Tips for Selecting the Right Financing Option for Your Restaurant Business

Updated on:
April 14, 2023

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As a restaurant owner or aspiring restaurateur, you know that the restaurant industry is competitive and requires significant investment. The right financing option can help you succeed in this challenging market. This comprehensive guide will walk you through various financing options, including merchant cash advances, and provide you with the necessary information to select the best option for your restaurant business.

1. Assess Your Restaurant’s Financial Needs

Before exploring financing options, it’s crucial to take a comprehensive look at your restaurant’s financial needs. This assessment will help you determine the amount of money required upfront and provide a clear picture of the resources needed to grow and sustain your business. Here are several aspects to consider:

Startup Costs

If you’re launching a new restaurant, you’ll need to estimate the initial investment required to get your business up and running. Startup costs can vary significantly depending on the type and size of the restaurant, as well as the location. Some common startup expenses include:

  • Lease or purchase of a commercial space

  • Construction, renovations, and interior design

  • Licenses, permits, and insurance

  • Initial inventory and supplies

  • Marketing and promotion for the grand opening

Equipment and Supplies

The right equipment is essential to the smooth operation of any restaurant. Assess your current equipment needs and plan for future purchases as your business grows. Equipment and supplies may include:

  • Kitchen appliances, such as ovens, grills, fryers, and refrigerators

  • POS systems and other technology

  • Furniture, fixtures, and decor

  • Dinnerware, glassware, and utensils

  • Cleaning and maintenance supplies

Consider both the upfront costs and the ongoing costs associated with equipment maintenance, repair, or replacement.

Operational Expenses

Operational expenses are the ongoing costs required to run your restaurant business. It’s essential to clearly understand these expenses to ensure you have adequate funding to cover them. Common operational expenses include:

  • Rent or mortgage payments

  • Utilities, such as electricity, gas, and water

  • Employee wages and benefits

  • Food and beverage inventory

  • Marketing and advertising

  • Insurance and taxes

  • Maintenance and repairs

Working Capital

Working capital is the money needed to cover day-to-day expenses, such as payroll, rent, and inventory purchases. Maintaining sufficient working capital is vital to ensure your restaurant can operate smoothly, even during slow periods or unexpected downturns.

Growth and Expansion

As your restaurant business becomes more successful, you may need additional funding to support growth and expansion. This can include opening new locations, renovating or expanding your existing space, adding new menu items, or launching new marketing campaigns. Consider the potential costs associated with these endeavors and factor them into your financing needs.

2. Review Your Credit History and Score

Your credit history and score play a critical role in determining your eligibility for various funding options. Lenders use these factors to assess the level of risk associated with providing funds to your business. Understanding and improving your credit can increase your chances of securing the most favorable financing terms. Here are some key points to consider when reviewing your credit history and score:

Examine Your Business Credit Score

The companies providing business financing will evaluate your business credit score. The business credit scoring model is different from personal credit scores and takes into account factors such as:

  • Payment history with suppliers and vendors

  • Credit utilization of your business lines of credit

  • Public records, such as bankruptcies, liens, and judgments

  • Length of time your business has been in operation

  • Company size and revenue

To improve your business credit score, establish a positive payment history with suppliers and vendors, responsibly manage your business credit utilization, and maintain accurate financial records.

Review Your Credit Reports

Regularly review your personal and business credit reports to identify potential errors or discrepancies that could negatively impact your credit scores. You can obtain a free annual credit report from each of the three major credit bureaus – Equifax, Experian, and TransUnion – for your personal credit. You can request a report from credit bureaus such as Dun & Bradstreet, Experian Business, and Equifax Business for your business credit report.

If you find any inaccuracies in your credit reports, take steps to dispute the errors and have them corrected. This can result in an immediate improvement in your credit scores.

Plan Ahead

Improving your credit scores takes time and effort. Start working on your credit well in advance of applying for financing to increase your chances of securing favorable terms. By being proactive and monitoring your credit, you can address any issues that may arise and ensure you’re in the best position possible when seeking financing for your restaurant business.

3. Know the Types of Financing Options for Restaurant Businesses

A diverse range of financing options is available to support your restaurant’s unique needs. From traditional bank loans and Small Business Administration (SBA) loans to equipment financing, business credit cards, and non-loan options like merchant cash advances, each financing solution offers its own set of advantages and eligibility requirements.

