Restaurant Financing: Loans and Funding Options for Restaurants

It costs a lot of money to open and run a restaurant. puts the average startup costs for a new venue at $275,000, or $3,046 per seat. And the price gets significantly higher if you want to own the real estate.

Unfortunately, not many small businesses have that type of cash on hand. But there are many restaurant financing options available that can help.

This article will explore why you might want to apply for business funding, and then introduce 11 options to consider.

What Is Restaurant Financing?

Restaurant financing refers to money from an outside source that restaurateurs use to run their business. It is typically in the form of a loan or cash for equity.

Restaurant owners often turn to financing when they are starting out to help get their idea off ground. But financing can be used any time the company needs a cash injection.

Why Do Restaurants Need Financing?

Funding is required for a range of reasons and at many different stages in a restaurant’s lifecycle: here are a few of the key areas.

Start-up Costs

Opening a restaurant costs a lot of money. Even small businesses need to find and refurbish a location, buy equipment, source food and drinks, hire staff, and start to market the restaurant.

Attracting financing when you’re starting out will help you cover these costs. You can then pay the loan back once your venue is generating income.

Restaurant Expansion

Successful restaurant owners may want to capitalize on their success by opening a new venue. The costs are similar to those associated with opening a new restaurant.

But you may be able to cover some of them with the money your existing restaurant generates.

Image: Markus Winkler/Unsplash

Refurbish an Existing Venue

Existing real estate may benefit from being refurbished. This could be to replace an old interior, increase revenue potential by adding more tables, or update the design to a modern concept.

Whatever the reason, refurbishment can cost a lot of money, making financing useful.

Buy New Equipment

Professional restaurant equipment is expensive. But you may need to invest in some if yours breaks down or if you need new equipment to freshen up your menu.

Another reason for equipment financing is if you currently lease yours but want to invest in your own.

Working Capital

Sometimes a small business just needs an injection of cash to cover costs during an unexpected slump—the pandemic is a prime example of this.

This is where entities such as the Small Business Administration (SBA) in the United States come in.

The Small Business Administration works with lenders to make it easier for entrepreneurs to access funding. During the pandemic, SBA loans have been a lifeline for many small businesses

A working capital loan can help you keep on top of costs until the situation turns around.

11 Restaurant Financing Options

This section will cover 11 different types of restaurant financing that owners can consider. Restaurants can explore several options to access multiple lines of credit.

Bank Loans

Bank loans are a traditional source of restaurant financing. All high street banks offer business loans, although some place more of an emphasis on commercial lending than others.

Banks are one of the first places you are likely to look for restaurant loans.

Advantages

• Relatively modest levels of interest.
• If you already have an account with a bank, a restaurant loan can be obtained fairly quickly as they already have access to your data.

Image: Robert Bye/Unsplash

Disadvantages

• In most cases, security is required or at the very least a personal guarantee.
• Loan applications can take a long time to be processed.
• Because of the high volume of loan applications that banks process, decisions are based on fixed criteria with little opportunity for flexibility.

A bank loan might be a good option if…

• You are an established company that is in a financially secure position.
• Have some assets to use as security or are comfortable giving a personal guarantee.
• You don’t need the funds very quickly.

Peer-to-Peer Lenders

Peer-to-peer lending is a relatively new concept where individuals invest money in other businesses through a platform.

There are many businesses running these platforms, some of the more well-known platforms are Funding Circle, RateSetter and Zopa.

These platforms have proved popular with investors because of low interest rates, the ability to spread risk across many businesses and the element of fun provided by investing in different businesses.

The market for peer-to-peer lending is facing some challenges such as a lot of competition and tighter restrictions. However, these platforms can be a good option for business owners looking for funding.

Advantages

• Generally quick decisions on lending.
• Personal guarantees are accepted as security for small business loans.
• There is an advisor to help walk you through the process.

Disadvantages

• Although less than banks the lending requirements are fairly rigid (although this varies a little from lender to lender).
• Due to a large volume of applications at popular lenders, it’s hard for lenders to be flexible.
• Interest rates are generally higher than banks (this does vary).

Peer-to-Peer Business Loans might be a good option if…

• You have security or are willing to provide a personal guarantee.
• You have an established restaurant with a clear record of successful trading.
• The need for funds is relatively immediate.

Overdraft or a Business Line of Credit

Business lines of credit or overdraft are both convenient financing options if you need to access an ongoing source of cash.

All banks offer overdrafts. The interest rate tends to be quite high but they can be helpful if a restaurant faces short-term working capital issues.

It’s straightforward to set up an overdraft or lines of credit with lenders because they already have access to your account and can normally make a decision based on your revenues.

Most high street lenders consider the time the account has been open and the amount of cash flowing through it. An overdraft limit will normally be offered as a percentage of revenue as long as the restaurant has been trading for a few years.

Image: Scott Graham/Unsplash

Alongside banks, other lenders offer revolving credit facilities. Iwoca is one example of a new breed of businesses trying to muscle in on the working capital lending market.

Advantages

• Very useful for working capital.
• The due diligence process is normally quick.
• Quick access to financing.

