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Opening a restaurant takes a lot of work and, more importantly, money. There’s a lot of funding options out there, and we’re here to explain them. In this blog post, we will go over restaurant financing and the options to consider.

First, what is restaurant financing?

Restaurant financing refers to the money borrowed or loaned from an outside source. Restaurateurs need funding to expand their business and to succeed.

Let’s go over some of the average startup costs, according to

  • Low total cost to open $175,500
  • Medium total cost to open $375,500
  • High total cost to open $750,500

These overall costs are for independent restaurants. But, many factors that go into these costs. 

Do you plan to open a full-service restaurant? Limited service? Bar or tavern? Another cost factor is deciding whether to build or remodel a restaurant. We’ve created another blog to help identify the right restaurant to acquire. The average spending during the opening phase are:

  • Construction $200,000
  • Kitchen & Bar Equipment $95,000
  • Pre-Opening & Training $20,000

Again, these costs to open figures vary on the type of restaurant you plan to open. So, where do you get the capital for all these expenses? Let’s go over them.

Here are seven ways to get financing for opening a restaurant:

1. Business Line of Credit

A business line of credit is ideal when first opening a restaurant. A line of credit is perfect for when business conditions are always changing. In the works of getting a business up and running, there are bound to be unexpected issues that arise.

Lines of credit give owners an approved loan that they can pull funds from when needed. These days, receiving lines of credit is as easy as a few clicks online.

Lines of credit can range from $5,000 to $1 million. Several payment plans will allow owners to pay it off at their own speed. Most have loan terms between six months to five years.

In the restaurant industry, things can change very fast. That’s why having lines of credit can help prepare your business for the future. They offer the flexibility that others do not.

2. Traditional Commercial Loans

A traditional commercial loan is what people associate with bank and term loans. For the most credit-worthy applicants, a bank loan may offer the best funding for you. Banks are often attractive to people because they provide some of the lowest rates on the market. But, you may have to wait up to 6 months for approval.

With this type of funding, you can decide whether to apply for a medium or long-term loan. Banks offer more long-term loans with up to 25 year repayment periods. However, commercial finance companies offer medium-terms loans that are very versatile. Once your business is open and profitable for at least two years, you can qualify for medium-term investment.

3. Equipment Financing

Kitchen equipment and furniture can be one of the highest opening costs. It depends on the size of your kitchen and dining room, but you must budget and plan for it.

Equipment financing is a great way to get capital for these things. Here’s how it works: First, you will need to find an equipment financing lender. Then, the lender sells you the required equipment or gives you the money to buy it. An agreement will come between you and the lender on how you will pay the money back. This money will most likely be paid back monthly and with a specified interest rate.

A beneficial tool that comes with an equipment loan is that the equipment itself serves as collateral. So all your restaurant equipment can be covered with this loan.

4. Merchant Cash Advances

Traditional loans usually have a payment that is due each month. Merchant cash advances take an automated payback approach.

What does this mean? This kind of cash advance gives you a lump sum of money that you pay back every day. The lender will take a cut of your daily sales until it’s fully paid back.

Owners often turn to this kind of funding because it’s a fast and easy way to access capital. Yet, we must recognize the disadvantage that comes with it, their cost. Merchant cash advances are one of the most expensive lending options. They are an excellent short-term option for funding but leave you with expensive debt if you can’t pay it off soon.

5. Crowdfunding

Crowdfunding is one of the newest and most popular financing methods. This method is where new owners tap into social media and crowdfunding platforms to raise money. They pitch their business idea via these channels to investors, family, and friends. Many sites are accessible for crowdfunding, such as:

Each of these sites specializes in its own fixed or flexible funding. Some are better for personal financing like GoFundMe, versus equity crowdfunding like CircleUp. Kickstarter has a devoted section to restaurateurs seeking crowdfunding.

Because this is promoted on social media, it can reach a broad investor base.

6. An SBA Loan (Small Business Administration)

A Small Business Administration, or SBA, loan is a loan that is a low-interest and a long-term option for small businesses looking for financing. This loan is funded by taxpayer dollars to promote economic development in the United States. SBA loans range from as little as $20,000 and go up to $5 million. The terms range from 5 to 25 years with low-interest rates, which will vary based on each specific lender.

SBA loans are used for a variety of reasons. They can be used to start, expand, or purchase a business. Also, they are attractive to business owners who need to refinance business debt, purchase inventory or equipment, and secure working capital to cover daily business expenses.

The business needs the following requirements to be eligible for this loan:

  • Considered “small” by the SBA size standards
  • For-profit
  • Located in the United States

The SBA has three different kinds of commercial lending programs:

  1. SBA 7(a) Loan Program – Most flexible and can be used for most business purposes.
  2. CDC/504 Loan Program – Loans can go up to $13 million and can be used to fund large equipment and building purchases. These loans are strongly regulated, have low-interest rates, and long-term loans.
  3. Microloan Program – The SBA created this program for those who do not meet most commercial loan requirements. If you need an amount of $500 to $50,000, this loan option may suit you.

Get Connected

Need help finding a lender? Get connected via the SBA’s Lender Match website. It’s an online tool that connects small businesses with SBA-approved Community Development Financial Institutions (CDFIs) and other various lenders. Here’s how it works on Lender Match:

  1. Describe your needs
  2. Get matched in 2 days
  3. Talk to lenders
  4. Apply for a loan

Use the Lender Match program to get connected with a small business lender near you. Each lender will have different requirements in the application.

7. Commercial Real Estate Loans

A commercial real estate loan helps owners buy the physical restaurant building. Given that properties tend to be expensive, most buyers need a loan.

The property itself serves as the collateral for this type of loan. Commercial real estate loans can come from lenders and banks. The amount can range from $200,000 to over 20 million. Rates are typically between 5% to 30% and on a loan term of 20 to 25 years.

For a deep dive into typical loan amounts, check out this example from Fundera.

The Bottom Line

Buying and opening a restaurant is a big financial decision. That’s why it’s crucial to explore your financing options to find the one that best suits your long-term needs.

With the tools above, you’ll be well on your way to securing funding for opening your restaurant. For all the rest of your details on opening and owning a restaurant, download our ultimate checklist to help you along the journey. 

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