1. Restaurant Loans Overview

If you are interested in starting your own restaurant business, you are probably currently researching restaurant loans. Restaurants can be found in every city across the country, yet, they are the hardest businesses to obtain financing for. Even if you have everything set with your business plan, it can still be difficult to meet the financial requirements set forth by different lenders. Restaurants are considered a high risk business, and banks tend to be leery of such investments.

Although obtaining financing for a new restaurant business venture may be difficult, there is no reason to give up. There is a multitude of information available to help you obtain the needed financing, and ensure that your restaurant business is successful. With the choices that are available for restaurant loans, you should be able to finance any restaurant business that you may have in mind, if you are prepared.

Restaurant loans are relatively similar to any other loan. The lenders have set rates and terms, just as with any other loan. They also have general requirements that are standard for being approved for financing. However, obtaining a restaurant loan usually requires a little more work on the borrower's side.

A restaurant is a business, and not all businesses are successful. In order to obtain a restaurant loan, you need to plan for a successful business. Look into your market, make a business plan, research loan options, and prepare yourself for the possibility of rejection. Take the time and effort to research starting a restaurant business, and research restaurant loans. The more you know, the easier it will be to find the appropriate loan, and get approved for the financing.

2. Restaurant Loan Options

Although financing options may seem limited, when it comes to restaurant loan options, there are actually quite a few. If you do your research, you can find so many financing options that are available. It can actually become very confusing if you are unsure of what you are actually looking for.

When it comes to restaurant loans, the majority of the borrowers end up obtaining three separate loans for complete financing. Usually, a commercial real estate loan, a straight commercial loan, and a line of credit are common methods of financing a restaurant business. The commercial real estate loan is used for the purchase of the building or the land, the straight commercial loan is usually used for the purchase of the restaurant equipment, and a line of credit is usually a safety net for emergency start up costs that were unaccounted for.

Other financing options include obtaining a loan through the Small Business Administration (SBA), using financing from investors, or even using financing provided by the seller of an existing restaurant business. If you are looking into an SBA loan, be aware that there are very strict requirements. There are even different types of loans which fall under the general heading of an SBA loan. If you choose to go the route of investors, you may even look into a partnership. Investors can actually provide a substantial amount of the financing for a restaurant business if you are willing to do the work to get the contacts and the money. For financing the restaurant through the seller, there are actually a few benefits. Since it is hard to obtain financing from a bank, seller based financing may provide you another option. Also, seller based financing shows that the seller still believes in the continued success of the business.

If you are unable to raise enough funds through one method of financing, try a few different methods. Most borrowers for restaurant businesses rely on a grouping of different financing options. Try talking to lenders to see what all of your options are.

3. General Requirements for Restaurant Loans

One of the main aspects that make obtaining a restaurant loan difficult is the eligibility requirements. Restaurants are considered a risky venture by bank standards, so they set high standards for approval for a restaurant loan. Obtaining financing can be very difficult, and there is the possibility of rejection. Most restaurants fail within the first three years of doing business, so the specific requirements for a restaurant loan are very understandable. Lenders are only looking at whether or not the applicant is worth the financing and if the business plan is practical.

Usually, lenders have a minimum and a maximum loan amount. Regardless of how much you are looking to finance, you will most likely have to enter the loan with a minimum of a ten percent down payment, which you can borrow from another source if you do not have the funds readily available. With a down payment that is relatively low, however, the lender most likely will require collateral in the form of real estate. Collateral gives you an extra edge when financing. Most lenders will give you a loan to value ratio of up to ninety percent when you have real estate collateral.

When looking to approve a borrower, lenders require a detailed business plan. If you haven't done enough research, then lenders will most likely send you away. Usually, lenders look at every aspect of the business plan to make sure that it fits with industry standards, and avoids trends wherever possible. If your plan is weak in one area, then there is the possibility for it to be weak in another. When researching for your business plan, make sure to account for potential profits from every angle, and also make sure that those figures are accurate and actually probable. Even if you come with enough funds for a down payment, amazing credit, and a well-researched business plan, other factors, such as a poor location choice or estimated menu prices, may actually end up leaving you rejected.

4. Rates and Terms

Usually, most lenders offer rates competitive with the standards. However, just as with any other loan, if you offer them more, then they will reciprocate. If you have a substantial down payment, are credit-worthy, and follow through with a strong, viable business plan, then your rate may be lower than the average. If your down payment is low, your credit is risky, and your business plan is weak, you will most likely have a substantial interest rate, if you are even approved at all.

The length of a restaurant loan varies widely with the type of loan that is obtained. Some loans can run for as long as twenty-five to thirty years, while others can carry an amortization period of only five to eight years. If you are looking for a lengthy loan, make sure to research what particular lenders are offering. Although having more time to repay the loan may mean lower payments, it will come with more interest that will be paid out in the long run.

5. Additional Costs

When researching restaurant loans, the majority of borrowers overlook possible additional costs that may arise. Although most of these costs aren't initially present, they can show up within a short time period after the loan closes. As with any other financial endeavor, always be prepared for the unexpected.

Since most lenders are wary of financing restaurant loans, you may be required to have a larger down payment than planned for. Have a back up plan for accruing additional funds on short notice, such as investments, or borrowing from a friend or family member. Sometimes, lenders may even require existing real estate collateral. Whatever may be needed, don't get in over your head.

