How to Get a Restaurant Loan: What Lenders Require

A restaurant loan provides capital for food service businesses, covering startup, expansion, working capital, or equipment purchases. This financing enables owners to launch ventures, grow businesses, maintain liquidity, and navigate industry financial demands.

Types of Restaurant Loans

Restaurant owners can explore several categories of loans, each designed for different financial needs and business stages. Understanding these options helps in identifying the most suitable funding path.

Small Business Administration (SBA) Loans

Small Business Administration (SBA) loans are partially guaranteed by the U.S. government, reducing lender risk and leading to more favorable terms. The SBA 7(a) loan program offers up to $5 million for startup costs, working capital, equipment purchases, or real estate acquisition. Repayment terms can extend up to 10 years for working capital and equipment, and up to 25 years for real estate, often with lower interest rates. The SBA 504 loan program focuses on fixed assets like real estate or major equipment, often requiring a partnership with a conventional lender for a portion of the financing.

Traditional Bank Loans

Traditional bank loans include term loans and lines of credit. A term loan provides a lump sum, repaid over a fixed period, usually between one and seven years, with set interest payments. These are suitable for significant investments such as large-scale renovations, property purchases, or substantial equipment acquisition. A line of credit offers revolving access to funds up to a predetermined limit, allowing restaurants to draw money as needed and pay interest only on the amount used. This flexibility makes lines of credit useful for managing cash flow fluctuations, purchasing inventory, or covering unexpected operational expenses.

Alternative and Online Lenders

Alternative and online lenders offer financing options that provide quicker access to funds, often with less stringent requirements than traditional banks. Merchant cash advances (MCAs), while not technically loans, involve a lender purchasing a portion of a restaurant’s future credit card sales at a discount. Repayment occurs daily or weekly as a percentage of credit card transactions, making them suitable for immediate, short-term needs, though they often come with higher effective costs. Short-term loans provide a lump sum repaid over a shorter duration, generally six to 24 months, for immediate cash flow gaps or smaller equipment purchases.

Equipment Financing

Equipment financing is tailored for acquiring restaurant equipment, such as ovens, refrigerators, point-of-sale (POS) systems, and dining furniture. The purchased equipment itself serves as collateral for the loan, which can cover up to 100% of the equipment cost. Repayment terms usually align with the estimated lifespan of the equipment, often ranging from three to seven years. This financing allows restaurants to upgrade or acquire machinery without depleting working capital.

Working Capital Loans

Working capital loans cover day-to-day operational expenses. These funds can be used for payroll, rent, utilities, purchasing inventory, or marketing initiatives. Such loans are short-term, often repaid within six to 18 months, and can be unsecured or secured by assets like accounts receivable. They are beneficial for managing seasonal fluctuations in revenue or covering periods when expenses exceed immediate income.

Preparing Your Application

Thorough preparation is crucial before submitting a loan application. Gathering information and documents ensures a smoother experience.

Business Plan

A business plan guides your restaurant’s operations and financial viability. It should begin with an executive summary, providing a concise overview of your business concept, mission, and objectives. A detailed company description should follow, outlining the legal structure, management team, and unique selling propositions. Include a comprehensive market analysis, identifying your target audience, assessing market trends, and evaluating competitors.

The plan must also articulate your service or product line, detailing your menu offerings, service style, and any dining experiences. A marketing and sales strategy should explain how you plan to attract and retain customers. The plan requires detailed financial projections for lenders to assess repayment capacity. These projections should include a breakdown of startup costs, such as leasehold improvements, initial inventory, and permitting fees.

You must present projected profit and loss (income) statements, showing anticipated revenues, cost of goods sold, operating expenses, and net income for at least the next three to five years. Cash flow projections, typically monthly for the first year and quarterly thereafter, illustrate the movement of cash in and out of the business, highlighting liquidity. Projected balance sheets, detailing assets, liabilities, and equity, provide a snapshot of your restaurant’s financial position. These financial forecasts should be realistic, supported by reasonable assumptions, and demonstrate a clear path to profitability and sustainable cash flow.

Financial Documents

Lenders require business and personal financial documents to evaluate your financial health. For existing restaurants, this includes historical income statements, balance sheets, and cash flow statements for the past two to three years, providing insight into past performance. You will also need business tax returns (e.g., Form 1120, Form 1065) and personal tax returns (Form 1040), typically for the last two to three years.

Bank statements for business accounts, usually covering the past six to twelve months, verify cash flow, consistency of deposits, and average balances. A personal financial statement (PFS) for each owner is also required, detailing personal assets and liabilities. This statement helps lenders assess the individual financial strength of the owners.

