How to Get Working Capital for Restaurants

Business Management

Jacques Famy Jr
Review By Todd Millman

Small business owners nationwide look at a business as an extension of themselves. For restaurant owners, a restaurant is not just a business that generates profit. The restaurant is a restaurateur's passion, inspiration, and desire to create a place where food pleases the palate and an establishment that makes for a great experience. But with that passion come’s a constant need for innovation and change to maintain relevancy in a competitive industry.

What is Working Capital for Restaurants?

For many restaurants, whether it’s revamping the menu, an enhancement to the experience of the restaurant itself, the need for an unexpected business expense, or an emergency, the restaurant owner must be prepared and have a plan for business funding, like working capital loans. There is little doubt that capital is needed to avoid negative working capital and ensure the financial safety net stays afloat.

Let’s delve into the eligibility criteria for a restaurant owner needing working capital, exploring various financing options, so you are well-equipped and ready to act when the need for accessible capital emerges. It's crucial to your business growth and stability, as few businesses have substantial savings to fall back on during emergencies. Armed with this knowledge, you can minimize financial emergencies and successfully navigate commercial lending networks, which offer a wide selection of financing solutions.

Funding for Working Capital: Top 6 Restaurant Working Capital Loan Options:

1. SBA Loans for Your Restaurant

SBA Loans (Small Business Administration Loans) are made through banks, credit unions, and other lenders who partner with SBA by originating those loans and then backed by SBA, which provides a government-back guarantee on part of the loan to reduce the risk on the part of the partner. SBA loans are recognized as some of the best all-around financial solutions for restaurant businesses.

  • They promise multi-year repayment terms
  • Low-interest rates
  • Manageable monthly payments.
  • Additionally, due to their long-term nature, they can provide more capital compared to other funding options.

SBA loans are sought after by many restaurant owners hungry for growth. However, their downsides are;

  • Rigorous eligibility criteria
  • Lengthy approval process involving multiple steps that could take months.
  • High credit requirements, strict working capital ratio
  • Demanding financial statement requirements
  • Collateral standards are part of the deal.
  • It’s fair to say, if your venture fits into this tightly defined box, this product remains unparalleled when it comes to securing a multi-year loan for capital needs. Updates on these factors may happen periodically, so it's best to stay informed.

2. Business Line of Credit for Your Restaurant

  • Business Lines of Credit provide flexibility, with access to working capital through a revolving credit line used as needed, unlike a business loan with a fixed term with a fixed amount that you accept. This product provides a credit limit but an ability to draw as little as you want at a time, when you want, up to that limit, and only pay interest on the outstanding principal. Great for short-term working capital needs.
  • Simple interest with rates starting at 1% per month
  • Credit lines with terms for renewal at 6, 12, 18, 24 and 36 months available
  • Draw funds on demand
  • Only pay interest on outstanding balance
  • No prepayment penalties
  • Offered by traditional lenders and banks as well as online lenders.
  • The bank offers most business lines of Credit the owner uses for their banking, but again, like SBA loans, banks have high credit standards, lengthy processes, and high financial statement requirements.

3. Small Business Loan for Your Restaurant

Working capital loans with a fixed term are called small business loans with long- and short-term options. These loans could serve as a lifeline for restaurant owners, whether they're looking to boost their marketing efforts, manage inventory, or explore catering to extend their brand exposure. Short-term loans in business funding refer to loans with rates between 10-20% and terms of 1-3 years that are fewer than 18 months. While not backed by the SBA, these loans present other working capital options, like selling off a portion of your future business earnings (receivables).

Business term loans are;

  • Based on principal and interest
  • Term lengths ranging from 6 months to 24 months
  • Thanks to the longer terms, more capital is available to cover urgent expenses like payroll, rent, or inventory management, which is often easier to manage using a cloud-based POS system.
  • Expect higher credit standards and financial statement paperwork sometimes to include business tax returns, but with more favorable response times of 1 business day instead of weeks or months.

Managing your receivables effectively is crucial to protect your working capital. This option is a great way to access a working capital financing alternative, particularly for capital expenditures or when expanding to catering services.

4. Equipment Financing for Restaurants

Equipment financing is typically available for new equipment and uses the equipment as collateral to offer multi-year financing.

  • Typical terms of up to 60 months.
  • Apart from the basic appliances like stoves and freezers, you can also finance other furnishings for your restaurant.
  • This type of financing is particularly useful for capital expenditures, helping you manage your inventory without jeopardizing your cash flow.
  • Strong personal and business credit will be required for this product, but they can be obtained very quickly, in some cases the same day. This becomes significantly useful when you identify the need to upgrade your silverware or replace your equipment - aiding efficient inventory management.

5. Business Credit Cards for Restaurants

Business Credit Cards are probably the most popular product on this list. As you may know, the product is virtually the same as a personal credit card; it provides a revolving line of credit, but it often packs more features and benefits tailored for business. Though not considered a specific working capital loan, this funding solution no doubt meets similar needs, acting as an essential working capital cushion.

