The Complete Guide to Restaurant Financing and Loans

Even if you don’t have a lot of money or good credit, you can still operate a restaurant. Don’t lose hope if you have a great restaurant idea but not enough money to open up shop. Don’t let a low credit score discourage you from pursuing your goals.

While banks might turn down your request for funding, others might be interested in investing in your groundbreaking new concept. If you can’t find a non-traditional investor, adapting your restaurant’s concept may be the next best thing. You can prove to banks, investors, and the general public that you’re serious about the food business and have what it takes to succeed by opening a food truck or self-catering firm.

What Is the Average Overhead Cost for a Restaurant?

The average overhead cost for a restaurant can vary depending on various factors such as the size of the establishment, location, concept, menu, and overall business operations. Generally, overhead costs for a restaurant typically range from 30% to 35% of total sales.

These costs include expenses such as rent or mortgage payments, utilities, insurance, licenses and permits, marketing and advertising, professional services (accounting, legal), administrative costs, and other general operating expenses. It’s important for restaurant owners to carefully manage overhead costs to maintain profitability and ensure the financial health of their business.

Restaurant Financing: What Does Opening a Restaurant Involve?

A restaurant is more than just chefs, chairs, tables, and people asking for a free meal. Oh, no. It’s an institution, and you have to treat it as such. Opening a restaurant might be doing God’s work, but you need to know what you’re getting yourself into first before you go about trying to make it happen. To help you out, here are some of the things you need to keep in mind before opening a restaurant:

Settle on an aesthetic

Developing a restaurant’s concept and name is the initial step. This determines the:

1. The restaurant’s decor
2. What you serve for dinner
3. Atmosphere

The only thing stopping you from opening an Italian, Mexican, Indian, American, or Asian restaurant is your own creativity. Once you have settled on an idea, you can narrow it down to the finer details, such as the type of food you wish to serve.

Spend some time digging into potential concepts until you locate one that meshes with your goals for the eatery. To stand out from the crowd, your restaurant needs to offer something no one else does.

Consider the location

One of the most crucial choices you’ll make is where to put your restaurant. You should start by looking for a location that is easily accessible and has enough parking. A restaurant cannot be run out of a private residence, thus you will need to lease a commercial facility.

If you need help understanding your lease, don’t hesitate to consult an attorney. It’s important to consider the cost of storage, which can range from $0.50 to $12 per square foot. In most cases, a down payment is not required when leasing commercial property as opposed to renting an apartment. Nonetheless, you could be required to pay for:

• A good lawyer
• Fees for a broker
• The inspection for your lease
• The security deposit

If your restaurant’s location also attracts a lot of tourists, that’s even better. You’ll have to pay more in rent, but the improved business prospects will be worth it.

Craft the ideal menu

Any menu is a crucial component of any establishment. It’s the deciding factor in whether or not you succeed, so put some effort into crafting a solid one. Now is an excellent time to bring in a professional chef to help you plan your menu if you aren’t already doing so.

Make sure that any cook on staff can easily and swiftly prepare every dish on the menu. Customers may become impatient and depart before they are served if the wait is too long. When it comes time to fill positions, keep in mind that a great eatery also provides excellent service.

Pick dishes with just four or six ingredients apiece to cut down on the time and effort spent in the kitchen. Prices on the menu should be competitive and lucrative for the business, but not so high that clients feel ripped off.

Most restaurants find success with menu items that are priced under $20 per person; however, this number can vary widely depending on the sort of establishment and what the local market can support. Pricing becomes less of a concern when launching a secret, expensive restaurant.

Have a plan ready

Now that you’ve done some basic research, creating a business plan for your restaurant is an essential next step. Because of this, you will be able to identify (and present) what financial resources are needed, which is very helpful if you are opening a small restaurant on a shoestring budget.

To help you answer these and other issues, a restaurant business plan is essential.

