Whether you are an established restaurant chain or a passionate chef planning on setting up your first business, you may be looking into restaurant financing options. But which of the many options are suited to you, and what can you expect from each type?
Our guide will answer any questions you may have and help you compare some of the top financing options out there. So grab your notebook and take a look below!
Types of Restaurant Financing Options
Restaurant financing refers to any type of business funding used by a restaurant business. As with most financing options, there are many options for restaurant owners looking to fund their business. A few of the most popular financing options available in the UK are:
Brick-and-mortar loans
A brick-and-mortar loan is easily one of the most common types of financing across the entire business sector. As the name suggests, a brick-and-mortar loan is provided by a physical bank to offer small and mid-sized businesses a way to access supportive finance.
Pros:
- Banks can usually offer a bespoke loan to meet your exact business needs
- Repayments are generally spread out across long periods
- One of the most tried and tested methods out there
Cons:
- Some banks can be extremely picky with their requirements
- You may need to place expensive assets on the line as collateral
- A bank loan can have a fairly high-interest rate.
Business line of credit (LOC)
An option provided by thousands of banks and lenders across the UK is a business line of credit loan, or LOC for short. A LOC will allow you access finances where they are needed as opposed to a single large loan. This amount will almost always be agreed on before you sign for a LOC.
Pros:
- Can be easily tailored to suit your cash flow
- You only pay for what you use
- Can be used to add to build business credit
Cons:
- Most lenders will usually have a fairly low cap on LOC loans
- Line of credit is not intended as a long-term financing solution
- Qualification requirements can be really strict.
Start-up loan
If you are considering starting your own restaurant, then a start-up loan might be an excellent option for you. They are provided by the UK government and can be used to fund small business administration such as restaurant equipment and property costs.
Pros:
- Interest rates are capped at 6% per annum
- Flexible repayment terms, usually between 1 to 5 years
- Can be used to help build up your restaurant’s credit history
Cons:
- Monthly repayments can have an impact on your cash flow
- Not suitable for already-established restaurants
- Qualification requirements can be hard to pass for first-time business owners.
Merchant cash advance
Merchant cash advances are one of the most unique financing options available. The main difference between a merchant cash advance and your typical loan is that you will be paying a set percentage on any card-related sales you make until it has been fully repaid.
This can be a decent option for small businesses, but the percentages can be too high for a larger business that uses a credit or debit card system.
Pros:
- Best suited to smaller businesses
- Can be an option if you have a low business credit score
- Funds are generally released a lot faster than other financing options
Cons:
- The sales payback percentage can be fairly high
- Successful payments do not add to your credit score history
- You will generally repay a lot more than you initially borrowed, up to 40% in some cases.
There are a few other options out there for restaurant owners, so be sure to take the time to research which is the best option for you!
What Can I Use Restaurant Financing for?
Financing can be used for a range of purchases. Start-up loans are generally used for equipment financing and paying for any property your business may require. Funding options can also be used to help you out with restaurant costs and can fix cash flow issues.
Do I Qualify for Restaurant Financing?
Depending on your chosen lender, there will be a few requirements you need to surpass to qualify for restaurant business financing. The type of loan you are applying for will also impact any requirements you need to qualify.
The two main types of restaurant loans are secured and unsecured loans. You can check out the typical requirements below:
Secured loan requirements
- Your business has been operating in the restaurant sector for more than three months
- The restaurant must be based in the UK
- Restaurant owners must own one or more business assets that can be used as a personal guarantee
- Be a sole trader, limited company or limited liability partnership registered in the UK.
Unsecured loan requirements
- Your business has been operating in the restaurant industry for more than four months
- An annual turnover of £60,000 or more
- Be a sole trader, limited company or limited liability partnership that is registered in the UK
- Business owner holds a UK bank account.
Always check loan requirements before you apply. This way, you can be sure that you have all the documentation needed to prove that you qualify for a specific financing option.
What You Will Need to Apply for Restaurant Financing
When applying for financing, you will need any business documents related to turnover and working capital. You may also need to show the lender a solid business plan to show that you will be able to pay back your loan.
Although most lenders will check for themselves, you could also prepare a document showcasing your credit history. This is just another layer to show that you are qualified for your chosen financing option.
How to Apply for Restaurant Financing
The way you apply for your financing will depend entirely on your chosen loan type and lender. You will usually need to meet your lender in person or arrange an online meeting to discuss your plan and hand over any required documentation.
Most lenders established in the UK will have a dedicated line to help guide you through the application process. If you are at all confused or not sure what steps you need to take, be sure to get in touch with your chosen lender!
Can I Get Financing If I Have a Bad Credit Rating?
Applying for financing if you have a bad credit rating can be extremely difficult. To apply for small business loans with a poor credit score may require using one or more of your assets as collateral. You may also need to pay higher interest rates on your restaurant loan.
It is possible to get financing even with a bad credit rating, but you will need to take the time to compare loans and lenders.
Who Offers Restaurant Financing?
Most money lenders and banks across the UK will generally offer some form of restaurant funding option. The UK government also provides start-up loans and grants designed to help business owners establish their restaurants.
As long as you have met the requirements needed and you can show that you have a dedicated plan, then you should have no problem applying for a restaurant finance loan.
Which Financing Option Is Right for Your Restaurant?
This will depend entirely on what you want out of a specific financing option and what stage your restaurant is in. If you are just setting up your first business, a start-up loan might be the best choice. Whereas if you are firmly established, then a bank loan or LOC might be better suited.
Always research your options before settling on a specific financing option. You don’t want to apply for a loan if it doesn’t align with your business plan!
Final Thoughts
Applying for funding for your restaurant can be extremely stressful, especially if you are unsure what loan is the right one for you. We hope that we have helped ease some of that stress and provided you with a way to find which option is the best one for your restaurant’s needs!
FAQs
How soon can I receive a business loan for my restaurant?
Your chosen finance option will have a significant role to play when figuring out how long it will take for you to receive your loan. MCAs are one of the fastest funding options out there, whereas some bank loans can take multiple days or even weeks to fully process.
What is the difference between secured and unsecured loans?
The main difference between a secured and unsecured loan is the method used to ensure payments are made. A secured loan will require you to use an asset, such as a property, as collateral if you don’t make payments. An unsecured loan doesn’t require any form of collateral if you don’t pay it on time.
What happens when you default on a commercial mortgage?
This will depend on the agreement type you have made with the lender. Generally, if you default on a commercial mortgage, the lender can seize assets and liquidise them to make up the expected commercial real estate loan payment.
Do I have to pay back a government grant?
If you manage to earn a government grant, then great news, you won’t have to pay it back! Government grants are awarded to businesses which means you will never need to pay the government back.