Restaurant Business Loans: Funding Options and Qualification Criteria

So you wanna open up your own restaurant or food truck, huh? I feel ya. The food biz can be super rewarding, with all the happy customers and creative menu options. But it also takes some serious dough to get it off the ground. Like you gotta rent a space, buy equipment, hire staff – it adds up fast.

Getting funding lined up is key. Banks and lenders wanna see you’ve done your homework before they fork over the cash. In this article, I’ll break down the main loan options for restaurants and what you’ll need to qualify.

Types of Restaurant Loans

There’s a few main types of funding to look at:

SBA 7(a) Loans

These loans from the Small Business Administration guarantee money that banks provide to restaurants. So you borrow from a bank, but the SBA guarantees most of it to the bank in case you default. This makes banks way more willing to lend.

The max amount is $5 million, with typical loans around $350k. The rates and terms vary by lender but are typically pretty reasonable.

To be eligible, your restaurant needs to meet the SBA’s size standards – like under 500 employees for most restaurant categories.

SBA 504 Loans

Another neat SBA loan option is the 504 loan. With these, a bank provides 50% of the loan amount, a nonprofit lender covers up to 40%, and you put down at least 10% as the business owner.So if you needed $500k total, the breakdown would be:

$250k from a participating bank
$200k from a Certified Development Company (the nonprofit lender)
$50k from you

The CDC loan piece has a really low, fixed interest rate and a longer repayment term. This makes the borrowing cheaper overall. Plus you can use it for major costs like land, buildings, equipment, etc.

USDA Business & Industry Loans

If you’re opening up a restaurant in a rural area, check out the U.S. Department of Agriculture’s B&I loan program. They offer up long-term, low-cost funding for businesses that create jobs in rural communities.

Loans range from around $10k – $25 million, with super flexible terms. The rates are also set really low – as of 2024 less than 3% fixed for up to 30 years.

These loans can fund pretty much any business cost associated with getting your restaurant running. The only catch is – yup, you gotta be rural. Your town needs under 50,000 people to qualify.

Conventional Small Business Loans

If government loans aren’t your jam, traditional banks like Chase, Wells Fargo and Bank of America all offer small business loans too.

They typically offer term loans up to $500k for new businesses, with repayment periods around 3-7 years. Interest varies based on your financials, credit score, etc but expect rates from 5% – 10%.The nice thing is you can use these loans pretty flexibly – for equipment, operating expenses, inventory, renovations, and more. The downside is they often require strong personal credit and collateral.

Restaurant Equipment Financing

If you just need money for gear – like stoves, fridges, point of sale systems – equipment financing lets you borrow specifically for large purchases.

Lenders like Credibly and National Funding offer loans up to $500k for new and used equipment. You usually just pay a percentage down. The loans are tied directly to the value of the equipment.

The repayment timeline is shorter too – around 3-5 years. And it leaves you flexibility in your other business banking relationships.

Merchant Cash Advances

Okay this isn’t technically a loan, but merchant cash advances help restaurants access quick capital based on future credit card sales.

Companies like Fundbox and Kapitus offer cash up front in exchange for a cut of your daily card transactions until it’s paid back – usually within 6-12 months. There’s no fixed repayment schedule.

The nice perk is quick access to funds without a strict credit check. But the rates can be steep – some providers charge back 2-3X what they advanced you. So it’s good for short term gaps only.

Qualifying for Restaurant Loans

To get any of these funding options, you’ll need to demonstrate your restaurant is a good bet. Here’s a high level checklist:

Good Personal Credit

For all small biz loans, your personal score plays a role. Usually 680+ is best for optimal rates/terms. If your score is lower, take time to improve it first.

3-5 Year Business Plan

Lenders wanna see detailed financial projections that show how you’ll spend the money and pay it back. Provide realistic costs, operating expenses, staffing plans, and expected revenue.

Proven Restaurant Experience

Your background and credentials will be heavily reviewed. Highlight any past restaurant, food service, or hospitality experience on your resume. Formal training helps too.

20-30% Cash Injection

Banks like seeing you invest savings into the business too. Most want 20-30% or more cash injected based on the total funding needs. This demonstrates commitment on your end.

Collateral

For larger or longer term loans, collateral like home equity or business equipment is often required. This gives the lender an asset to collect if you default the loan.

Incorporation Documents

Formal registration showing your restaurant’s legal formation like articles of incorporation helps. This proves you’re running a real business.

Licenses & Permits

Health permits, food handler certs, liquor licenses, sales tax IDs – gather as much of this stuff ahead of time as you can. It shows attention to legal details.

With these pieces in place, you’ll put your best foot forward to get approved. Even then, expect lots of negotiating on rates, terms, budget approvals, and requirements. It ain’t easy! But with some hustle and smart planning, you can line up the financing to start serving up quality grub in no time.

Let me know if you have any other questions!

Resources

Videos

How to Write a Restaurant Business Plan

Articles

8 Tips for Writing a Winning Restaurant Business Plan

10 Expert Tips for Putting Together a Tasty Restaurant Business Plan

Restaurant Business Loans: Funding Options and Qualification Criteria