Creditworthiness

Creditworthiness plays a role in loan approval, encompassing personal and business credit scores. Lenders evaluate personal FICO scores, looking for scores above 680 for traditional loans, as an indicator of an applicant’s debt management history. Factors considered include payment history, debt utilization, and credit history length. For businesses, a business credit score, such as a Dun & Bradstreet PAYDEX score, reflects the company’s payment habits with its vendors and other creditors. Monitoring credit reports, promptly disputing errors, consistently paying bills on time, and managing revolving debt can help improve your credit profile.

Collateral

Collateral refers to assets pledged to secure a loan, reducing the lender’s risk in case of default. Common types of collateral for restaurant loans include real estate owned by the business or its principals, valuable kitchen equipment, accounts receivable, and inventory. Lenders may file a Uniform Commercial Code (UCC) financing statement, known as a UCC-1, to publicly record their security interest in these business assets.

Legal and Operational Documents

You will need to gather legal and operational documents to demonstrate your business’s legitimacy and compliance. These include business registration documents, such as Articles of Incorporation or Organization, and the Employer Identification Number (EIN) confirmation letter from the IRS (Form SS-4). Licenses and permits, including health department permits, general business operating licenses, and potentially liquor licenses, must be in order and current. If your restaurant operates from leased premises, a copy of the commercial lease agreement is required for lender review. Government-issued personal identification will be needed for all principal owners. Clearly articulating the loan’s purpose, detailing how funds will be utilized and contribute to success, is a component of your application.

The Application and Funding Process

Once all preparatory steps are complete, the next phase involves formally applying for the loan and navigating the funding process. This stage focuses on the procedural steps from submission to disbursement.

Identifying Lenders

The initial step is to identify suitable lenders based on your specific needs and the type of loan you are pursuing. Traditional banks and credit unions are often preferred for established businesses seeking lower interest rates and longer repayment terms, especially for SBA-backed loans. Online lenders may offer faster approval times and more flexible eligibility criteria, making them an option for businesses requiring quick funding or those with less extensive financial history, though often at higher interest rates. Community Development Financial Institutions (CDFIs) may also be a resource, particularly for businesses in underserved communities, sometimes offering technical assistance in addition to financing.

Submitting Application

Submitting your application package is the next procedural step. This often involves utilizing online portals, which streamline the document submission process. For traditional banks, in-person submission or secure mail services might be an option. Ensure application forms are accurately completed and prepared documents, such as financial statements and business plans, are correctly attached and organized.

Review and Underwriting

After submission, the lender initiates a review and underwriting process. This begins with an initial check for completeness, followed by due diligence where the lender verifies information. This might involve contacting references, conducting site visits, or requesting additional supporting documents. Underwriting involves a detailed financial analysis of your business plan, historical financial statements, and credit reports to assess risk and repayment capacity. Lenders may also schedule interviews with business owners to discuss their plans and experience. For secured loans, an independent appraisal of any pledged collateral will typically be conducted.

Loan Offer and Terms

If the underwriting process is successful, the lender will issue an approval and offer letter or a detailed term sheet. This document outlines the terms and conditions of the loan, including the interest rate (fixed or variable), the repayment schedule (e.g., monthly, weekly, or daily payments), and the overall loan term. It will also detail any associated fees, such as origination fees, closing costs, or administrative fees, which commonly range from 1% to 5% of the loan amount. The offer may include loan covenants, which are conditions the borrower must adhere to throughout the loan term, such as maintaining certain financial ratios or obtaining lender approval for additional debt. Reviewing these terms and understanding the total cost of borrowing is important before proceeding.

Closing and Disbursement

The final steps involve closing and disbursement of the funds. This stage requires signing legal loan documents, including the promissory note and any security agreements related to collateral. There may be pre-disbursement conditions that must be met, such as providing proof of required insurance policies or setting up specific bank accounts for loan proceeds. Once all conditions are satisfied and documents are signed, the funds are typically disbursed, often via direct deposit to your business bank account. In some cases, funds may be released in stages, particularly for large projects with defined milestones.

Post-Funding Responsibilities

Following the disbursement of funds, there are ongoing post-funding responsibilities. These include adhering to the repayment schedule. Lenders may also require periodic financial reporting, such as quarterly or annual submission of updated financial statements, to monitor your restaurant’s performance and ensure continued compliance with any loan covenants. Maintaining open communication with your lender and fulfilling these obligations supports a healthy borrower-lender relationship.