After the loan closes, there may be other areas that could have possibly been overlooked. If the business doesn't immediately succeed, profits could be low. Try to come into the business with extra funds to compensate for that possibility. There is also the possibility of needing extra supplies, or having to attend to possible repairs. It is a good idea to come equipped with some sort of funding for anything that may go wrong.

Obtaining a restaurant loan may actually be expensive. However, if you do the research before hand, you will have the possibility to prepare yourself for whatever financial situations may arise. Don't be afraid to ask for additional financial help from others, if you are able. Taking on a partner or other investors may actually benefit the business and take off some of the financial burden from your own shoulders.

Whatever the cost may be, some people put too much of their personal investments into their financing. Don't get into a situation that you will be unable to get yourself out of. If obtaining a restaurant loan requires you to liquidate all of your own assets, leaving you with nothing, you may want to rethink what you are doing.

6. Determining Which Loan is Right for You

With the different loans that are available, it can quickly become confusing when looking to obtain a restaurant loan. Lenders can ask questions and help you determine what loan will suit your situation best, but it never hurts to do a little research of your own. The more educated you are on what loan options are available, the easier it will be to obtain the restaurant loan that you feel is the most appropriate.

Usually, restaurant loans are turned down if they are only small loan requests. Even if the borrower has a well-researched business plan and has immaculate credit, the lender may still turn down a small loan. If you are looking to finance only a small portion, then you may want to try approaching investors rather than obtaining a restaurant loan through a lender.

If you are looking into a loan through the SBA, there are some additional requirements. First, the loan must be for business purposes only. Second, you must have been rejected for traditional loans before applying for an SBA loan. A loan through the SBA is a back up plan if you are unable to obtain a traditional commercial bank loan.

Since there are so many loan options that are available, don't limit yourself to only one. Find two or three that fit options that fit your situation best, and start with those. It is very common for restaurant financing to actually be a combination of two or three different types, as well.

7. Finding a Lender

If you are having trouble obtaining a restaurant loan, you may just not have the right lender. Although there may seem like an endless amount of lenders, finding a lender who will finance a restaurant loan is very difficult. However, if you look hard enough, you will succeed.

If you are trying to obtain a restaurant loan for the first time, it could be very difficult to obtain a traditional commercial bank loan. However, don't be discouraged. Do your research, and find banks in your area that have a proven track record of financing to first-time business owners, specifically first-time restaurateurs. You need to be able to prove that your business is low-risk, and that the loan will get repaid on time.

Finding a lender who specializes in SBA loans, however, is relatively easy. Try researching SBA loans over the Internet and you should have a place to start. If you get turned down by another lender, you may even ask them to suggest a lender.

Obtaining restaurant financing through lenders, however, can be rather tricky. There is extra effort involved: not only do you have to create a viable business plan, but also you have to find investors who are willing to contribute large amounts of money for a risky venture. If you have worked in the restaurant business in the past, use your contacts. They may have suggestions of potential investors, or they may even invest themselves. However, if this is your first venture into the restaurant business, you will have more difficulty finding investors for financing.

Whatever type of loan you choose for financing, you will have to find a lender whom you can work with. Most importantly, do your research. Become educated on what is out there and who provides it. The more you know, the easier it will be.

8. Getting Approved

Getting approval on a restaurant loan is very challenging. Regardless of how much effort you put into your business plan, you may still end up getting rejected. There are some extra things that you can incorporate, however, that may help you get the approval.

Obviously, your business plan needs to be thorough and well-researched. If you are lacking in factual information, you are only hindering your chances of being approved for your restaurant loan. Make sure that your business plan has the basic restaurant concept, including the location and the market in that location that would warrant that type of a restaurant. Include research over area demographics, basic costs including food and fixed costs, and figures showing potential revenue. Check, double check, and triple check to make sure that all of the figures add up. If the numbers are wrong when you present your business plan, you will be immediately rejected, and for a good reason.

Another thing that may help you to get approved for a restaurant loan is prior experience. If you have previous experience working in a restaurant, particularly a management position, you will have learned valuable tools of the trade that can help you to be successful in your own restaurant business. If you approach a lender with a well-researched business plan and previous restaurant experience, you are giving yourself more credibility as a potential restaurateur.

When it comes to getting approval for a restaurant loan, focus on your business plan. That is your key to getting a bank to give you financing. Lenders want to see that you know how to get your restaurant started, that you know how to keep it going, and that you know how to succeed. Research your business, research the market, and research how your business will thrive in that market. Show lenders that your business plan is well worth the risk.

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If you end up getting rejected with your first application for a restaurant loan, make sure to find out why you were rejected. Modify your business plan based on what they tell you. If you are rejected a second time, modify your business plan again. Don't be discouraged if you get rejected more than once; it is very common to end up having to apply a number of times before you are finally successful in obtaining a restaurant loan.

Put time and effort into researching every aspect of obtaining a restaurant loan. If you are diligent, it will pay off in the end. The more you know, the easier it will be to obtain approval for a restaurant loan.

When writing your business plan, take your time. Don't rush through it in a matter of days. Plan on spending months - if not a year or two - fine tuning your business plan and incorporating marketing research, cost research, and potential profit research. The figures should all be exact, and you should include every pertinent piece of information that will help explain how your business will succeed. You need to prove to the lenders through your business plan that you are worthy of the restaurant loan.

Restaurant loans are hard to obtain, but not impossible. With a little time and effort, you will eventually get approval. Write an effective business plan, research the loans, and find a lender. The harder you try, the easier it will be to get a restaurant loan.

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