Featured Expert
Katie Taylor
Katie Taylor Assistant Vice President – Communications, Main Street Launch View bio

This guide was written by

Jessica Sillers

Starting a restaurant takes a lot more than a standout signature dish. Many business owners struggle to come up with the cash to pay for construction, staff, equipment and inventory. Restaurants are notoriously risky ventures, but there are still businesses out there willing to loan the funds you need. If you dream of running a restaurant, here’s what you should know before you sign a loan agreement.

What Does a Restaurant Loan Cover?

Your start-up costs obviously depend on what kind of restaurant you’re opening — and where. Starting a dining place in a major city can easily triple the amount you’d need in a small town. Here are some costs that Inc. magazine projects that you’ll need to be able to cover, based on a typical sit-down eatery:

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Licenses, permits and an employer identification number (EIN). Registering your business with the government, health code inspections and liquor licenses typically cost a few hundred dollars apiece. Review the full list of documents you’ll need and multiply by $200 to get a rough estimate.

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Appliances, large and small. Whether you put a hood over your oven or buy a new refrigerator, ice cream maker, coffee roaster and other appliances you need for your specialty, count on spending about $15,000-$100,000, depending on size and scope of your kitchen.

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Staff, including a chef, sous chefs, servers, an accountant and other employees that keep the house running. Expect staffing costs to eat up around 30 percent of your overall budget.

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Inventory. Tableware, cooking equipment, linens, nonperishables like dish soap and paper towels. Plus, of course, the food ingredients and beverages! $90,000

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Renovations. Tweaking fixtures can still add up, says Taylor. “[A client is] changing some furniture/fixtures and upgrading some equipment. He’s purchasing the business for a little less than $400,000, plus estimating about $200,000 in improvements.”

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Construction. Buy a space that needs a lot of renovation, and you could easily add $500,000 in expenses. In a major city, construction can be a multimillion-dollar project, says Katie Taylor of Main Street Launch, an Oakland, Calif.-based small business lender devoted to community empowerment.

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Marketing and branding. Designing a logo, business cards and website or marketing your business with simple fliers or high-end TV ads, can require from $1,500 to tens of thousands of dollars, depending on your strategy.

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Furniture. Tables, booths and chairs are a must. Don’t forget a hostess stand, wine shelf and other specifics you may need for your restaurant. $40,000

Where to Find Restaurant Financing

Lender Type of Financing Description Site Link
Advantage+ Working capital Restaurants that have been open for at least 3 years can apply for $5,000-$50,000 in working capital. Approval can happen in a few days. Terms last from 1-2 years, with no prepayment penalty. View
ARF Financial Restaurant loans, equipment financing, franchise financing, lines of credit Borrow from $5,000 to $1 million, with no collateral required on loans under $725,000. Flex Pay loans allow business owners to defer 25 percent of loan principal to maximize immediate cash flow. Terms up to 18 months are available. View
Apple Pie Capital Franchise financing Apple Pie specializes in businesses that hope to franchise. Loans start at $100,000, with interest ranging from 8-12 percent. No personal collateral is required, and funds are available within 30 days. Terms last up to 7 years, and there’s no prepayment penalty for loans under $1 million. View
Balboa Capital Equipment financing, franchise financing Small business loans go up to $250,000 with no collateral required. Terms run from 6-12 months for loans, and up to 60 months for equipment financing. They offer same-day funding for equipment financing and business loans in a few days. View
Business Loans Direct Business loans Business Loans Direct promises funds in as little as 72 hours. You only need to have been in business for 3 months to apply for up to $250,000. Use funds for anything your restaurant needs. Read terms carefully, as this is a factor-based loan. Interest rates and payback terms may vary widely. View
CAN Capital Loan, merchant cash advance Businesses only need to be in operation for 4 months and gross $4,500 monthly to qualify for a loan. Single-location businesses can access up to $150,000 in as little as 2 days. Terms are available from 4 to 24 months. Your payment is based on credit sales volumes. View
Dealstruck Loans Business loans are available up to $350,000. Lines of credit go as high as $500,000. Interest rates begin at 9.99 percent, and terms are available up to 48 months. Businesses can access funding within 7 days, and there are no daily payments required. View
eCapital Working capital, equipment leasing eCapital offers up to $500,000 for businesses that have been open at least 6 months, with no personal collateral required. Plans range from 30 days to 4 years. View
Fora Financial Loans, merchant funding Fora Financial proudly lists restaurants as their most-served industry. Loan up to $250,000 for equipment, inventory and staffing. Startup restaurants only need 3 months of history. Repayment of merchant funding is based on a percentage of future sales. View
Funding Circle Marketplace lender Get up to $500,000 within 10 days. You’ll pay an origination fee of .99 percent to 5.99 percent and interest rates between 5.49 percent and 21.29 percent. Terms range from 1-5 years. There’s no prepayment penalty, but this loan requires collateral. View
Kabbage Working capital, line of credit Kabbage can be a good option for restaurateurs who don’t have great personal credit, since the company uses your business data to approve a loan. Borrow $2,000-$100,000. Fees range from 1.5 percent-12 percent of the selected loan amount. Terms range from 6-12 months, and there’s no prepayment fee. View
Fimerica Loans, lines of credit, merchant cash advance Fimerica uses a lender marketplace to help businesses find competitive rates for business loans or merchant cash advances. Terms range from one to five years and loans are available up to $500,000. View
Small Business Administration Small business loans The gold standard for small business financing, this government organization offers several loan programs that benefit small businesses. Loans are competitive, but interest and fees tend to be much lower than many loan companies. View
OnDeck Loans, lines of credit OnDeck offers loans or lines of credit to businesses that have been open at least nine months for lines of credit, with at least $75,000 in annual revenue. Loans go up to $500,000, and lines of credit go to $100,000. Average interest rates for short-term and long-term loans are 19 percent and 30 percent. APR on credit lines range from 13.99 percent to 39.9 percent. View
StreetShares Loans, lines of credit StreetShares offers loans and lines of credit up to $100,000, with terms ranging from 3-36 months. Veterans may be eligible for special deals. There’s no prepayment penalty. There’s a one-time origination fee of 3.95 percent or 4.95 percent. One year in business or $100,000 in revenue is required. View

