The Complete Guide to Restaurant Financing and Restaurant Loans

By: Amanda McNamara, Christine Georghiou, and Paige Madden

21 Minute Read

Nov 18, 2019

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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.

In this guide to restaurant financing and restaurant loans we will walk you through:

  • What restaurant financing is
  • Restaurant financing options to consider

  • How to compare and evaluate restaurant financing options

Let’s get started with the basics - what do we mean when we talk about restaurant financing?

What is restaurant financing?

Restaurant financing refers to money sourced, borrowed, and/or loaned from an outside partner to help start, expand, or refurbish a restaurant business. This access to vital, working capital provides restaurant owners with a reliable way to put money toward making their short and long term goals reality. 

Why do business owners apply for financing?

In order to stay competitive and succeed, businesses need to grow. Some popular reasons restaurant owners use outside capital include:

  • Starting a new business

  • Renovating their existing location

  • Investing in new equipment 

  • Opening a second, third, or 100th location

  • Improving their restaurant’s look and feel

  • Accommodating more guests by changing up to floor plan to fit more tables or adding a patio 

  • Investing in new back-of-house equipment, like an oil filter or a commercial range hood

  • Funding operational expenses 

  • Creating a reserve that can be used to offset future unavoidable costs

  • Working with a consultant to improve their operations, marketing activities, hiring process, or purchasing decisions.

  • Rebranding

  • Expanding into new revenue channels like consumer packaged goods or catering

If you’re interested in applying for restaurant financing, it’s a smart idea to outline your plan for using the capital early on in your search for funding and start digging up some of the financial statements you’ll need during your application process. 

Read More: 5 Ways to Use Your Restaurant Working Capital

Now that your wheels are turning, thinking through ways you could improve or expand your business with a little extra cash, let’s dive into the most popular business financing options available, as well as the specific types best suited for restaurateurs interested in applying for restaurant financing.

10 Restaurant Financing Options to Consider

Which are the most popular restaurant financing options?

It seems as though there are equally as many business financing options as there are reasons to apply for financing. Some financing options are perfect for short-term projects, while others are better suited for long-term business goals. 

It’s worth noting that when business owners typically think of business financing, they assume all of their options are loans or they’re limited to funding they can receive from a brick-and-mortar bank. Not true! Merchant cash advances, lines of credit, purchase order financing, and invoice financing are all solid restaurant financing options that don’t fall within the loan bucket. Additionally, alternative loan lenders offer a little more leniency and flexibility around eligibility, qualifications, and the pay-back process than brick-and-mortar banks.  

Within the wide-net of restaurant financing options, these are the ones restaurateurs typically lean on when applying for restaurant financing:

  • A term loan from a “brick and mortar” bank

  • An alternative loan 

  • A small business association loan, also known as an SBA Loan

  • A merchant cash advance

  • A business line of credit

  • Funds or equity from friends and family

  • Equipment financing 

  • Crowdfunding

To help you decide which business financing option is the best choice for you, your restaurant, and your goals, let’s dive into the characteristics of 11 popular restaurant financing options, ranging from restaurant loans to business lines of credit.

1) Traditional “Brick-and-Mortar” Bank Term Loans

Brick-and-mortar bank loans vary from bank to bank and business to business. Let’s walk through some of the pros, cons, and general characteristics of traditional “brick-and-mortar” bank term loans.

A “brick-and-mortar” bank loan oftentimes:

  • Has a lengthy application process. The average “brick-and-mortar term” bank loan application process tends to span 14-60 days. This could be a good option for you if you have a flexible timeline for your project or if you start looking for funding well in advance of when you need to have cash on hand

  • Requires you to put up collateral to back the loan. This could be business or personal collateral. 31% of small business owners with debt use personal assets to secure debt, while 49% of small business owners use business assets (like real estate if you own your brick and mortar location, equipment, etc.) to back their loan. Putting up collateral, or using a personal guarantee, can sometimes reduce your cost of funding. You need to decide what your risk tolerance is here and whether less expensive funding is worth putting personal or business assets on the line.

  • Usually has compounded interest, meaning that if you do not pay back quickly, the amount that you have to repay will exponentially increase. In the restaurant industry, you have to stay prepared for the unexpected. With compounding interest, there is no forgiveness for a bad month or a flood that closes your restaurant for a week during repairs, and the penalties for not meeting your monthly payment could significantly drive up your cost of capital.

  • Term loan payments are typically billed monthly. This requires recipients to keep track of a monthly bill. A bank loan typically has compounding interest (as mentioned above), so the longer you take to pay, your cost of capital could increase exponentially. 