SBA Loans

The Small Business Administration (SBA) offers several types of small business loans. SBA loans are popular due to their lower interest rates and longer repayment terms compared to traditional bank loans. Some common SBA loan options for restaurant businesses include:

  • 7(a) loans: General-purpose loans for working capital, equipment purchases, and operational expenses

  • CDC/504 loans: Designed for commercial real estate loans and major equipment purchases

  • Microloans: Smaller loans for startups and new businesses

With low interest and loan amounts of up to $5 million, SBA loans are often the least expensive option for entrepreneurs looking for restaurant financing. However, the process of acquiring SBA loans is arduous and eligibility is more difficult than it is for other types of financing.

Traditional Bank Loans

A bank loan is another option for small business owners seeking financing. Term loans provide a lump sum for specific purposes which must be repaid over a pre-determined period of time (hence term loans). Several other types of loans also fall under the umbrella of term loans, including short- and long-term loans.

Equipment Loans

Restaurant equipment financing is designed specifically for equipment purchases, such as ovens, refrigerators, and POS systems. These loans often have lower interest rates than traditional loans and may not require a personal guarantee.

Equipment loans work by holding a new, upgraded, repaired, or rented piece of equipment as collateral for the loan itself. That protects lenders: if the borrower is unable to repay the loan for some reason, the lender will repossess and sell it.

Many types of restaurants depend on specific and expensive equipment: pizza ovens, gigantic cooktops, keg coolers, and more. Choosing an equipment loan as a restaurant financing option can save money on getting the necessary equipment.

Business Credit Cards

A business credit card can help cover short-term expenses and provide additional cash flow. They also offer rewards and benefits, such as cashback or travel points, which can be beneficial for business owners.

Business credit cards work much like your personal cards: you’ll be given a credit limit and can spend up to that limit, making payments and paying interest only on what’s spent.

Alternative Financing: Merchant Cash Advances (MCAs)

A merchant cash advance (MCA) is a financing option for restaurant businesses that generate revenue through credit card sales. MCAs are not loans; they provide a lump sum in exchange for a percentage of your future credit card sales. This type of financing is ideal for businesses with inconsistent cash flow, as the repayment is based on a percentage of sales rather than fixed monthly payments.

4. Consider Important Factors When Selecting a Financing Option

Interest Rates, Factor Rates, and Repayment Terms

Interest rates, factor rates (used with MCAs), and repayment terms vary among financing options. Traditional bank loans and SBA loans typically offer lower interest rates than alternative lenders or short-term loan options. Ensure you understand the repayment terms and compare rates before selecting a financing option.

Application Process and Eligibility Requirements

The application process and eligibility requirements also differ among financing options. Traditional banks often have more stringent requirements, while online lenders and alternative lenders may have a more streamlined application process.

Speed of Funding

The speed at which you receive funds can be critical when selecting a financing option for your restaurant business. Traditional bank loans and SBA loans may take longer to process, while online lenders and short-term loans can provide funds more quickly. If you need immediate access to cash for operational expenses or new equipment, consider financing options with faster funding times.

Non-loan products like merchant cash advances can sometimes get funding in your bank account the day after you apply.

Collateral and Personal Guarantees

Some financing options may require collateral or personal guarantees. Collateral refers to assets, such as equipment or real estate, that can be seized if you fail to repay the loan. A personal guarantee means you are liable for repaying the loan, putting your assets at risk. Carefully consider the potential risks associated with each type of financing before making a decision.

Flexibility of Use

The flexibility of funds’ usage can also impact your financing choice. Some financing options, like equipment loans and commercial real estate loans, have specific purposes and cannot be used for other expenses. On the other hand, options like business lines of credit and working capital loans provide more flexibility in how you can use the funds.

5. Tips for a Successful Financing or Loan Application

Follow these tips to improve your chances of securing financing for your restaurant business:

  • Develop a solid business plan: A well-crafted business plan is essential when applying for financing. It should include detailed information about your restaurant concept, target market, financial projections, and marketing strategies.

  • Maintain accurate financial records: Funding providers will review your financial records to determine the health of your business and your ability to repay the loan. Ensure your records are up-to-date and accurate.

  • Be prepared to provide personal financial information: Lenders or cash advance providers may require personal financial information, such as tax returns and credit scores, to assess your creditworthiness.

  • Research and compare multiple financing options: Take the time to research and compare various financing options, including the cost of financing, repayment terms, and eligibility requirements.


Selecting the right financing option for your restaurant business is crucial for its success. Assess your financial needs, review your credit history, and explore various financing options, including SBA loans, traditional bank loans, equipment loans, crowdfunding, business credit cards, and non-loan options like MCAs.

Consider factors such as interest rates, factor rates (for MCAs), repayment terms, the application process, funding speed, collateral requirements, and flexibility of use when making your decision. By following these tips and conducting thorough research, you can secure the best financing option for your restaurant business and set yourself up for long-term success.

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