Things to Do Before Applying for a Restaurant Loan

Prep work is as important before a meeting with a lender as it is when you’re working on the line. Impress financing agencies by following these steps.

Get experience working in the industry

Just because you love to cook doesn’t prove you understand what goes into keeping the front and back ends of a restaurant running smoothly.

Write up a menu–and a business plan

Lenders want to know what makes your restaurant stand out in the neighborhood you’ve chosen. Are you introducing a new cuisine, or a style of dining that’s lacking in the community? Who’s your target market, and how will they find out about you? Show lenders that you’ve got not only great food but also the business sense to know how to get people to come eat it, and they’ll be more likely to work with you.

Square things away with Uncle Sam

As a new business, you don’t have much sales history to show. Lenders will use your past three years’ tax returns as one way of determining your financial trustworthiness.

Get rid of credit card debt

It should go without saying that it’s best to have your finances steady before launching a new venture. Lenders also use your credit report–and your spouse’s if he or she is a co-applicant on the loan–to make a decision on whether to approve your loan application. Federal law entitles you to a free copy of your credit report every year, so this might be a good time to use it.

Collect your paperwork

As much as you can, obtain the licenses and permits you’ll need to run your restaurant. If there are steps you can’t take until you have loan funding, that’s okay. Write them up and bring the plan along to your meeting with the lender.

Save up some cash

Opening a restaurant is a lot like buying a house. You need to put a significant chunk of your money on the table to show you’re serious. In fact, some aspiring restaurateurs take out a second mortgage on their homes to make their business dreams come true. Make your decision based on your finances (ask an advisor for guidance if you need to), but be prepared to provide 10 to 50 percent of the figure you need to open your doors.

Ask your community to contribute

Crowdfunding can help you scrape together your contribution. You can also use it to get a jump on marketing and assess the demand in your area. GoFundMe and industry-specific FoodStart are popular options. Tip: If you’re offering incentives for pledges, make sure they scale up well. You don’t want to have to list 2,000 backers on the back of a menu, or give away free drinks to hundreds of customers.

Imagine your future

Write out financial projections to help lenders see what success would look like for your business. Again, this is about proving you know as much about profit margin as profiteroles. Inspire confidence in and out of the kitchen.

Profile:
How One Restaurant Owner Found Business Financing

Kevin Onyona was driven both by a love for cooking and dissatisfaction with the restaurant scene in Beltsville, Md. His restaurant, Swahili Village, launched as the area’s only source of authentic Kenyan cuisine.

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I started Swahili Village seven years ago. I was frustrated trying to find good African cuisine,” Onyona said. “In 2009, I bought a lease from a gentleman who was struggling…We did some renovations, cleaned up the kitchen [and] got a liquor license.

Opening the restaurant was a relatively inexpensive endeavor for the industry, coming in around $150,000. Still, coming up with the money involved a few challenges.

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We borrowed from different people, different companies that were basically loan sharks,” says Onyona, who cautions aspiring restaurateurs to be wary of merchant cash advances. Getting funds quickly is tempting, but high interest rates and payments can make it difficult for a business to succeed. Business owners who don’t read the details, he says, can easily get in over their head.