  • Flexibility in terms of length of term (typically 3-10 years) This flexibility allows recipients to customize the payback period to an amount of time that works well for your restaurant. The term length that you choose will typically have an impact on cost. For example, if you can afford to pay back your loan quickly, a bank will typically give you a more favorable interest rate than if you have to pay off over a longer period of time.

Read More: 10 Finance Terms Every Business Owner Should Understand

2) Alternative Loans

When individuals and business owners think of applying for a loan, they usually have a traditional bank loan in mind, however, alternative loans from bank and nonbank lenders are another great option to consider if you’re looking for working capital or funding to start a new project at your restaurant. 

Some lenders offer alternative loans in order to provide capital to approved business owners; these lenders typically have access to more sophisticated technology than “brick-and-mortar” banks to determine whether a candidate is qualified, and may offer more flexible repayment options. 

For example, where a “brick-and-mortar” bank may look for a business to have been operating for 2+ years and require the owner to have a great credit score, a bank offering alternative loans could accept newer restaurants or base approval criteria on your business’s performance and other factors, rather than your personal credit score.

Alternative loans may also offer methods of repayment that flex with your daily sales. Rather than requiring you to make one fixed monthly or daily payment for the duration of your loan, alternative loans may offer daily payments as a fixed percentage of your credit card sales, so that payments ebb and flow with your business’s sales, making it easier for seasonal restaurants to keep up with payments.

If you’re interested in the flexibility and speed of an alternative loan, consider applying for a Toast Capital Loan. Toast Capital Loans offer restaurants fast, simple funding to help grow your business. With flexible payments, no compounding interest, and no personal guarantees, Toast Capital Loans provide restaurants with access to financing from $5K to $250K. 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.

3) A Small Business Administration (SBA) Loan

A Small Business Administration, or SBA,  loan is a loan of funds from The U.S. Small Business Administration. It’s important to note that the SBA is not the one actually lending small businesses funds – it leans on a vast-network of partner lenders to provide approved small businesses with the money they need to get their business off the ground. You will be working with a smaller, local or nationally recognized lender. 

SBA loans fall into two buckets: Working capital and fixed assets.

Those eligible to apply for SBA loans are:

  • For-profit businesses who 

  • Operate in the United States,

  • Have an owner/founder who has invested equity (monetary, sweat, or otherwise), and,

  • The owner cannot get funds from any other lender

SBA loans typically require applicants to put down a significant amount of personal or business collateral to back their loan to prove their personal investment in the venture. SBA loans also have lengthy application processes that can extend for weeks or months, requiring applicants to submit years of financial statements and produce receipts for each major purchase the business has made over the course of several years. SBA loans could be a fit for you if your project has a flexible timeline and you don’t need capital on hand quickly. For those with time to spare, going through the SBA loan process could result in a lower overall cost of capital. SBA loans also offer flexibility when it comes to the amount of funding available. Many SBA-approved lenders will originate loans up to $5 million, the maximum amount allowed by the SBA. 

Here’s how the Small Business Administration defines eligibility for a loan: 

In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must meet size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding."

The Small Business Loans Administration

Source: The Small Business Loans Administration

4) Merchant Cash Advance

A merchant cash advance is where a percentage of an eligible restaurant’s future sales (typically credit card sales) are purchased in exchange for an up-front  lump sum.

Unlike a loan where a payment is due to the lender each month, a merchant cash advance takes a more automated payback approach: The majority of third parties will deduct payments through a daily ACH (Automated Clearing House) deduction from a bank account.

While most loans will present the cost of capital as an interest rate or APR, the cost of a merchant cash advance is typically presented as a factor, 

A merchant cash advance is great for businesses that accept credit or debit card purchases. If you’re running a cashless restaurant, this may be a good option for you.

5) Business Line of Credit

A business line of credit works similarly to a credit card: An approved business owner is extended an open line of credit from a brick-and-mortar bank or an alternative lender. As with credit cards, there is typically a spending limit, which must be repaid either monthly or annually before a merchant can draw down additional credit. This option is beneficial for two big reasons: 

  1. It gives business owners working capital when they need it and the flexibility to decide how much they need 

  2. It helps business owners improve their credit score

A Tip from Toast: When exploring funding options, you should also debate whether secured or unsecured debt is best for your business: Secured debt is backed by an asset, while unsecured debt is not. Unsecured debt carries few or no personal guarantees,  but it is often more expensive. Secured debt can be backed by a personal or business asset and is generally cheaper, but places more personal risk on the assets of the business or business owner. Loans and lines of credit are two examples of types of funding that can be secured or unsecured. 

6) Crowdfunding

Of all the restaurant financing options on this list, crowdfunding is both the youngest and the most trendy. 

