop around for your next location, or replace that oven that’s on its last legs.
Everyone knows you need money to make money. Many restaurateurs invest their capital into channels that will help them increase revenue or spin up a new revenue channel entirely.
Some examples of how you could put your loaned money to work include
Investing in tech to test out a new service model. Order & Pay at the table technology is helping restaurants delight their guests with speedy but hospitable service while paying their staff more.
Testing out a ghost kitchen concept to run within the restaurant.
Getting into the Consumer Packaged Goods (CPG) space. If you have a housemade hot sauce that your guests are clamoring to take home with them, think about bottling it up and putting it on the shelves of grocery stores.
Stand up a catering business. Many restaurants in seasonal areas will take their food on the road when most of their guests leave town to serve diners where they are, or to cater their holiday parties.
Marketing. Sponsor local events to promote your restaurant with the community.
Host events. Host a theme night or invite a local band in to play a set to attract more guests to your restaurant. You can even charge admission to these events to bring in more revenue on top of food and beverage sales.
Get the Capital You Need
Applying for business loans can be daunting, but having extra working capital on hand can be a gamechanger for any business. Talk to your financial advisor or lawyer before you get started with your applications, and get to work.