All About Restaurant Business Loans and Best Restaurant Financing Options
Most people open a restaurant not just for profits, but to feed their own hunger and passion for entrepreneurship. But, the constant rise in the costs of starting and maintaining a restaurant bewilders aspiring businessmen even before they set foot into the venture.
You might be an extremely talented chef, a modest local entrepreneur or a foodie full of creative ideas ready to offer an exciting dining experience. Irrespective of who you are, restaurant financing is one way that can help you realize the dream of your life.
This article is going to help you understand
- What restaurant financing is
- Reasons why restaurants resort to financing options
- The 10 best restaurant financing options
- Evaluation of restaurant financing and loans
Before we begin, we must also understand the significance of a restaurant website. Having a strong online presence is vital for any business’ survival and success these days. Therefore, to create a restaurant website use an affordable, DIY-based restaurant website builder that facilitates online food ordering and direct payments from customers. A robust food web constructor will allow you to customize their pre-curated templates, not levy any hidden charges or charge commission per order. Such reliable website builders also permit restaurants to accept an unlimited number of online food orders.
RESTAURANT FINANCING — EXPLANATION
Restaurant financing refers to an(y) external form of funding that restaurant business owners utilize to support and manage a wide range of their business needs.
Restaurant financing could take any of the following forms:
- Bank Loan
- Funding from family members or friends
- Money from investors
- Money from private lending sources
REASONS WHY RESTAURANTS RESORT TO FINANCING OPTIONS
There are several reasons why restaurateurs seek funding. Some of them are mentioned below:
Starting a new restaurant
Starting a restaurant afresh involves an extensive list of expenditures. Restaurant owners must renovate the premises, update kitchen equipment, purchase new furniture and appropriate fittings, spend on menus and staff set-up. A major portion of the expenses will be channelized on carefully sourcing the food, alcohol, or beverage stock.
Renovation or makeover of an existing restaurant
As restaurants develop and evolve, chefs or owners looking to hire and onboard more renowned and experienced kitchen staff or even rework the ambiance and interiors. The trends in interior designing change rapidly. Moreover, busy restaurants experience greater wear and tear with more foot traffic to the restaurant all through the day. While it is good for the business, it also means regular renovations to keep surprising the loyal crowd every time they walk in for dining.
Purchasing new equipment
Chefs, waiters, or baristas — Everyone needs their set of tools to get the work done in the right manner. So, restaurant owners look forward to financing options to purchase the equipment required for kitchens and restaurant management — from coffeemakers, an effective POS system, premium ovens to grills and stoves.
Inaugurating a new branch in another location
Restaurateurs resort to external finances when the idea of expansion is on the cards. Several entrepreneurs branch out from a single location to embrace the ‘chain of outlets’ form or regional restaurant format. During the expansion process, external financing will help restaurateurs to pay for new commercial spaces, renovations, or probably even constructing a new building.
Increasing the number of tables for greater profits
Expansion activities need not necessarily be exorbitant or expensive. Just like the chefs who work inside the kitchen, carefully adding an ingredient or two to ensure an enticing taste, restaurant owners also prefer to infuse changes in a gradual manner. Even adding space to serve extra covers on new tables can be a part of an expansion activity.
Operational expenses, marketing campaign, or hiring needs
Decision-making is something that restaurateurs constantly do, in fact, every day — in the midst of the hustle and bustle of their own busy team and the general public. This can be mentally tiring. Therefore, owners usually look to get some external counseling. Today, there are several consultants (they might be chefs working in a restaurant or running one of their own) who provide paid advice to their restaurant owners. Such consultants lend advice to sourcing managers, giving advice about restaurant brand positioning and improving the overall running of a restaurant business.
Restaurant owners are well aware that the industry is filled with competition to the brim. You would be surprised to know that many thrive on it. Yet, it can be challenging for restaurants that serve popular cuisines like French bistros or Italian pizzerias to win the competition and stand unique in a space where everyone serves the same dishes with almost similar experiences. During such times, highlighting the value of a restaurant brand can help secure the competitive edge. Therefore, restaurant owners make use of loan money to create unique brands or to rebrand their conventional venues to suit the dynamic culinary and dietary tastes.
Diversifying the business by taking catering orders or selling packaged goods
Restaurants can build a strong brand by creating a relationship with customers and offering them culinary experiences beyond the brick and mortar building. Providing them with catering services or takeaway food products can help restaurants in great ways.
