The Ultimate Guide to Getting a Restaurant Business Loan

The Ultimate Guide to Getting a Restaurant Business Loan
Dave Lavinsky

By Dave Lavinsky

Starting a successful restaurant requires passion, hard work and persistence. It also requires money to open a restaurant and build it out, buy equipment and finance the operation until it reaches break-even.

In this article, you'll learn how to get a business loan for your restaurant so you can make your dream of starting or growing your restaurant a reality.

Before you Begin: Create a Restaurant Business Plan

Creating a business plan is essential to getting a loan for your restaurant. Fortunately, you can use a restaurant business plan template to make the process easier.

The key elements to include in your restaurant business plan are:

  1. Executive Summary: This is a 1-3 page summary of your business plan. Highlight the key points here that you need readers to understand, mainly what type of restaurant you are launching or expanding, how much funding you need and for what purposes, and why your restaurant will be successful.
  2. Company Overview: Describe the type of restaurant you operate, how your company is organized,and any accomplishments your restaurant has achieved to date.
  3. Industry Analysis: Document the size and trends in the restaurant industry to show readers you are an industry expert.
  4. Customer Analysis: discuss the types of customers you will attract and serve.
  5. Competitive Analysis: document local competitors and show how you will be able to carve out a niche in your market. The best way to do that is by conducting a restaurant feasibility study.
  6. Marketing Plan: detail your pricing structure (e.g., premium pricing), your location, your menu, and the promotional strategies (e.g., social media marketing) you will employ.
  7. Operations Plan: detail the growth plan of your restaurant, for example, the date you hope to launch, the date when you will reach $100,000 in sales, etc.
  8. Management Team: document your team and why they have the experience and expertise to make your restaurant a success.
  9. Financial Plan: detail the amount of funding your restaurant needs and the core uses of the funds. Include 5-year financial projections including an income statement, balance sheet and cash flow statement showing that your restaurant will be able to repay any loans with interest out of operating profits.
  10. Appendix: include any supporting information in the appendix of your business plan. For example, you can include lease documents, architectural drawings, proposals from vendors for equipment and/or location buildout, menu designs, etc.

Find other business plan resources from GrowThink.

Getting Your Restaurant Business Loan

Once you've completed your business plan, you'll need to present it to banks and/or credit unions. Each may provide traditional bank loans, or a Small Business Administration (SBA) loan.

The key differences between traditional business loans and SBA loans is that SBA loans usually have longer terms and lower interest rates than conventional loans. As such, SBA loans are generally favorable to restaurateurs.

What is an SBA Loan?

The Small Business Administration (SBA) is a division of the United States federal government. The SBA seeks to assist and support American entrepreneurs. They do this through a variety of programming; of particular interest to us are their loan programs.

The Small Business Administration exists to help you raise capital.

Importantly, SBA loans do not actually come from the SBA. There is an existing network of banks that cooperate with the SBA to extend these loans. They are unique because they are backed in part by the SBA. This means the bank is partially "insured" in case somebody is unable to repay them. This encourages banks to give out more loans and to do so with more favorable terms to entrepreneurs.

When an entrepreneur applies to a participating bank for a loan, the bank reviews their application and applies for a guarantee from the SBA. If the SBA approves the loan, it means they will share the risk on that loan and be willing to cover part of the bank's loss in case the borrower defaults.

Who Is Eligible For SBA Loans?

In order to get an SBA loan, the applicant must meet certain eligibility standards. They vary in specifics from loan to loan, but the following criteria hold true in most cases. The primary consideration in the SBA loan decision process is the business' ability to repay the loan from the cash flow of the company. Other considerations revolve around the business and the business owner and particularly that your restaurant must operate in the United States or its possessions.

What is the Most Common Type of SBA Loan?

The most common type of loans backed by the SBA are 7(a) Term Loans.

7(a) Term Loans can be used for purchases of fixed assets and properties, materials, as working capital, to refinance other debt, or for various other purposes. The SBA secures between 75% and 85% of the loan, at a rate slightly above the prime rate (2-3% above, usually), on principals of up to $2,000,000, for terms ranging from 7 to 25 years.