Fortunately for Swahili Village, Onyona navigated the restaurant’s early years successfully. “Like most places do, we struggled the first three years and then stabilized financially,” he said. “America is ready for an authentic African restaurant. We are growing an American clientele very well.”

In the last year, Onyona decided it was time to expand, so he chose a site near his original restaurant to keep his established customer base. Moving to the new location was intensive work, and expensive, coming in at $700,000.

This time around, Onyona had experience on his side when it came to seeking financing.

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I managed to take advantage of [owning] a solid business that had been open seven years,” he said. “I was able to get lines of credit and a small SBA loan.” He highly recommends that restaurant owners explore applying for an SBA loan. “SBA loans are the best financing option that any business could want. They’re more forgiving and interest rates are more affordable.

To Onyona, the cost of a loan was worth it for the freedom to customize the space.

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We built it from scratch,” Onyona said. “It used to be a grocery store…I had to build an entirely new restaurant, new kitchen, new bar. It was a complete buildout from the ground up. Parking is abundant, and there are a lot of options to do a large party. We have so much to play with.

Expert Q&A

Katie Taylor

Restaurants are a high-risk industry. Several studies put the failure rate at about 60 percent within three to five years. The perishability of food also means thousands of dollars in investments may literally get thrown away if a business doesn’t thrive.

Main Street Launch, formerly OBDC Small Business Finance, provides capital for new small businesses in the Oakland and San Francisco, Calif. areas and to veteran-owned businesses in California. Katie Taylor, assistant vice president of communications, spoke with MoneyGeek about the unique challenges facing aspiring restaurateurs.

What special challenges do restaurants face when it comes to financing?

“Financing is really dependent on your general business plan and understanding how much things cost and how to price things. When you’re a brand new restaurant, any type of startup has a hard time getting a traditional bank loan. Crowdfunding can be really time-consuming and challenging, [and] location is a big thing, in the sense that you want to make sure your customers are going to be able to find you.

One thing with financing that folks don’t know until they’re in the mix is that they need to have some money to put in… It’s showing that you have some skin in the game.” For Main Street Launch, this “equity injection” is around 10-20 percent of the total loan amount.

How much money does a restaurant owner need to get started?

“The size of the space has a big impact on varying costs. Your rent is generally based on square footage, so a smaller space may be cheaper. If you need to do construction or purchase equipment, furniture and fixtures, the size of the space impacts that also.” One client who’s purchasing a restaurant that’s already built out has an estimated $600,000 budget to acquire the business and make some upgrades.

For would-be restaurateurs paralyzed by sticker shock, Taylor recommends a more wallet-friendly starter option. “Food trucks can generally be purchased and built out for $50,000 or less (depending on the choices made in the build-out). This is sometimes a good way to get started to build revenues before launching a brick and mortar space.”

How can a business owner demonstrate that they’re an ideal candidate for a restaurant loan?

“Having a really strong business plan. Even if it’s not fully written out, having a really strong concept of what you want to be doing, who your clients are and what you’re bringing to that community or neighborhood that isn’t there.” Having financial documents and projections prepared as fully as possible is important, too, she says.

What are the typical fees and interest rates associated with restaurant loans, and how can you make sure you’re getting a good deal?

“Bank loans typically are prime plus two, so that’s currently 5.5 percent. Prime is determined by the Fed, so it changes periodically. Read the fine print to see if there are regular fees that are incurred. We’re seeing that the difference between interest rate and APR can be really big. You could be offered a 3 percent interest rate and have a 30 percent APR because of all the costs…Ask if there is a prepayment penalty and how much it is.” Understanding the full amount you need to pay, according to Taylor, can make the difference between succeeding and getting caught in an ugly repayment cycle.

Resources

The National Restaurant Association advocates for the food service industry’s interests and helps connects members to resources, including information on financing.

The Small Business Administration offers resources and loans for small businesses. Your local office may be able to point you to banks in the area with a history of approving restaurant loans.

A local or regional restaurant association, such as the Restaurant Association of Metropolitan Washington, may have resources for area businesses.

The National Small Business Association advocates for the economic and regulatory interests of small businesses. Check its news page for updates on finance bills that could affect your business.

The National Federation of Independent Businesses offers resources on how to open a restaurant or franchise, including guides to different types of business financing.

The U.S. Department of Agriculture offers some small business loan guarantees, including restaurant financing, for business owners in rural areas.

The International Franchise Association offers education and resources for franchise operators.

The American Culinary Federation offers certification programs for chefs. It may be able to help an aspiring restaurateur build the experience and connections to be successful in the industry.

Updated: July 28, 2017