The 5 Best Options for Restaurant Loans

With approximately one million restaurants located in the United States, you never have to look far to find an establishment to grab a bite to eat. Furthermore, thousands of new restaurants open for business every year.

Owning a restaurant can be both exciting and profitable. It can also be a big risk, as 60 percent of new establishments do not make it past the first year. If you want to avoid a similar fate and you want your restaurant to survive and thrive, it takes a solid business plan, tasty food, and of course, plenty of money.

Do You Need a Loan?

If you don’t have the money required to start up and maintain your restaurant, it is time to consider your funding options. Many restaurateurs understand that a loan could be the difference between success and failure. They also realize there are many loan products to choose from.

Here are the five best options for restaurant loans:

1. Traditional Small Business Loan

It does not matter if you are starting a restaurant or some other type of business; a traditional small business loan may be just what you are looking for. In short, these can be used for pretty much any industry, as long as your company qualifies. Furthermore, and just as important, is the fact that the money can be used for anything related to the business.

Before you go down this path, answer these questions:

• How much money do you require?
• What are you going to use the funds for?
• What term and interest rate are you most comfortable with?
• What is your credit score?
• What is your annual revenue?

Answering these questions will help you better understand your situation. They are also the same questions lenders will ask, so you should get used to answering them. Keep in mind that traditional small business loans can be very hard to qualify for if you don't have an established business. Lenders will want to see you have strong revenues, cash flow, and credit. If you don't think you fit into this category, that's okay--you still have options.

2. Equipment Loan

As the name suggests, an equipment loan is used to purchase equipment. You may need this as you are starting your restaurant or it could also come in handy as you look to grow. You never know when you will need a new piece of equipment; you may need it to expand, or you may need to make a purchase when your current equipment breaks down and fails you.

The great thing about equipment financing is that the equipment you are purchasing serves as collateral for the loan, which helps offset some of the risk for the lender. If you are deemed a "riskier" borrower, this default collateral could be a huge advantage.

Benefits of an equipment loan:

• Less documentation than a traditional business loan.
• Provides the option to purchase the best equipment.
• No down payment (with some lenders).
• Option to finance up to 100 percent of the cost.
• Flexible repayment terms.
• Newer, better equipment increases the value and efficiency of your business.

3. Merchant Cash Advance

An often overlooked option, a merchant cash advance is something to consider if you are in a bind and need to secure funds in a hurry. Also known as an MCA, securing this type of financing is quicker and easier than with a traditional loan.

With an MCA, the lender advances you a certain amount of cash, which is paid back by a set percent of your credit card sales every day. If you don't have a lot of credit card sales, then an MCA wouldn't be a good option for you. Most importantly, you need to know that a merchant cash advance is almost always one of the most expensive financing options out there. If this is the only option you qualify for, be sure your business can afford it before committing.

4. SBA Loan

If you don’t qualify for a traditional loan through a bank, your next step is to consider the SBA loan program. When the SBA partially guarantees a loan, there is less risk to the lender. Subsequently, lenders are more likely to lend the money.

The 7(a) Loan Program is the most common. To qualify, your restaurant must meet the following requirements:

• Operate for a profit.
• Be considered a small business as defined by the SBA.
• Own a business in the United States.
• Have invested some of your own money.
• Ability to show a need for a loan.
• Have a plan to use the funds for the business.
• Have no debt obligations to the U.S. government.

If you meet these requirements, an SBA loan may be the best choice for your business. Why? An SBA loan is essentially a bank loan, with single-digit interest rates. However, with the SBA guarantee, it is often an option for "riskier" borrowers. If you don't qualify for a traditional business loan, this may be your next best option.

5. Franchise Restaurant Loan

Franchise restaurant loans are only for entrepreneurs opening a franchise, such as Subway or Jimmy John’s. The primary benefit of this loan type is that it is specifically for borrowers in your position; they are offered with terms that work for franchise owners.

Here is another point to consider: the company issuing the franchise may be able to recommend lenders. They often have relationships with banks, which improves your chance of receiving a loan for the right amount, at the right time.

Get Your Finances in Order

There is a lot that goes into running a successful restaurant. From an economics point of view, you never want to get off track.

If you require a loan to start a restaurant, grow a restaurant, or buy equipment, there are many options to consider. One (or more) of these five loan products may be able to help you solve all your financial concerns.