1. In what range should profits be?
2. What will the first investment be?
3. With the way things are going financially, how much longer do you think the company has?
4. To what extent will you advertise to potential buyers?
5. Can you describe the company’s long-term goals?

Building a reliable business model can help you, as the entrepreneur, and potential investors in your company make educated financial decisions.

Having a solid restaurant business plan in place will protect you and your investors from starting a venture that will fail. You will evaluate the potential for initial investments to generate profits within a realistic time frame. Also, it serves as a guide for your future actions. You shouldn’t just “wing it” while opening a restaurant because the costs can be high.

Your business strategy needs to be revised at least once a year to account for any new information you’ve gathered.

Top 5 Ways to Secure Funds for Your Restaurant

No matter how you look at it, you cannot start a restaurant with no money. However, there are a few ways you can raise money in order to open the restaurant of your dreams. In this section, we will give you five solid strategies to try out. Here we go:

Appeal to the masses

Crowdfunding is a good option. Crowdfunding refers to a type of finance in which many people individually contribute a little amount toward a common goal. Crowdfunding websites like Kickstarter, GoFundMe, and AngelList help certain restaurants get started because they allow interested supporters to support businesses they believe in.

Take into account your own abilities. Do you offer a novel, intriguing, or alluring take on food or dining at your restaurant? Is there a backstory you could tell that would make investors more interested in funding your new restaurant? Crowdfunding is something to consider if you want to open a restaurant but don’t have any initial capital. Crowdfunding campaigns can be a great way to gauge public interest in a venture before it’s even up for business.

Try to get a loan for your restaurant

A small business loan could be the answer to the question of how to operate a small restaurant with no money (or even how to open a larger one). The expenditures of opening a new restaurant might be covered by applying for a small business loan.

The question then becomes where one should apply for such a loan. Benefit from the SBA’s openness, promptness, and equity when applying for a loan.  We advocate for both the SBA 7(a) loan and the microloan.

If you want to get off to a good start, an SBA 7(a) loan could be the way to go. If everything goes through, you’ll have access to $5 million to put toward construction, property acquisition, materials, and machinery.

SBA’s microloan is the greatest way to open a diner with no money if you want to take things slowly and not risk too much. A loan of up to $50,000 is made available for any purpose other than the purchase of physical structures. If you’re thinking about opening a food truck, give this some thought.

Local funding options could work

A restaurant can also be opened through the use of local funding opportunities. Associations on the local level may be willing to provide financial aid in the form of loans or grants if they are attempting to attract new businesses to the area.

Investigate the financial resources of your immediate neighborhood. I was wondering if the city provided any grants to start-up businesses. Is there a local restaurant group you might approach for a loan? Find out whether any grants or other financial aid are available by doing some digging.

Try courting investors

One of the best ways to launch a restaurant with no money is to find an investor to collaborate with. An investor will back your plan if they believe it has the potential for financial gain. Some private investors may prefer a loan-like arrangement in which they get periodic payments from you; others may prefer to buy a stake in your new eatery and share in the profits as the business expands.

Start out small

Even if you know how to start a restaurant with no money, it can be difficult to secure the necessary funding in some cases. It may be difficult to attract investors, even if you have a fantastic idea for a restaurant, if no one is familiar with it or the services it offers.

But if you start out modestly, you might be able to attract customers, gain experience, and create a loyal following that will return again and again to your eatery.

Types of restaurant business loans

There are various types of business loans available for restaurants. Some common types include:

Business Acquisition Loans

These loans provide financial support for entrepreneurs looking to acquire an established restaurant or establishment. Whether you’re a seasoned restaurateur seeking to expand your portfolio or a new entrant into the industry, these loans offer the opportunity to invest in a proven business model. By financing the purchase of an existing restaurant, you can tap into its existing customer base, brand reputation, and operational infrastructure.

This type of financing enables you to take advantage of a turnkey solution, reducing the risks associated with starting from scratch. It provides a pathway to quick market entry and the potential for accelerated growth in the vibrant and competitive restaurant industry.

