Owning a restaurant is a huge financial responsibility. There are constantly new expenses that come about during your day to day operations. The average estimated startup cost ranges all the way into the six figures. It is no surprise that 60% of all restaurants fail within the first year and 80% fail within the second year. The high rate of failure, along with many unexpected operating costs are just a few reasons why many restaurant owners are unable to secure a traditional bank loan when they need additional funding the most and cause bad credit issues. Be that as it may, it is completely understandable that owners are forced to look for a small business loan for restaurant financing from sources other than a bank.
Types of Lenders for Restaurant Financing with Bad Credit
There are many banks who are willing to provide restaurant financing invest on you and your restaurants success and there are even more alternative lenders who are wiling to provide restaurant funding even if you have bad credit and without all of the hassle, and requirements of a traditional lender.
Franchised Restaurant Owner and Restaurant Financing
In most cases, becoming a franchised restaurant owner is a very diligent process and licensor may require up to one year of operating capital in your bank account. In addition, franchise restaurant corporations generally allow for their franchise owners to apply for additional monetary assistance when needed and most banks will lend to a franchise business owner because of the established business assets and proven restaurant business model from the parent corporation.
Family and Friend Loans and Restaurant Financing
Many restaurant owners, unable to get a commercial bank loan, will ask a friend or family member to help with financing their restaurant. Borrowing from friends and family can often be much quicker and without all of the paperwork and credit checks that a banks require. Sometimes, family and friends won’t charge you all the interest that would come along with taking out traditional business loan or alternative business loans. However, if you run into repayment problems, you are at high risk of straining your relationship with your loved ones.
Traditional Business Lending and Restaurant Financing
Obtaining a traditional business loan to help your restaurant can help you receive the funding you need to keep your business thriving; however, keep in mind this is not ideal when you need funds fast or for business owners with previous bad credit history. When applying for a traditional loan you will need to gather documents including a full business plan, proof personal capita, and even a resume showcasing your experience in the industry. A high credit score (630 and over) is the primary factor that banks look at. In addition, they may require an in-person interview and may ask for high-risk collateral to offer you a loan. The overall process takes weeks to months depending on the size of your business and your qualifications as a loanee. With such strict lending qualifications, more often then not, many restaurant owners will not qualify for a loan from a bank institution. If you have an emergency repair or any other pressing issues, traditional loans are not always the most reliable option.
Alternative Business Loans and Restaurant Financing
Fortunately, alternative loans are a bit understanding of time. Through a good lender, you can receive approval and have money in your business bank account in less than 24 hours. Another benefit is that past bad credit may not play a part in your loan approval from many alternative business lenders. However, high risk lending often has slightly higher interest rates than traditional lenders. Since most non-traditional lenders are privately owned, they have their own payment terms and rates. Keep in mind a good lender will never provide a loan or business funding without reviewing your past revenue including your business bank account statements and/or your monthly merchant account deposits. Thus, if you decide to apply for funding from these lenders, make sure that you have at least 3 months revenue records ready.
Crowdfunding Loans for Restaurant Startup
If you are planning a startup and open a new restaurant, unfortunately your lending options are limited. Getting a business loan for a new restaurant from traditional lenders in the form of a SBA loan or a Commercial Business Bank Loan requires great credit, collateral and/or a down payment, as well as a formal business plan and the business owner will need to prove he or she has the enough experience in the restaurant industry to successfully own and operate one. Thus many restaurant startups use a combination of funding options including using personal assets, borrowing from friends or family, and another way becoming increasing popular is Crowdfunding.
If you wish to finance your restaurant startup, there are many big crowdfunding sites, such as Kickstarter, that allow restaurant funding. There is also a crowdfunding websites that specifically catatersto restaurant businesses such as EquityEats, Foodstart and PieShell. Although repayment options may vary, it’s important to note that crowdfund funding is not a loan. People who fund your campaign receive variety of benefits including credit and cash to use at your restaurant once it opens.
Types of Loans for Restaurant Financing with Bad Credit
If you are considering an alternative lender, here of the types of loans we best suits the needs of most restaurant owners:
Working Capital Loan
Working capital loans are designed to help your restaurant’s day to day expenses. It is a short-term loan, that helps you with meeting payroll or keeping your restaurant up to health code. Working Capital Loans are fairly easy to get from alternative lenders even if you have bad credit history. This type a loan is great for buying extra time to keep your business afloat until you accrued more revenue. At best a restaurant owner should budget 3 – 6 months of operating costs to tide you over if sales suddenly slow. Common restaurant operating expenses include: Restaurant insurance, license fees, taxes, permits, utilities, staff wages & benefits,
Restaurant Equipment Loan
Owning a restaurant involves purchasing industrial grade cooking equipment, including stoves and ovens. The purchase and maintenance of this equipment can be one of the most expensive costs for restaurant owners. If you need to purchase or update equipment, consider a lender that specifically offers an equipment loan program.
Restaurant Commercial Property Loan
This type of restaurant loan can be used to cover costs associated with securing a new commercial property including security deposit, and first month /last month rent, as well as, expenses related to the costs of purchasing commercial property and/or buildings, property taxes, restaurant renovations costs and legal fees. Traditionally this type of commercial loan has been given out by banks. In recent years most alternative lenders have added commercial property financing to their funding programs. Most non-traditional lenders have less strict lending requirements which also helps business owners with past poor credit history when applying.
Restaurant Inventory Loan
It’s easy to get caught up in all the money talk and forget that to open a restaurant and to keep it open you actually need to purchase food prepare and serve. The same way restaurant equipment loans are used for purchasing and maintaining equipment, inventory loans can be funded with a SBA Business Loan, Merchant Cash Advance (MCA), or a Business Line of Credit and can be used for purchasing the ingredients and food you’ll be serving on a day-to-day basis. Sometimes lenders will allow inventory to be used as collateral to secure a business loan, but in the case of a a restaurant business where most food inventory is perishable, traditional banks probably wont accept this to secure an inventory loan for a restaurant.
Restaurant Advertising & Marketing Loan
Advertising and marketing, like all other parts of a restaurant business will require money too. Many restaurant owners take a Restaurant Advertising & Marketing Loan to create and develop new campaigns, purchase media space as well as to cover the cost of creative design and publishing costs.
Restaurant marketing costs, unlike many fixed expenses in restaurant operation, can change from month-to-month and year to year. Seasonal marketing promotions, coupons, and marketing creatives are all included under this type of restaurant loan.
Restaurant Advertising is also another expense that also can fluctuate through out the year based on season media purchase costs and higher competition.
Finally, keep in mind that the 2015 Annual CMO Survey found that businesses that grew 1 to 15 percent year over year spent an average of 16.5 percent of their revenue on advertising and marketing. Although there is no one-size-fits-all number for every restaurant, if are spending outside the 16% range, you should probably review the effectiveness of your advertising and marketing spending for Return on Investment (ROI) on a monthly or quarterly basis.
Can Restaurant Financing Be Used for Any Purpose?
In many cases, traditional lenders will require that you detail out how you plan to spend the business loan. For alternative lenders, most only require that you spend the money on business related expenses only. An alternative lender my ask a restaurant owner what he needs the money for but willBad not require a list or budget proposal.
Most Common Restaurant Financing Expenses
Restaurant Financing with Bad Credit in Summary
In summary, owning a restaurant can be difficult and expensive but the rewards of success can be extremely gratifying and lucrative. Don’t be discouraged if you are unable to get a bank traditional bank or SBA business loan for restaurant financing. There are many alternative lenders who are willing to take the risk and invest on you and your restaurants success even if you have bad credit and without all of the hassle, and requirements of a traditional lender.