Providing catering and takeaway services will undoubtedly increase the revenue stream for restaurants. But, they come along with the costs of product development, hygienic (and environment-friendly) packaging, and logistics.
For daily maintenance and operations
Restaurant owners need not look for external funding only during times of expansion, growth, or development. Sometimes, owners require funds to even support their everyday running of the business. In restaurants that have seasonal or unpredictable revenue patterns, some owners might want to make use of secure funds to achieve positive cash flow.
THE 10 BEST RESTAURANT FINANCING OPTIONS
Following are the 10 best restaurant financing options that any restaurant owner can consider using:
Brick and mortar bank loans
This is probably the most popular option — asking the bank for a loan. Conventional banks have been lending money to support small and medium enterprises from time immemorial. The bank’s financial systems are established, rigorous, time-tested, and proven too.
Alternative loans come into the picture as an effective funding option as every restaurant owner does not have the time or the credit scores to get funding approved from a brick-and-mortar lender. While the application and approval process is quicker, collateral is not required and the money can be used for any restaurant business purpose, the interest rates are considerably higher and repayment terms are rigid. Some lenders also have only a short track record.
Small Business Administration Loans
When small businesses cannot get loans from other sources, such SBA loans can be very helpful to them. An SBA does not fund loans directly. It just provides a guarantee to the bank that it will repay a part of the loan if a business fails to pay. This loan can be used for various purposes — buying land or equipment, acquiring an existing business, refinancing existing debts, purchasing machinery, furniture, fixtures, materials, and other supplies.
Merchant Cash Advance (MCA)
MCA is technically not a loan. It is a way for restaurants to secure funds against payments that would be made in the future via their merchant payment system. MCA is very useful for restaurants that process a high volume of credit card transactions and those that look for quick access to funds. But, business owners must be aware that MCA providers charge high rates — so much so that the repayment amount might exceed the original advance by more than 40%.
Business Line Of Credit (LOC)
Most commonly, businesses seek their lines of credit through their respective banks. This option is now being offered by alternative lenders too. That is, a business line of credit permits restaurants to gain access to a particular amount of additional funds each, whenever required.
When a large number of individuals contribute small amounts of capital to finance a new business venture, it is called crowdfunding. This is usually adopted to validate new product ideas or seek funding from early adopters for a startup concept or ideation. Although it is not much associated with service businesses like that of a restaurant, you can still give it a try if you are interested.
Friends and Family
If you have been in the restaurant industry for a considerable amount of time, your friends and family are not just your biggest supporters, but your invaluable assets too. As your earliest and most loyal patrons, they may have supported you in your entrepreneurial deeds by spending from their own pockets.
So, when restaurant owners need money or finances, it is but natural that they rely on their mighty pillars of strength — parents, siblings, partners, and friends. Such people lend a loan and help chefs or business owners get their working capital (that too, without a credit check). But there is a very important point to remember — mixing personal relationships with professional goals can get far too complicated if a delicate balance is not maintained.
Commercial Real Estate Loan (CRE)
Commercial real estate is definitely expensive. Restaurateurs can tap into such loans to improvise their building structures, parking areas, garden spaces, and much more. Some lenders may also allow restaurants to include architectural costs, legal fees, and construction costs within this loan. As far as a CRE loan is concerned, it is strongly suggested that you speak to your accountant or any other trusted financial advisor. This will help you better understand how this loan is assessed or structured in different ways for restaurants of different sizes.
Restaurants need to fund their equipment like coffee makers, premium ovens, grills, stoves, or even POS technology. An ‘Equipment Financing’ can help them in this regard.
Purchase Order (PO) Financing
Every restaurant business owner is well aware that orders are received and completed long before payments are received. If your restaurant offers catering services, then this is particularly true for your business too. This type of financing can be extremely helpful for those restaurants that do not have enough cash flow to fulfill their outstanding orders.
EVALUATION OF RESTAURANT FINANCING AND LOANS
The funding options discussed above vary in great ways. If you have narrowed down your financing options, it is now time to take the following steps while assessing every option:
Check the time frame within which you can get the capital on hand
Calculate the total repayment amount
Compare loan terms
Also, compare the benefits of fixed-rate vs variable rate
Check if any collateral is required
Read reviews about the lender’s reputation
When a restaurateur decides to expand or support a restaurant, it is not just exciting but a nervous task too. As you continue to look into the various sources of funding, let us give you one point of reassurance — as an owner, no one but you will know the best and the right option for your business.