Equipment Financing

Specifically tailored for the unique needs of restaurant owners, these financing options are designed to facilitate the acquisition or leasing of essential equipment. Whether it’s kitchen appliances, furniture, point-of-sale (POS) systems, or other operational tools, this type of financing provides restaurateurs with the means to acquire the necessary equipment without upfront capital outlay.

By offering flexible repayment terms and competitive interest rates, restaurant equipment financing empowers businesses to modernize their operations, enhance efficiency, and deliver exceptional dining experiences to their customers. It enables restaurants to stay ahead of the competition and adapt to evolving industry trends by ensuring they have access to the latest equipment and technology.

Working Capital Loans

These loans offer financial support to cover the day-to-day operational needs of restaurants. Whether it’s managing payroll, purchasing inventory, or addressing cash flow gaps, these loans provide the necessary funds to ensure smooth and efficient business operations.

By providing access to working capital, restaurant owners can meet their immediate financial obligations, maintain adequate inventory levels, and ensure timely payment of employee salaries. Additionally, these loans assist in managing cash flow fluctuations that are common in the restaurant industry, providing stability and support during both busy and lean periods. With the flexibility to allocate funds where they are most needed, restaurant owners can focus on delivering exceptional dining experiences while effectively managing their financial responsibilities.

SBA Loans

The Small Business Administration (SBA) provides loan programs tailored to support restaurant owners. Two popular options are the SBA 7(a) and 504 loans. These programs offer financing solutions with favorable terms and lower down payment requirements compared to traditional loans.

The SBA 7(a) loan is a versatile option that can be used for various purposes, including restaurant acquisitions, working capital, and equipment purchases. On the other hand, the SBA 504 loan focuses specifically on long-term fixed assets such as real estate and major equipment.

These SBA loan programs aim to promote entrepreneurship in the restaurant industry by providing accessible and affordable financing, helping restaurateurs establish, expand, or enhance their businesses with reduced financial barriers.

Lines of Credit

A revolving line of credit offers restaurant owners the flexibility to access funds as needed, providing a valuable tool for effectively managing cash flow fluctuations and unexpected expenses. With a revolving line of credit, restaurateurs have a predetermined credit limit and can withdraw funds up to that limit. They only pay interest on the amount they borrow, making it a cost-effective financing solution.

This revolving nature allows for funds to be repaid and borrowed again, providing ongoing access to capital whenever necessary. Whether it’s bridging short-term gaps in cash flow, covering unexpected expenses, or seizing growth opportunities, a revolving line of credit empowers restaurant owners with financial agility and peace of mind.

Invoice Financing

Invoice financing is a valuable loan option that enables restaurants to borrow against their outstanding invoices, offering immediate working capital while awaiting customer payments. With this type of loan, restaurant owners can unlock the cash tied up in unpaid invoices, providing a boost to their cash flow. Instead of waiting for customers to settle their invoices, restaurants can access a portion of the invoice amount upfront from the lender.

This allows them to cover ongoing expenses, manage operational costs, and seize growth opportunities without the burden of delayed payments. Invoice financing serves as a practical solution to bridge the gap between invoicing and payment, providing the necessary liquidity for smooth business operations and continued growth.

Expansion Loans

This loan option is specifically designed to support restaurants in their expansion efforts, whether it involves opening new locations or renovating existing ones. It provides the necessary funds to fuel growth and enhance the restaurant’s infrastructure. Whether it’s expanding into new markets, increasing seating capacity, upgrading facilities, or revamping the interior design, this loan option caters to the unique needs of restaurants seeking to evolve and improve their establishments.

By providing access to capital for expansion or renovation projects, this loan empowers restaurant owners to take their businesses to the next level, attract more customers, and create memorable dining experiences.

It’s important to explore different loan options, compare interest rates, terms, and eligibility requirements to choose the most suitable loan type for your restaurant’s specific needs.

