Restaurant Business Loans Explained
Of the seven restaurant business loan types outlined above, you’ll need to decide which loan is right for you. Here we’ll explain the features of each of these loans in detail to make your choice easier.
1. SBA Loans
Created in 1953, the Small Business Administration helps entrepreneurs secure funding and supports the interest of small businesses. SBA restaurant business loans cover expenses like start-up costs, expansion, equipment, working capital, inventory, and real estate. Unfortunately, limited loan amounts, a lengthy approval process, and bad credit can deter borrowers. Ranked the #1 SBA lender, we recommend Live Oak Bank, who specializes in small business loans. Their online application process eases uploading documentation and monitoring loan progress.
2. Merchant Cash Advance
Merchant cash advances are lump sum payments available to borrowers using future credit/debit card sales as repayment. Fast cash with no collateral upfront doesn’t require good credit; however, high interest rates and daily minimum payments can disrupt cash flow. Requiring only three months in business and a minimum personal credit score of 550, Rapid Finance is our choice for merchant cash advances with funds of up to $500,000 available in 24 hours.
3. Business Line of Credit
Fifty percent of all business owners experience cash flow issues. A business line of credit can provide flexible access to capital for recurring expenses and seasonal business flow. Like a credit card, with a spending limit and monthly or yearly payments, this revolving line of credit allows you to borrow the minimum amount you need while only paying interest on that amount. A secured credit line requires collateral, but the payoffs may include a considerable loan amount and a lower interest rate.
Unsecured credit lines may be more expensive due to more lender risk, but no collateral is required. Wells Fargo takes the top spot here as a national bank with extensive experience lending to startups and young businesses with some of the lowest interest rates on the market.
With over six million crowdfunding campaigns last year and $17.2 billion generated in North America alone, this industry is expected to grow by at least 14% next year. Creating and maintaining a social media presence helps reach a vast audience. Business owners present their ideas or products in exchange for benefits such as free meals, invitations to the opening, or monthly reservations. With no credit checks, collateral, or financials required, campaigns take 11 days to prepare and run for nine months.
The crowdfunding experience can be time-consuming with no guarantees of reaching your funding goals. This growing market could reach $300 billion by 2030, so the time and effort may be worth it. We recommend you visit the following three sites for more crowdfunding information:
5. Commercial Real Estate Loans
For projects designed to purchase new/existing commercial property or renovate an existing structure, commercial real estate loans use your property as collateral to secure funding. Commercial real estate loans, or business loans to buy a restaurant, offer flexible interest rates, payment schedules, and repayment terms that compliment your business schedule and budget. Receiving tax breaks while building equity adds value to your business.
Most banks require a 20% down payment, with some requiring a minimum of at least two years in business under the current owners and $250,000 in yearly revenue. Be wary of short-term (5-7 years) “balloon loans,” which offer low monthly payments with the entire balance due at the end.
With over $290 billion in U.S. commercial loans, 4,400 branches, and a robust mobile banking system, we recommend Bank of America as a solid choice for your commercial real estate loan needs.
6. Equipment Financing
Equipment financing is a form of small business lending that provides capital for purchasing new and used equipment. You can borrow up to 100% of the equipment value, which is then paid back over time with interest. Lenders can also finance capital using paid-off equipment as collateral without a personal guarantee. Leasing equipment tends to be expensive. Sale-leaseback loans allow you to take a small loan on paid-off equipment to fund small restaurant projects, with lower interest rates and more attractive payback terms than other forms of funding.
Balboa Capital is our choice for equipment financing with its same-day processing, higher loan amounts, one year in business, and $100,000 in yearly revenue.
7. Invoice Factoring Vs. Invoice Financing
Referred to as accounts receivable financing, restaurant owners get a capital advance in exchange for unpaid invoices. Invoice factoring involves selling your outstanding invoices to an invoice factoring company at a discount, while invoice financing requires paying off the advanced capital on unpaid invoices with interest. Lenders finance 85% of the total invoice and the final 15% upon full payment. These loans are easier to get, and freeing up your cash flow is always a win-win situation.
We recommend BlueVine, which will fund up to $1 million to borrowers with a 530 credit score, who have been in business for at least three months, and show an annual revenue of $120,000.