Knowing where to begin is your first issue if your restaurant needs a loan. There are many traditional banks, merchant cash advances, and financial technology firms, each with their own perks, obstacles, and repayment plans.
The success of your restaurant may depend on your ability to obtain financing. A loan could make a difference between hiring additional employees to deal with a surge in clients and offering a poor level of customer service. Operating with a restaurant loan can, at least temporarily, relieve some of the pressure that comes with becoming a restaurateur.
The most crucial thing to keep in mind while applying for restaurant loans is that, even if you are turned down for a conventional bank loan, there still are lots of other options you may look into before giving up.
The criteria for qualifying for a loan, the application form, and typical mistakes restaurateurs make while seeking funding from lenders will all be clarified in this article. Let’s start with the basics first.
Who is Eligible for a Restaurant Loan?
Any operating restaurant is eligible for hotel loans. It’s not always the case, but a restaurant may need to have been open for at least a year before requesting for a merchant cash advance or a credit from such a conventional bank. Restaurants with a short history of operation may send the sender and the recipient via non-traditional lenders with a long history of underwriting.
To borrow money from a lender, however, you most likely need to wait until your business has been operating for at least a month if you’re still in the beginning phase. Due to the risk, very few lenders will give money to a restaurant that has no history of financial stability. This does not, though, mean that you have no other alternatives. If you can show that you have prior restaurant opening experience, certain non-traditional financial firms will support the opening of your restaurant.
Why Is Getting a Loan So Hard for New Restaurants?
In order to receive a loan, banks ultimately require restaurants to put up collateral. Cash, assets, a home or other property with a commercial use can serve as collateral. However, the majority of restaurant owners who require loans simply could provide the level of security required for a bank loan. In exchange for a $50,000 loan, a bank may request $25,000 in collateral. Most restaurant owners depart with the feeling that they could probably survive without borrowing if they had $25,000.
How Should I Proceed if I Lack Collateral?
There are situations when non-traditional lenders provide a way to “collateralize” a bank loan. Broadly said, the lender will obtain a bank loan on your behalf and offer 50% collateral. Due to the bank’s own security provided by the alternative financial lender’s collateral, this permits you to obtain an unsecured loan.
Let’s imagine you’ve hit the 30-day mark or are ready to get funding to hasten the expansion of your restaurant. Now the issue is: which lender do you pick?
Making the Best Lender Selection for Your Restaurant Loan
You must know how you want to use the funds before choosing a lender for your restaurant loan.
Let’s say your goal is to obtain a $600,000 loan. You plan on spending half of it on new machinery and the other half on stock. As a result of the equipment you wish to lease serving as collateral, equipment leasing firms may be able to offer you a reduced interest rate in this situation.
The takeaway is to constantly seek for lenders who put in the effort to get to know you and your business. Instead of taking the first quick and simple loan you find online, take the time to speak with prospective lenders. Although a few internet lenders might advertise low interest rates of 3%, this is typically a monthly rate. Always compare interest rates with the length of the loan’s repayment period in mind. You’ll need to think about what you can manage because you can have a reduced interest rate but a shorter time to pay back the loan.
The process of applying for the loan begins once you have found a lender, whether it be a traditional bank or non-traditional financial lending company.
How Does the Application Process for Restaurant Loans Look?
Some non-traditional lenders just need the absolute necessities. The following basic paperwork is required when applying for a loan from a non-traditional lender:
- The request for credit, which enables the lender to check
- bank statements for the last three months
- Statement for a credit card
- a K1 from a tax return or other document relevant to the partnerships in your restaurant
- Federal Identification
- driving permit
- Unused check
Many restaurateurs may not want to spend all that time gathering a lot of evidence only to have their loan rejected and their effort squandered, which is one reason why non-traditional borrowers can be attractive. The request process is straightforward.
For a loan application, banks ask for more information. In adding to the above-mentioned documents, a business owner also must submit:
- 2 years’ worth of tax returns
- Annual financial results
- business strategy
- private finances
- all other loans listed
- Banking records
A non-traditional lender will review the application after it is submitted, which might take less than two days. The lender will contact the guarantee and landlords for an interview at that time frame. The entire procedure might well be finished in 5-7 days, assuming everybody answers their phone.
Repayment Plans for Loans
While some lenders could ask for a weekly payment, traditional bank loans frequently need monthly payments. Some merchant cash loans might even call for daily payments, which is tough to handle. Some creditors even go as far as to deduct a portion of credit card sales.
Before you sign up, be sure you are aware of the loan’s terms. Due to its risky nature, the restaurant business is susceptible to many short-term loans because most lenders want the loan agreement to terminate within a year. Look for lenders who offer loans with a longer 12- to 24-month term, as this gives you more freedom.
Typical Errors with Restaurant Loans
It can be tempting for a restaurateur to disregard excellent procedures and commit errors when they seek a loan to protect their business. Here are several blunders to stay away from it while trying to get finance for your restaurant.
Giving in to pressure to buy
Agents that are pushy and offer empty promises must be avoided. Some agents coerce restaurateurs into accepting a loan that is unsuitable for their industry or, worse yet, one that is too large for their needs. In order to ensure you get the correct restaurant financing, make sure the agent you’re dealing with approaches you in a consultative manner.
- Stacking payday loans
Avoid obtaining repeated merchant cash advances at any time. Restaurant operators may drown in high interest from merchant cash advances.
Delaying obtaining a credit line for too long
Set up your line of credit before you need it and it could be harder to get if you need it. Waiting until you’re in a horrible position will increase the probability that you’ll be refused.
Accessing private finances
Many restaurant owners frequently refinance their houses or take cash from their 401(k) to fund their businesses. One of the most essential business guidelines is to avoid from using your personal money to create a company unless you have money put aside solely for that purpose.
Keep in mind that restaurants with good operational discipline are those that succeed. Although owning a restaurant is an expensive business, with the appropriate financial strategy, you can continue in existence for so many years.