How hard is it to get a loan for a restaurant?

Obtaining a loan for a restaurant can be challenging due to various factors. Lenders typically assess the risk associated with restaurant financing, considering factors such as industry volatility, competition, and high failure rates. The difficulty of getting a loan depends on several factors, including:

1. Creditworthiness: A strong personal and business credit history increases the chances of loan approval and favorable terms.
2. Business Plan: A well-prepared business plan that demonstrates the restaurant’s viability, competitive advantage, and growth potential is crucial in securing a loan.
3. Financial Stability: Lenders assess the restaurant’s financial health, including revenue projections, profitability, and cash flow management.
4. Collateral and Down Payment: Providing collateral or a substantial down payment can improve loan eligibility and terms.
5. Industry Experience: Previous experience in the restaurant industry can enhance credibility and improve loan prospects.
6. Market Conditions: Economic factors and market conditions can impact lenders’ willingness to finance restaurant ventures.
7. Loan Type and Lender Criteria: Different loan types and lenders have varying requirements, so exploring multiple options can increase the chances of finding a suitable match.

It’s advisable to consult with lenders experienced in restaurant financing, work on improving creditworthiness, and prepare a compelling business plan to enhance the likelihood of obtaining a loan for a restaurant.

What credit score is needed to buy a restaurant?

The credit score requirements for a restaurant loan can vary depending on the lender and the specific loan program. Generally, a higher credit score increases your chances of qualifying for a loan and obtaining more favorable terms.

While there is no fixed minimum credit score requirement, a credit score of 650 or above is often considered favorable for restaurant loan eligibility.

However, some lenders may be more flexible and consider lower credit scores depending on other factors such as your business plan, financial projections, collateral, and industry experience. It’s important to research different lenders and loan options to find the best fit for your specific credit situation.

What Can Restaurants Use Business Loans For?

Restaurants can utilize business loans for various purposes, including:

• Start-up Costs: Covering expenses like lease payments, permits, licenses, and initial inventory.
• Equipment Purchase/Upgrade: Buying or upgrading kitchen equipment, furniture, POS systems, or technology infrastructure.
• Renovations and Remodeling: Updating the restaurant’s interior, layout, decor, or outdoor dining areas.
• Working Capital: Managing day-to-day expenses, payroll, purchasing inventory, and maintaining cash flow stability
• Marketing and Advertising: Implementing marketing campaigns, social media advertising, website development, or hiring marketing professionals.
• Expansion and Growth: Opening new locations, franchising, expanding menu offerings, or diversifying revenue streams.
• Staff Training and Development: Investing in employee training programs, certifications, or professional development.
• Debt Consolidation: Consolidating high-interest debts or merchant cash advances into a more manageable loan.

Business loans provide flexibility for restaurant owners to fund critical aspects of their operations, seize growth opportunities, and ensure long-term success in a competitive industry.

Alternative Starts You Can Consider

Nobody says that you have to start a restaurant with, well, a restaurant. It can definitely be something you build towards. If you want to be in the service industry, you need to make sure that your food is top-notch. To do that, here are a few things you can start instead:

• Starting a food truck business is less of a commitment than opening a full-fledged restaurant. The low operating costs of a food truck are one of their greatest advantages. There will be no rent or utility bills to pay. You won’t need to maintain an extensive kitchen staff or a stocked bar. Without a website or other forms of traditional advertising, marketing can be conducted entirely through social media. The initial investment in a food truck is much lower than it would be for a typical restaurant, but the time and effort required are still comparable to those of any small business.
• Doing some self-catering work is a simple approach to getting a feel for the restaurant business. Menu planning and pricing, advertising, budgeting, food preparation, customer service, insurance, and bookkeeping are all necessary for any catering event, no matter how small. If, after a few catering contracts, you are still enthusiastic about launching your restaurant, you should do so.