Crowdfunding is a business financing option where new business owners pitch their business idea or product idea to the public in exchange for a benefit – like an invite to the soft opening, a free meal, or a guaranteed reservation once a month –  once it has launched. Popular sites for crowdfunding include:

Kickstarter specifically has a full section devoted to restaurants seeking crowdfunding. Restaurateurs looking for the funding to open their first location or the capital to move into the consumer packaged goods space by bottling up their famous house-made hot sauce or jam might want to explore crowdfunding.

Crowdfunding has a lot of benefits, such as the ability to reach a broad investor base and streamline the fundraising process. Things to consider are regulations around the amount of money an issuer can raise using crowdfunding and the disclosure requirements for certain information about the business and the fundraising effort. 

7) Asking Friends or Family Members

Ah, the ol’ reliable. Asking for funds from friends and family is a tried and true way to gain business funding without the red tape application and approval process. 

Asking friends or family for a loan requires no credit check, no business plan, no W-2s or work history, just trust. That being said, you will want to heavily weigh out bringing your personal life into your professional life, as well as any conflicts of interest that may arise through business decisions you make that may not align with your lender’s outlook on life. Make sure the investment is well documented and you pick the partner that works for you and your business.

Read More: The Pros and Cons of Working in a Family Owned Restaurant

Along with the above seven restaurant financing options, there are three additional options – commercial real estate loans, equipment financing, and purchase order financing – that could be viable options if you have a project in mind where the specifics ladder up with how these sorts of funding must be used. 

8) A Commercial Real Estate Loan

As real estate costs continue to rise, it’s getting harder to be able to afford rent on brick and mortar restaurants in an attractive location. If you’re an existing restaurant expanding by incorporating a new location or you’re a new restaurant looking to purchase your restaurant location outright, decide whether it’s worth applying for a commercial real estate loan to help you shoulder the costs. 

9) Equipment Financing

Whether a valuable piece of equipment broke or you’re looking to upgrade, equipment financing is a great option to get capital for restaurant equipment related projects. Here’s how it works: An equipment financing lender either sells you the piece of equipment you need or gives you the funds to buy it, and then you pay them back in monthly increments (plus interest). Some equipment financing companies will also let you take out a loan against your paid-off equipment to fund small projects within your restaurant, known as a sale leaseback. Sale leasebacks tend to have very low interest rates and attractive repayment terms compared to other sources of funding. 

10) Purchase Order Financing 

Looking to expand into new revenue streams, introduce your brand to new audiences, and grow profits? If you’re a restaurant with a signature product – like a hot sauce, bbq sauce, jam, or seasoning – that guests adore, testing sales in grocery stores and other brick and mortar retail locations as a consumer packaged good (CPG) could be a viable revenue option for you.

Purchase order financing gives restaurants that have already taken orders but need additional capital to fulfill them the funds they need, so it can be a good fit for brands looking to expand into the catering or consumer packaged goods space who may need help scaling to meet demand.

Read More: Could Consumer Packaged Goods be A Suitable Revenue Stream for Your Restaurant?

Now that you’ve got a better idea of the business financing options available to new and existing restaurant owners and how they work, your next question is likely about how to choose which restaurant financing option is right for you. 

How to compare and evaluate restaurant financing options

You’ve done some planning to outline how you would use capital, researched popular business financing options, and now you’re wondering how to compare the opportunities available to you. The main characteristics business owners want to consider when comparing business financing options are:

  • Cost

  • Term

  • Speed

  • Lender or Partner

We’ve added a few additional details to consider, like:

  • Reputation of the lender

  • Fixed rate payments vs. variable rate payments

  • Whether you need to put up collateral 

  • Daily or monthly payment schedules

  • How quickly you can get the capital, once approved

1 . Consider how quickly you can get your capital

Before you choose to go with one restaurant financing option over another, consider how long it 

will take until the capital is available to be put toward the project you have in mind. Ask your potential lender (or other third party financing provider) what information they need, eligibility criteria, and an anticipated timeline that you can expect to hear back, but also ask yourself: Can you wait for the capital with a longer term build out, or do you need to replace a broken oven today?  

2. Evaluate the total payback 

There are many different types of cost structures that lenders use and there are equally as many factors to consider when determining total cost, including total payback amount, APR, upfront fees, compounding interest or other penalties, and more.

Annual percentage rate (APR) is a calculation that looks at all interest, fees, and the timing of those fees on equal ground. APR is expressed as a percentage and represents the yearly cost of borrowing funds. While APR is important for comparing funding options, it isn’t the end all be all. Another factor used to assess the cost of a loan is the absolute dollars you will pay back for the funding you receive (inclusive of application costs, interest, late fees, origination fees, etc.,). APR doesn't necessarily translate to the total amount repaid for the amount borrowed. Take a look at our two examples below. 