Note that SBA Express loans (a loan that is faster to get) are an important type of 7(a) Term Loans that have maximum loan amounts of $350,000.

Tip: Be Sure to Specify the Uses of the Loan

Loans may be used for acquiring or improving restaurant real estate among other things. Loans may cover the cost of opening a new space, expanding your current location, or rebuilding the old one.

You will need to provide some basic information about the property you're buying (or building) with the loan, including what you plan to use it for (whether this is purchasing an existing restaurant that needs renovations or creating a new establishment), how much it costs and where exactly it's located. The exact requirements may vary according to your lender; however, most will ask for at least an address and some additional information. A good way to find out exactly what you need is to call your bank or credit union and ask for the requirements before starting on your loan application.

Meet a Bank Lender

If you're looking for a restaurant business loan, you should visit your local banks. Before doing so, though, keep these tips in mind:

Be prepared with numbers, when meeting a bank lender. Fortunately you'll have such figures in your business plan. You should also have a sample menu itemizing costs and prices of all the dishes you plan to serve as well as copies of any permits, licenses or certificates obtained from municipal authorities.

If you want to increase your chances of getting approved for a business loan, bring all necessary documentation with you to the meeting. In addition, be prepared with an estimated valuation of the property where your restaurant will be located (or is already located) in case the lender has additional requests regarding this matter.

Make Sure You Qualify for Such a Loan

It's also important to note that your chances of being approved for a restaurant-related business loan are greater if you have experience in the industry. If you've managed or owned other food service establishments, be ready to provide details on these businesses (such as their physical location and success rate) when meeting with your bank lender.

Having good credit will also help in acquiring a loan; however, this isn't always necessary since some lenders factor in more than just credit scores when considering applicants. Nevertheless, make sure you bring all of your paperwork with you (including bank statements and previous tax returns) so that the banker has all of the information needed to make an accurate assessment of your situation.

Open a Line of Credit with Your Existing Bank

If you already have an account with a financial institution, it can't hurt to ask them if they offer small business loans geared towards restaurant owners as well.

Some banking establishments will allow customers to apply for a line of credit that's specifically intended for those who own or manage restaurants; however, these types of transactions aren't always free of charge and may come with a minimum amount required as collateral. If the lender has additional requirements regarding this matter (such as requiring personal guarantees), make sure you fulfill all the requirements to increase your chances of being approved.

Consider Alternatives

If you want to be creative about raising money for your restaurant, you could try borrowing it from a friend or family member; however, make sure you establish the terms and conditions surrounding this type of deal before committing yourself to anything. For starters, set out how much money is required as well as the duration of time required to return it (if it's an unsecured loan). From there, both parties should agree on the interest rate that's going to apply along with any additional charges that may be applied if payment isn't made on time. Lastly, discuss what happens if one of the parties decides to end the lending arrangement early.

Other funding options include:

Borrowing From Your 401K Retirement Plan

If you've been employed by the same company for at least five years, you might be eligible to borrow up to $50k from your 401k account without penalty or having it withheld from your paychecks.

Taking Out a Second Mortgage on Your Home

If you're eager to open your restaurant, another possibility is to take out a second mortgage on your home.

Taking Out a Home Equity Loan

As an alternative to taking out a second mortgage on your home, you could also take out a home equity loan. This type of financial transaction is slightly different from the one mentioned above in that it's sometimes done with a credit-worthy co-signer who shares responsibility for repaying the debt when necessary. In regards to when this option would be preferable over mortgaging your home, it's typically best suited for borrowers who aren't planning on tying up their entire nest egg just to finance their business.

Closing Thoughts: The Ultimate Guide to Getting a Restaurant Business Loan

When it comes to opening a restaurant, the steps are fairly straightforward: create your business plan and then present it to local bankers, particularly those who participate in the SBA's 7(a) loan program. Come prepared to meetings with these bankers to impress them and convince them that your restaurant will be successful and will be able to repay any loans they give you out of future operating income.

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Dave Lavinsky
Dave Lavinsky

Dave is the president and co-founder of Growthink. Over the past 20+ years, Growthink has helped over 1 million entrepreneurs and business owners to develop business plans to raise capital and grow.