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Restaurant Business Loans: Funding Options and Qualification Criteria

Opening and operating a restaurant can be an extremely rewarding yet challenging business venture. With high startup costs, tight margins, and a highly competitive landscape, securing funding is crucial for any aspiring restaurateur. This article explores the various funding and financing options available for restaurant owners, as well as eligibility requirements to qualify for small business loans.

Types of Restaurant Loans

There are several loan types suited for food service businesses at different stages of growth:

SBA 7(a) Loans

Part of the Small Business Administration’s loan programs, the 7(a) loan provides financing up to $5 million for purchasing real estate, equipment, working capital, and more. The SBA guarantees a portion of the loan to the lender, allowing for lower interest rates and longer repayment terms. Qualifications depend on time in business, credit score, collateral, and other factors.

As shared on Reddit, 7(a) loans can fund startups under certain circumstances, such as having a strong business plan and expertise in the restaurant industry.

USDA Business & Industry Loans

For rural communities, the USDA Business & Industry loan program offers up to $25 million to develop businesses that create jobs. Restaurants can use the loan for construction costs, equipment purchases, working capital, and refinancing debt. Eligibility is based on location, ability to repay, and business purpose.

According to this Quora thread, USDA looks for realistic financial projections, sufficient equity, credit history, and community economic need when approving B&I loan applications.

Commercial Real Estate Loans

Since restaurants require a physical location to operate, commercial real estate loans help purchase or refinance land, buildings, and properties. As noted on Avvo, typical loan terms run 10-25 years with interest rates based on property type, location, loan-to-value ratio, and other factors. The borrower’s financial strength and credit score also determine eligibility.

Equipment Financing

From stoves, ovens, and grills to dishes, furniture, and point-of-sale systems, restaurants need specialized equipment to function. Equipment financing allows spreading out these major equipment costs over 2-7 years. Interest rates vary from around 6% to over 20% depending on credit rating, down payment, and other qualifications.

Loan Qualification Criteria

Meeting eligibility requirements is key to securing financing for a restaurant venture. Some of the main criteria lenders evaluate include:

Credit Score & History

According to FindLaw, a credit score over 700 gives the best shot at approval, while scores below 650 often lead to denial or very high interest rates. Your personal and business credit reports also factor in, revealing information on existing debts, payment history, collections, bankruptcies, and more.

Cash Flow & Profits

Lenders need to see historical and projected financials proving your restaurant can repay the loan. As covered on this Reddit thread, cash flow projections should show sufficient net operating income to cover the new debt service. For startups, 3-5 year projections are scrutinized along with assumptions behind the numbers.

Collateral

For loans over $100-250k, most lenders require collateral to secure the financing. Real estate, equipment, securities, inventory, and business assets like liquor licenses or franchise agreements are commonly pledged. The assets must hold enough value to cover the lender’s exposure if you default. Stronger collateral allows for better loan terms.

Equity Investment

While not always mandatory, putting your own “skin in the game” with an equity injection inspires confidence in lenders. For startups especially, 20-30% or more of total capital needed should come from personal savings, friends/family, home equity, retirement accounts, or other sources.

Management Team & Experience

Your expertise and capacity to operate a successful restaurant can outweigh other deficiencies when seeking financing. As shared in this Quora discussion, experience managing or working in restaurants helps demonstrate you can handle the challenges of this industry.

Where to Apply for Restaurant Loans

Many options exist when it comes to submitting loan applications for your restaurant concept:

Banks

National, regional, and local banks provide various small business loan programs, including restaurant-specific loans and lines of credit. Developing a relationship with bankers early allows tapping into their expertise navigating financing options. Based on your situation, they may facilitate SBA loans or other government-guaranteed programs.

Credit Unions

Like banks, credit unions offer small business lending services such as term loans, lines of credit, and credit cards. According to this Reddit comment, credit unions may feature lower rates and fees compared to big banks. Loan amounts also tend to be smaller, catering to very small businesses.

Online Lenders

A newer option, online lenders like Kabbage, OnDeck, and Fundbox provide fast small business loans and lines of credit. However, this convenience and speed comes at a price with interest rates often exceeding 10-30%. Thus this Quora post advises using online lenders sparingly and when traditional financing is unavailable.

Government Agencies

Beyond the SBA, government bodies like the USDA, CDC, and municipal agencies run special loan programs assisting restaurants. State and local initiatives can target economic growth, commercial district revitalization, job creation, and other community development goals through subsidized lending.

Peer-to-Peer Lending

Using online platforms like LendingClub and Prosper, peer-to-peer loans allow borrowing from individual investors instead of institutions. This expands funding sources beyond traditional banks. However, this Redditor suggests peer lending works better for supplemental funding rather than fully financing restaurants.

The Bottom Line

Opening a restaurant entails significant upfront and ongoing investments. From real estate and buildouts to equipment and inventory, costs add up quickly. Carefully researching funding options, understanding qualification criteria, and matching the loan purpose to the right lending vehicles paves the way for securing restaurant financing. Consultation with lawyers, accountants, bankers, and other advisors also helps navigate what can be an intricate process. With proper planning and preparation, restaurant owners can obtain the necessary backing to turn vision into reality.

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