Options for Restaurant Business Loans & What You Need to Apply

When it comes to running a restaurant, there are a number of reasons why a business loan may be needed at one point or another.

It is not uncommon for small or new businesses to experience cash flow issues and turn to loans to cover the various costs of doing business. However, this is not the sole reason a restaurant may need to seek additional financial funding. Other situations may include-

  • Purchasing new equipment
  • An unforeseen dip in sales
  • Increase rent or cost of supplies
  • Rebranding
  • Expanding or renovating operations
Whatever the reason and no matter the size or industry of the restaurant business, there are a number of loan options available to provide financial support.

Loan Options

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With plenty of reasons to seek out loans and financing, fortunately, there are plenty of options available.

Traditional bank loans
There are pros and cons to a traditional brick and mortar bank term loan. While the details of this process will vary on the specific type of loan and bank, they do tend to have long application processes. They also expect the loan to be backed with business or personal collateral and tend to bill monthly. Tradition loans have a flexible length of time required for payback; although, they charge compound interest.

Alternative Loans
Alternative Loans can be granted by select banks or lenders. Unlike a brick and mortar loan, alternative loan lenders gauge a business's viability for a loan based on performance and other related factors rather than being heavily based on an individual's credit score. For this reason, lenders are more likely to grant funding to new businesses.

Small Business Administration Loan
An SBA Loan comes from the U.S Small Business Administration. However, when applying for this, it's important to keep in mind that the SBA does not directly lend the money itself but relies on a network of partner lenders.

There are two types of SBA loans - working capital and fixed assets. In order for a business to apply for an SBA loan, it needs to be a non-profit business operating in the US, with an owner or founder having invested equity and unable to seek funds from any other source. They also require personal or business collateral and request significant financial statements and major purchasing receipts as part of the application. However, they do offer flexibility in regards to the amount of funding granted, with a maximum of $5 million.

Merchant cash advance
A Merchant Cash Advance is commonly used by businesses whose revenue comes mostly from debit or credit card sales (such as retail shops and restaurants). Through this loan option, businesses can receive a lump sum of cash in exchange for a percentage of future sales. While each lender will vary, businesses usually pay back 20 40% of the amount borrowed when using this method.

Business line of credit
Similar to the way a credit card works, a business line of credit is when the business owner is extended an offer by the alternative lender or bank to an open line of credit. However, there will generally be a spending limit, which can be paid monthly or annually before the owner can draw from additional credit.

This type of loan offers owners working capital when needed with the flexibility to choose how much they require. Additionally, this method can help build and improve a business owner's credit score.

A more recent trend for alternative financing is crowdfunding. This is when a business publishes their idea or product online and pitches it to the public as a beneficiary where investors receive perks in return (such as free product samples, special offers).

There are a variety of crowdfunding sites available online, such as GoFundMe. While this medium allows businesses to attract a broader base of investors while gaining free publicity, it also involves thinking about regulating the amount of money that can be raised and disclosure requirements regarding the business.

Necessary Documentation

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Each type of loan may require different documentation and paperwork in order to apply. However, there are 3 key financial statements most lenders will ask for to support a loan application.

Balance sheet
The balance sheet is a key document that gives an overview of the business's financial health and stability. This information reveals shareholder investment and current assets, compared to what the business owes. Lenders will use this documentation to see whether a company's assets outweigh their liabilities, which would indicate a strong fiscal standing. Balancing sheets should be put together monthly or quarterly and businesses should provide information dating back to the past three years, as well as a projected balance sheet for two years.

The profits and loss statement
Also known as the P&L statement, this showcases how the business is doing over a given period of time. This statement can be monthly, quarterly, or annually and will show statistics regarding revenue, expenses, gains, and losses within the given time period. Lenders will expect statements for the past 3 years and it's a good idea to provide a P&L forecast with projections for the next two years as well.

Cash flow forecast
Arguably the most important document is the cash flow forecast (or projected cash flow statement), which can be produced instantly using forecasting software. This financial statement provides a more detailed view of cash discrepancies within a business, such as the timing of incoming cash flow and the rate at which it leaves the company. This helps lenders see the viability of the loan and the reliability of it being repaid. Generally, cash flow forecasts should cover projections for the upcoming 12 months. It is essential to include assumptions about incoming cash, expenses (fixed and variable), and any existing funding.

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