Disadvantages

• The interest rate tends to be quite high, and there are fees to manage the overdraft.
• Although the criteria aren’t too stringent, overdraft facilities or a business line of credit are rarely offered to brand new start-ups.

Overdrafts or a business line of credit might be a good option if…

• You need a short term working capital buffer on a regular basis.
• You don’t need large sums of cash for capital expenditure.

Private Finance Houses

Private Finance Houses are an alternative way to get a business loan. They tend to be managed by experienced and expert commercial lenders, with the focus on a personalized service.

They normally take the time to understand your business and circumstances before offering tailored solutions. It can be a good source of restaurant loans if you can’t get financing from a bank.

Advantages

• For businesses that don’t fit into a bank’s criteria but still have a viable lending proposition, these providers are effective.
• The lending process is normally quick.
• There is an expert advisor on hand who will take the time to understand your business and advise accordingly.

Disadvantages

• The fees tend to be higher than at traditional lenders.
• You still need to provide security or personal guarantees.

Private Finance Houses might be a good option if…

• You don’t fit into the traditional lenders profile; perhaps your business is young, your assets are unusual, or your latest filed accounts don’t reflect the current financial health of your business.
• You need money quickly: these organizations focus heavily on customer service and releasing funds in the timeframes you need.
• The proposition is complicated and needs a relationship manager to work through the lending process.

Online Lenders

Image courtesy of www.spotcap.co.uk

With the Fintech revolution, many lenders offer access to financing for businesses online that aren’t peer-to-peer lenders. They normally raise an investment fund and then use online platforms to find, vet and lend to business owners. Fintech software development has played a pivotal role in streamlining the processes of these online lenders, enabling them to efficiently manage investment funds, automate credit assessments, and enhance the overall user experience for business owners seeking financing.

One example is SpotCap: its business model is based on speed and flexibility by assessing creditworthiness quickly, accurately and smoothly.

The raft of Fintech companies offering finance is worth exploring but there is unlikely to be a magic bullet out there for you.

Business owners need to show a solid plan, good financials and some degree of security.

Advantages

• Often a faster way to get financing than banks.
• They may have a due diligence process that takes into account factors more relevant to your small business. So if you’ve been refused a loan by your bank, one of these providers may be a good option.

Disadvantages

• You will still need security or a personal guarantee.

Online Lenders might be a good option if…

• You want a quick and easy application process.
• You have security and a good proposition.

Business Angels

There are many business angel networks across the UK that are looking for viable business investments. Some are sector-agnostic, many are technology-focused, but some are food-specific.

The show Million Dollar Menu features some business angels looking for the next hot restaurant business. One investment fund run by Richard Read, the co-CEO of Innocent Smoothies, is called JamJar Investments, which invests in food businesses at all stages, including start-up restaurants.

Some business angels make much smaller investments, but one common thread is the desire to find great new businesses and normally to add expertise to help them grow. This makes it a good form of financing if you want to access business knowledge as well as cash.

Business angels are generally considered less ‘hard-nosed’ than venture capitalists or private equity but the sector is being gradually professionalized and investors see small business angel level investments as a viable asset class.

The book Angel by Jason Calacanis is a great read if you want to understand the mindset of angel investors in more depth.

The food and drink sector doesn’t necessarily attract a lot of angel money because of the perceived complexity of growing a restaurant business, and a lot of the capital is invested in branded products.

However, if the proposition is right it’s possible to attract an angel, and as we’ve seen on the show Million Dollar Menu, there are some investors with a particular interest in the sector.

Advantages

• Equity funding relieves the pressure of regular repayments.
• Benefit from the expertise of a seasoned business person.
• The angel community is growing and there is some activity in the restaurant space.

Disadvantages

• You have to give up part of your business.
• It’s difficult to demonstrate that you will be able to scale a restaurant business.
• The process of raising funds is onerous and can take months with no surety of success.

Business angels might be a good option if…

• You have a compelling proposition with a lot of potential.
• The idea of working alongside a business angel to grow your business is appealing.
• You don’t have the assets to offer any form of security.
• You are willing to grow the business.
• You have the time and patience to meet a lot of potential investors.

Crowdfunding

Image courtesy of seedrs.com

Crowdfunding is a relatively new form of financing. Crowdcube and Seedrs are two of the larger platforms available.

The concept is simple: businesses put a plan together and pitch on an online platform, with people viewing the pitches and investing in ideas they find interesting.

Investors in these platforms range from individual hobbyists investing a few hundred pounds to larger institutional investors.

These platforms can work well for restaurant businesses; award-winning chef Gary Usher used crowdfunding platforms to raise capital after being turned down by banks.

Gary gives some advice to restaurant owners looking to raise money through crowdfunding:

1. Be clear on what financial assistance you need.
2. Focus on the campaign.
3. Engage with potential investors.
4. Have a plan if you don’t quite reach the limit.

Many crowdfunding campaigns are made successful by having a few initial investments on the platform lined up so the campaign can build momentum.