  • With a more intuitive selection process
  • Only pay interest on principle
  • Receive instant access to the funds when needed.
  • Depending on your restaurant expenditures and overhead costs, you may be able to have more than one credit card at a time, ensuring your restaurant keeps working without undue financial strain.

Everyone should consider one for their working capital needs. However, it's critical to do your homework to find the best terms and options. I suggest the following comparison sites to check out what’s the best credit card fit for your restaurant's unique profitability goals and to handle important areas like restaurant payroll:

  • Credit Cards
  • Credit Karma
  • NerdWallet

Alternative Business Funding Options for Restaurant Working Capital

Alternative business funding are available to businesses in need of money to serve the underserved small businesses market, which needs capital but can’t get approved with banks due to credit and financial statements that don’t show enough gross sales, debt to income, or profits in general.

1. Business Cash Advances, aka Merchant Cash Advance

Merchant cash advances are not small business loans but an advance by selling a portion of the business's future sales (credit card sales) at a discount to a funder in exchange for cash for the business owner now.

  • Offering flexible repayment terms with estimated durations varying from 4 to 18 months depending on eligibility.
  • Payments are made weekly or, in some cases, daily, especially if businesses have low bank account balances, a particular percentage of the monthly deposits is used.
  • Popular with many restaurant business owners due to repayment flexibility
  • Uses a factor or fixed cost, unlike principal and interest.
  • They may cost more than traditional financing, but they also provide a financial cushion due to their accepting of low credit scores and limited and poor financial statements.
  • Regular updates on your repayment progress are available, offering you a clear view of your debt journey.

If you need working capital to pay expenses, and can't get approved with other options, perhaps due to rigid repayment term conditions or lack of funding from venture capitalists, this option may be a great choice when searching for money. Especially when you need fast and easy inflow to clear your pending invoices, or perhaps invest in an event catering opportunity, expanding your reach within the hospitality industry. Bank on your past accomplishments to provide the confidence to take up this method of financing, and potentially refinance in the future to terms that better suit your financial structure.

2. Alternative Term Business Loans

Some loans out there have similar loose standards, like business cash advance, but also come with higher costs than traditional business funding. They are loans but have terms from 4 to 24 months, with weekly or daily payments, and charge a factor cost or fixed cost instead of principal and interest.

  • Unlike Business Cash Advance, these products often come with early pay discounts, which are a nice feature.
  • Unlike traditional loans, they allow for lower credit scores, no capital, below-average financial statements, and significantly boost your restaurant's liquidity by covering short-term expenses like supplier payments, rent and payroll.
  • They also have much higher approval rates than SBA loans or traditional loans, providing greater access to finances to dining establishments, and improving sales deposits, particularly during times of crisis such as the pandemic.

Although alternative business funding has higher costs than traditional lending, it requires, as a business owner, patience and a close look at the cost versus benefit/value of the money. These products have a lot of value for a restaurant if used for the right reasons. For instance, catering to an event or extending hospitality services can increase your exposure.

Alternative business funding has really improved access to business working capital for restaurant business owners often turned away by banks, credit unions, and SBA Lenders/Brokers when they need money most. Without this product, most small business owners wouldn’t have access to capital.

Just remember to do a cost versus benefit analysis before deciding to take out working capital with this type of funding.

Identifying the Need For Working Capital for Restaurants

Let’s start with the working capital needed. What is going to be enough capital? Believe it or not, your goals and/or “need” will often drive what business funding products will work best for your working capital needs. Why do many restaurants have negative working Capital? how much working capital? Because restaurants are complex businesses that have to address many different needs. Identifying the "need" will lead you to what is enough working capital.

Top 6 Reasons Why You Need Working Capital For A Restaurant:

  1. Operating Expenses for a Franchise Restaurant. Restaurants, especially franchise ones, are capital-intensive due to the composite nature of their expenses. The variable cost of appliances like freezers and stoves, the lifecycle of these equipment, and seasonality can all cause fluctuations in costs. Equipment repairs and maintenance also contribute to the demand for working capital. In certain months, an extra capital injection may be necessary to maintain a positive cash flow.
  2. Marketing Campaign Strategy for Restaurant Expansion. Advertisement is indispensable for boosting brand visibility, sustaining customer loyalty, and increasing traffic. A variety of techniques is adopted, spanning from search engine optimization and Google Pay Per Click to traditional methods like mailers or radio ads. All these require substantial funding, and working capital loans can supply the finances required to expand your franchise's customer base.
  3. Construction, Remodeling, and Decoration for a Franchise Restaurant Expansion. To maintain relevance and improve customers' dining experience, it's sometimes necessary to completely revamp or expand your franchise. The hefty capital involved often necessitates working capital for such renovation projects.
  4. Repair and/or Replace Equipment for a Franchise Restaurant. It's inevitable in the restaurant business to carry out frequent equipment repairs or replacements. Whether it's kitchen appliances like stoves and freezers or other operational machinery, these overheads can be pricey, requiring a readily available pool of working capital.
  5. Point of Service or Technology Upgrades for a Restaurant Franchise. With the rapid innovation in the restaurant industry, there's a need for novel technology systems and point-of-sale terminals. These upgrades, which are key to a franchise's service delivery and operational efficiency, can come with a significant price tag.
  6. Inventory. Juggling furnishings, managing suppliers, and other aspects of inventory control is another area where capital is paramount. An optimal inventory turnover rate will prevent stocking less popular menu items which could monopolize funds. Additionally, catering for special events or seasonal business activities may require additional inventory.
  7. Diversification. Adding services like event catering could broaden exposure and bolster sales. These activities necessitate substantial working capital.

