A guide to financing the expansion of your restaurant business
Once you have a recipe for a successful restaurant, your next endeavor may be to expand. Unless you have ample cash on hand, you will likely need to secure financing to help fund this expansion. Here’s how a restaurant business loan can help take your business to the next level.
What is restaurant expansion financing?
Restaurant expansion financing is not a specific type of loan. In fact, several types of financing—debt financing or equity financing—can be used for expansion purposes. That’s why it’s important to understand your options in order to choose the financing that best suits your business needs.
When to consider expanding your restaurant operations
It often happens that restaurant business owners need additional capital to grow. These include when you must:
- Expand the current space, in particular by adding a patio or additional parking
- Acquire or upgrade hardware
- Renovate the current space
- Acquiring real estate for a new location
- Rename or revise the menu
- Add products such as bottled sauces
Deciding whether to extend or not is an important decision. You need to make sure that your current business is profitable and that the money you invest in expanding will pay off.
What types of financing are best for restaurant extensions?
There are several types of financing that may suit your expansion efforts. These options may be available from traditional financial institutions such as banks, as well as other lenders, including online lenders.
If you have a project that requires a specific amount of capital and you know how much you need to borrow, a term loan may be an excellent choice. With a term loan, you borrow a specific amount of money with a specific repayment period. Interest rates can be fixed or variable.
For large real estate or equipment projects, you may be able to obtain a term loan with repayment periods of up to ten or twenty years, but many of these loans offer short term repayment periods of 6 at 24 months.
For short-term projects, working capital, and emergencies, commercial lines of credit can prove invaluable. The business will be approved for a specific amount against which they can borrow. Once approved, it is the quickest and easiest way to access capital. However, interest rates may be higher, depending on the qualifications of the borrower. Variable interest rates are common.
There may be an interest-only repayment period, but the loan must eventually be repaid. Most lines of credit have short repayment terms of 6 to 24 months, although longer repayment terms may be available.
Commercial real estate loan
If your goal is to purchase real estate for your current location or to expand to a new location, you will want to investigate commercial real estate loans. These may be available from banks or other lenders.
If your restaurant needs new equipment to expand, equipment loans or rentals can allow you to acquire or upgrade restaurant equipment with little or no down payment. You will preserve your cash and also benefit from tax advantages.
Business credit cards
Small business credit cards can provide quick access to cash. They are best for short term needs. You will want to make sure the interest rate is affordable. (Some card issuers offer 0% APR financing for a year or more.) Since the underwriting decision is usually based on the owner’s personal credit scores and income from all sources (not just l business), this can be an option for startups and new restaurants. .
Some restaurants have successfully used crowdfunding to raise funds for expansion. Options include debt-based, investment-based or rewards-based financing. Each of these options has its own advantages and disadvantages. One of the benefits of crowdfunding is that backers often become fans who will recommend the restaurant to others.
Some restaurants may be attractive to investors (which may include friends and family). Equity financing usually requires you to give up some ownership of the business, so it should be carefully considered.
How to Evaluate and Choose the Best Expansion Financing Options
Credit ratings. Many lenders check the small business owner‘s personal credit scores. Business credit can also be checked. Bank loans and SBA loans in particular often require good to excellent credit. (Here’s to building business credit.)
Time spent in business. If your business is established and generating revenue, you are in a better position to obtain financing than a brand new business. Generally, businesses that are at least two years old will be eligible for more loan options.
If you’re trying to get financing for a new restaurant, you’ll need a business plan that clearly demonstrates a solid plan and, ideally, experience in the restaurant industry.
Revenue. Lenders prefer to see businesses with strong revenue and cash flow. Most lenders will require business bank statements and/or business tax returns. Financial statements may be required, especially by traditional lenders.
Industry may be another important factor. Some lenders are happy to lend to businesses in the food and beverage industry. Others may view the restaurant industry as too risky. You will want to confirm that restaurants are not on a lender’s list of prohibited industries.
Once you’ve found a lender that’s right for you, you’ll want to make sure you understand the terms of the loan to assess whether financing is right for you:
- Amount of the loan. Can you get enough financing to meet your business needs? If not, how will you fill in the gaps?
- Rates and Fees. The interest rate and fees will affect your bottom line, so make sure you understand the cost of the loan.
- Payment terms: How soon does the loan have to be repaid? Some types of financing will require daily or weekly payments, and you need to understand the impact of these payments on cash flow.
- Funding speed. If an opportunity presents itself and you need to take advantage of it quickly, you may not have time to get a bank loan or an SBA loan. (The loan application process for these types of loans can take weeks or months.) On the other hand, online lenders can approve loans within hours or days. But quick funding can lead to higher costs, so you’ll need to make sure it pays off.
Entrepreneurs looking for business financing will need to understand the financing options they qualify for, at a cost that makes sense for their growing business.
Our best list of financing options to expand your restaurant
The best financing is the one that helps you achieve your goals and for which you qualify. Here are several options restaurateurs might consider. These are not specifically small restaurant business loans, but restaurant owners may be able to use these financing options for the expansion of their business.
Lines of credit
Commercial real estate loans
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