Advantages

• Good platforms give you access to a huge range of investors.
• A good pitch and video isn’t that expensive so you can portray your company in a professional light for a reasonable price.
• As you’re raising equity, there are no repayments.
• Restaurant businesses tend to work well on crowdfunding campaigns because casual investors understand the industry.
• It is a good vehicle for lots of people to invest small sums of capital in.

Disadvantages

• Setting up and managing campaigns is time-consuming.
• Normally if you don’t reach a certain figure, then the investment doesn’t go ahead.
• The competition on the platforms is strong now with lots of businesses using them.
• If you don’t get initial early investors, then your campaign can look flat with no capital committed, which can deter investors.

Crowdfunding campaigns may be a good option if…

• You have a compelling restaurant proposition that can be conveyed well on a video campaign.
• You’re willing to spend the time developing the campaign and then drumming up support for it.
• You have a few early investors such as family and friends that are willing to get your campaign started.

Business Credit Cards

These are the same as personal credit cards. They provide a line of credit mostly used by businesses for convenience or short term cash flow requirements. They often also come with a range of benefits.

All of the main high street financial lenders offer credit cards, and there are some new entrants as well.

These products can help restaurant owners ease cash flow issues and act as a backup line of credit in case of emergencies.

Credit cards can be very expensive if you need to make a bank transfer or take out cash, but they can be a suitable form of business loan where credit cards are accepted.

Advantages

• Generally quick application process.
• Line of credit for short term cash flow issues.
• Generally no need for personal guarantees or security.

Disadvantages

• High interest rates, especially for bank transfers and cash.
• If you remain in debt on a credit card, it can get very expensive.
• Unless you have a good credit score you’re unlikely to get a large credit limit when a card is first issued.

Business Credit Cards might be a good option if…

• Your restaurant needs short term working capital and you are in a position to repay the cash spent on the credit card quickly.
• You have a good credit history so you can access credit cards with favorable interest rates and larger limits.
• The working capital needs are relatively modest.

Start-Up Loans

Governments often provide easy access to small business loans. In the UK loans are available from £500 to £25,000, with annual interest a modest 6 %.

The idea of these loans is to stimulate the economy by motivating people to start companies. The loans come with mentoring, and there are no early repayment penalties.

The funding can be used alongside other funding options, therefore, part of a wider fundraising process. It’s a suitable form of funding for budding restaurant owners.

There are a number of providers of these loans on behalf of the government, one example is a provider called Street Loans, and you can read more about how to process loans here.

Advantages

• Low-interest rate.
• Relatively simple application process.
• No need for security.
• No early repayment penalties.
• Mentoring available.

Disadvantages

• The amounts available are relatively modest.

Start-Up Loans might be a good option if…

• The restaurant only requires modest funding.
• You’re not in a position to offer security or personal guarantees.
• You have a viable business plan.
• You can pass credit checks.

Private Equity

Private equity funding may be an option if the company is very large and needs a lot of funding for aggressive growth.

Private equity firms normally manage large capital reserves and deploy this capital into businesses to make a return for investors.

Many private equity firms have a specialism; naturally, some private equity firms are more active in the restaurant industry than others. You can read a list here of a few private equity firms that have a lot of investments in the restaurant sector.

Private Equity firms invest large amounts of money, but for the large level of investment, they normally want to exert a high level of control and take charge of company assets.

While private equity has a ruthless reputation for putting profit first they have benefited many restaurant businesses by providing the cash and expertise to help them grow.

Advantages

• It can provide companies with huge capital reserves to grow.
• Have access to expertise and contacts to help grow businesses.
• Equity funding means the business doesn’t have the cash flow stress of constant loan repayments.

Disadvantages

• Private equity businesses are driven by profit so they may take actions that aren’t best for the long term health of the restaurant business.
• They exert a lot of control over the businesses they invest in.

Private Equity investment might be a good option if…

• You are a large successful restaurant that is looking to grow and doesn’t want to take on copious amounts of debt.
• You need some expertise to help take your restaurant to the next level.

Equipment Restaurant Financing

After our brief foray into the world of private equity investment, we come back down to earth with one of the most commonly used restaurant financing options.

Due to high prices, restaurant businesses often choose to lease equipment.

The approval process for equipment financing is straightforward, as the machinery you borrow is used as security.

By leasing equipment, a restaurant takes the sensible step of avoiding large upfront costs – especially important when opening a new business or expanding.

Equipment financing can be more expensive than buying but it gives restaurants the option to obtain high-quality equipment without a large financial outlay.

Advantages

• Access high-quality equipment without the initial investments by leasing or spreading costs over time.
• No need for security as the item being leased is used as security.
• The application process is fairly simple, although it can get more complex for high-cost equipment.

Disadvantages

• Be careful with the small print because there can be heavy excess costs and penalties if the equipment is damaged.
• In the long term, equipment financing is more expensive than buying.

If you are looking to finance your restaurant then do your homework, get everything lined up and we wish you the best of luck.

Once you’ve got your restaurant financed and launched – don’t forget to get your own ordering system to truly bring your business into the 21st century.