Fixed interest rate loan with a 3-year term 

  • $10,000 loan 

  • 10% fixed annual interest rate, paid monthly, not compounding 

  • Term: 3-years

  • No additional fees

For this example, the total payback is $11,616 for the $10,000 borrowed. This corresponds to an APR of 10%.   

Compare the example above with the example below. You will see that while the APR is higher for the next example, it has a lower total payback. 

This loan has a fixed cost (called a factor rate), 9-month term, no accruing interest: 

  • $10,000 loan

  • Interest rate = N/A

  • Term: 9-months 

  • Factor rate of 1.1 (corresponds to a fixed cost of $1,000) 

For this example, the total payback is $11,000 ($10,000 loan + $1,000 fixed cost) for the $10,000 borrowed. This corresponds to an APR of 26%. 

Bottom line? By calculating the absolute dollar amount you will pay back and comparing it to your other offers, you can determine which funding option works best for your budget and cash flows. It is important to pay close attention to any additional fees, like late fees, that you may incur with the funding you receive so that you have a full picture of the total cost of borrowing. 


3. Compare the Term

The third characteristic you should evaluate when comparing business financing options is the repayment term (if there is one for the financing option you select) as it dictates the size of your regular payments. The repayment term refers to the amount of time you have to pay back the amount of funding you receive. 

Here is an example of a loan with a  fixed factor rate. We have assumed a loan of $100,000 with differing terms of 9 months, 6 months, and 3 months. 

You may notice a significant difference in total cost in favor of the 3 month term, however, the shorter-term source has the highest APR of all of these options. The significantly higher daily payment required by a shorter term results in a higher annual percentage rate. If you can afford the payment great, but not everyone can.  

4. Weigh out the benefits of fixed rates vs. variable rates 

If approved for a loan, you’re not just going to be paying back the loan amount, rather you will be responsible for paying back the amount borrowed plus interest or a fixed cost. The interest rate or factor rate (fixed cost) may be based on a variety of potential factors like your sales history, how long you’ve been in business, any debt your restaurant has, and more. Interest rates can either be fixed rate – meaning they do not fluctuate during the life of the loan – or variable rate – meaning the interest rate can fluctuate throughout the life of the loan. 

When comparing business financing options that have an interest rate, you’ll want to consider whether fixed rate or variable rate interest payments are more affordable. 

5. Find out if collateral is required

As defined by Investopedia, collateral is “an asset that a lender accepts as security for a loan. If the borrower defaults on the loan payments, the lender can seize the collateral and resell it to recoup the losses.”

Sometimes, in exchange for a loan of a large sum of money, banks and other lenders will require you offer up a valuable item – like your house, a car, or your business’s brick and mortar location – as collateral that they would then own should you default on your payments. It’s important to note that some lenders will require you to offer up collateral that is the property of the business – like the funds in the business's account, your food truck, or your brick and mortar location (if you own it), while other lenders may require personal assets (your house, your car, your retirement fund) if they require a personal guarantee, which requires you to put your own assets and personal well being on the line if anything goes wrong.

Offering up collateral can be incredibly stressful, knowing that should you default on your payments, you may lose something meaningful and valuable to you, so it’s important to weigh out the benefits and risks before you sign on the dotted line.

6. Consider the reputation of the financial provider

Do you know the financial provider or others who have worked with them in the past? Will they work with you if you miss a payment or run into trouble? How much volume do they do with the capital product you selected?  Do they specialize in working with restaurants? 

You may want to focus your search on financial providers that take into consideration restaurant industry challenges, as they may be more likely to take seasonality into account when determining your rate, rather than denying your application because of it. They  may also be more permissive of low profit margins, which are standard within the restaurant industry (cite average profit margin) but could be a red flag to a brick-and-mortar financial institution.

You may also want to explore lenders that you have an existing relationship with, as they will be more invested in your business’s success and expansion. For example, POS providers, accounting systems (like QuickBooks), and payment processors may be a good choice to partner with for funding, given your existing relationship with them.

When you have your initial meeting with a potential lender, make sure the interview is going both ways: you should be asking just as much about them as they are about you. You need to make sure that this lender is reliable, has a good rapport with other clients, and won’t pull any funny business a few months down the road. 

All restaurants started out first as a dream…

Securing capital for an important project can be scary, but by taking the time to do your research and arming yourself with the right tools and resources, you can make a great investment in the future of your restaurant. 

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