How to Apply for a Business Loan for Your Restaurant

Running a restaurant doesn't come cheap. Most restaurants go through periods of financial precarity, largely due to thin profit margins and increasing operational overhead.

Multiple factors at play make surviving in the restaurant industry more challenging in 2024 and the foreseeable future. Rising food costs due to inflation, extreme weather making it hard for ingredients to grow, and labor shortage.

Despite these challenges, there's still plenty of opportunity in the industry waiting for you to seize with the right restaurant financing plan. Set your establishment up for success with restaurant loans that support business needs from the get-go.

All restaurant business owners should know about loans. We're here to walk you through all things loans, including how to pick online lenders and what funding options work best for your restaurant.

Key Takeaways 

• Plan in Advance for a Better Chance of Approval: Create a clear budget and timeline to match your financial needs and increase the likelihood of securing the right loan. 

• Explore Different Types of Restaurant Loans: Consider SBA loans, traditional bank loans, or others that align best with your business goals. 

• Look Into Flexible and Alternative Funding Options: Unsecured loans and alternative lenders offer quick access to money without requiring collateral, perfect for urgent or short-term needs.

1. Calculate Budget and Loan Timeline

Before you even consider applying for restaurant funding, you must have a budget. Use your business plan to fully understand the scope of your business and determine the required loan funds.

Do extensive research into multiple areas of your business, including contacting the local vendors supplying your restaurant. Make sure to account for how much capital you have on hand.

A timeline helps you prioritize funding to keep restaurant operations running smoothly.

It's important to establish a timeline before applying for a business loan. This will ensure you're fully prepared and increase your chances of securing the right loan for your restaurant. Traditional lenders also appreciate restaurant owners who come to them with a clear understanding of their financial needs.

To lay out a timeline, ask yourself questions such as what the loan is predominantly for, when you need it in the bank account, and how long it will take to get approved. Your timeline should be influenced by the following financial decisions:

• Interest Rates: Decide how much you will pay for the loan, including interest and other fees. Consider how these costs will fit into your budget.

• Monthly Repayment Terms: Calculate how much you can afford to put toward repayments every month while keeping enough funds on hand for surprise expenses.

• Seasonal Adjustments: If your restaurant has seasonal fluctuations, look for lenders offering repayment plans tied to a percentage of your family sales rather than fixed payments.

• Repayment Period: Choose between lower payments over a longer term or higher payments over a shorter term, depending on what aligns best with your cash flow.

2. Research Business Loan Lenders

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 restaurant business loans:

SBA (Small Business Administration) Loans

Small business loans are often competitive and only given to the most qualified. While SBA loans offer great benefits like lower interest rates and longer repayment periods, they aren’t easy to get. There is a lengthy application process, and you need to have good credit and collateral in some cases. 

Traditional Bank Loan

A traditional bank loan is given directly by a physical bank. They usually have fixed interest rates and repayment terms, so you’ll need to make consistent monthly payments over a set period. To qualify for a traditional bank loan, you will need a good financial history and credit score. 

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 Loans

You should think about getting an equipment loan if you are interested in expensive equipment like machinery or kitchen appliances. The equipment itself is collateral for the loan, so the lender can seize it if you don’t repay. Equipment loans typically have fixed interest rates and repayment terms and are great for businesses that need an upgrade sooner rather than later. 

Unsecured Restaurant Business Loans

If you want a loan option that doesn’t require collateral like equipment or property, then you should consider an unsecured restaurant business loan. This makes them an appealing choice despite their high interest rates for restaurant owners who don’t have a lot of assets or want to avoid risking them. Instead, lenders look at your credit, business revenue, and financial history to see if you’re eligible for a loan. 

Merchant Cash Advance

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. This is a great option for restaurants with high credit card sales and seasonal fluctuations because repayments adjust based on your daily revenue. 

Alternative Loans

Most business owners immediately consider going to a brick-and-mortar bank to get a loan, but there are many alternative options from other banks and non-bank lenders. Some lenders offer more flexible payment terms and faster approval 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.

3. Get the Necessary Paperwork and Documents Together

To apply for a business loan, you’ll need to know your desired loan amount, your reason for borrowing money, how long you’ve been in business, what industry you’re in, and what business entity you run.

Restaurant loans, particularly those from traditional banks or the SBA, often require extensive paperwork and can involve a lengthy application process that may take months. Even just preparing the necessary documentation for your business loan application can take days or even weeks, depending on the lender’s requirements.

Here are the legal documents needed to apply for a business loan from most brick-and-mortar banks and lenders on SBA loans. 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 plan

• Business licenses and permits

• EIN (Employer Identification Number)

• Proof of collateral

• Annual business revenue and profit

• Bank statements

• Balance sheet

• 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

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. If your credit score is very good — usually 700 or above, out of a possible 850 — you’re more likely to get approved for a loan. 

4. Complete and Submit your Business Loan Application

Nowadays, applying for a business loan is done digitally. Some business loan providers facilitate their application process entirely online. Whether submitting a physical application or applying for funding online, you will want to follow the guidelines provided by your lender closely.

If speed matters, look into lenders you already work with, like your point-of-sale provider or accounting software, since they already have your financial data.

Some lenders focus on your business’s sales instead of your credit score, making the process faster and less stressful. You might also need to check your business credit score if your business is well-established.

5. Use the Funds Deposited from Loan

Once approved, the next step forward can vary widely among lenders, but typically, the (responsible) fun can begin. Start that renovation, shop for your next location, or replace the unreliable oven. 

Everyone knows you need money to make money. Many restaurateurs invest their capital into channels to help 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: a Point of Sale (POS) system helps restaurants provide exceptional customer satisfaction with fast and reliable service and business operational management. 

• 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 connect with your community, increase your restaurant’s visibility, and build relationships through various marketing channels. 

• 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. Ensure these events are a success with state-of-the-art industry software. 

Fund Your Restaurant Business the Right Way

Securing the right funding options is a big step in opening and running a restaurant. Business loans cover essential expenses, from upgrading equipment to launching a marketing campaign. Every little helps, especially with rising food costs and labor shortages.

A solid credit score can greatly improve your chances of getting approved for the right restaurant loans. In contrast, business credit cards and other financing options offer flexible solutions to day-to-day expenses.

FAQ

Can I get a SBA loan to buy a restaurant?

Yes, SBA loans can be used to buy a restaurant as long as you have good credit and collateral. Prepare for the application process to take a while, but if successful, you will receive low interest rates and longer repayment periods in return. 

How long does it take to pay off a restaurant loan?

The repayment period for a restaurant loan varies by type. SBA loans may take up to 25 years, and traditional bank loans are closer to 5 or 10. Short-term loans can have repayment loans under 3 years. 

What is the best loan for restaurants?

It depends on what you’re looking for when deciding which loan is best. Traditional bank loans work well for established restaurants needing predictable repayment terms, while merchant cash advances and unsecured loans provide quick, flexible funding.