How To Qualify For A Restaurant Working Capital 


1. Personal Credit

Credit is the best indicator of risk. Personal credit scores do matter greatly for business funding products. When someone says high credit standards, generally, your credit score needs to be 720 FICO and Up. Once you get into the 600s, alternative business funding may be your option. If you have a poor rating, getting financing may pose an issue for you and your business. You can find ways to improve your score and understand how it works. ( )

2. Business Credit

All business funding products look at business credit and focus on how you pay vendors, other loans, the number of business trade lines and judgments, liens, bankruptcies, etc. Your company's credit does play a role, but personal credit is a heavier-weighted factor.

3. Time in business

Typically traditional funding products are available at 3 years plus in business with a minimum of 2 tax return years completed. Alternative funding is available within only a few months in business and starts around 6 months in business, depending on the lender or funder.

4. Financial Statements

Company financial statements include tax returns, profit and loss statements, balance sheets, assets and liabilities, debt to income ratio, cash on hand, capital reserves(negative working or working capital ratio), and accounts receivable/accounts payable reports. SBA and Traditional loans will examine these statements and weigh them heavily in decision-making. Alternative business funding generally does NOT require company financials unless it is a large request for capital, such as $150,000 or more.

5. Cash Flow Health

All business lending and Funding have monthly/annual revenue requirements, and look at how much revenue is deposited per month in your bank account and your annual gross sales. Traditional Lending typically likes to see $750,000 and up in gross annual sales, while alternative financing will evaluate starting at $120,000 per year.

Ask yourself the following health check questions. Is the deposit consistent month over month? Where are those deposits coming from? What is the average daily balance in the bank account? Any overdrafts, NSFs (non-sufficient funds), or negative balance days? When Underwriters talk about bank statement health, the above is what they're looking at.

The bottom line, as an owner, you must be aware of all the above qualifications. Many restaurant owners don’t know what the Bank, Credit Union, Lender, Funder, Broker, angel investors, or whoever is offering your financing is looking for or at. Ignorance is NOT bliss! Trust me on this one. You can’t solve your business's working capital needs without finding or getting approved for the funding product.

How To Apply for a Restaurant Loan: 5 Steps

Step #1 Application: Provide application with business and personal information as well as necessary documentation to support cash flow depending on product selection. Ensure to include basic items like identification, business licenses, and equipment invoices which meet eligibility criteria.

Step #2: Compare and Shop Offers: Evaluate offers with patience and contrast rate, terms, and conditions with multiple lenders to determine what product is the best fit for your business. Consider your target repayment terms based on your eligibility.

Step #3: Select Option: Following your careful comparison of offers, you will be asked to provide closing conditions and sign an agreement. Always scrutinize the agreement to ensure the rate, fees, terms, and conditions are unchanged.

Step #4: Clear to Close: Upon cleverly selecting an option, the lender will initiate a quality control process and complete verifications before issuing updates regarding the fund approval.

Step #5: Fund: After receiving clear to fund and final approval, the lender sets up an automatic repayment process. Finally, they disburse funds into your business bank account,

Frequently Asked Questions by Restaurant Owners

Are There Restaurant Working Capital Loans for Owners with Bad Credit?

There are working capital options for restaurant owners with bad credit. While the eligibility criteria might appear stringent, even those with impaired credit have access to options such as merchant cash advances or short term loans. However, take caution as the repayment terms, rates, and fees get significantly impacted by credit status. Despite these challenges, there is still a chance to refinance your debts and seek investors, even venture capitalists, who may be willing to cushion your venture during tough times.

Are restaurants capital-intensive?

A restaurant is a capital-intensive endeavor and requires a lot of money to stay afloat and maintain a successful restaurant.

How much working capital do I need?

This is an important question to ask yourself before searching for working capital. You can make big mistakes if you don't get your numbers in order first. Calculate your need and predict future sales, don't overestimate.

What are the major sources of capital for a restaurant business?

A restaurant's major source of capital comes from real estate or investors. Getting a loan to start a restaurant is a daunting task. Raising capital from angel investors may be your only solution.

In California, is a licensed California finance lender the only entity I can borrow money from for my restaurant?

A licensed California finance lender is not required for all products and/or entities. Check with your originator and CFL about the legal issues surrounding business financing.

What Are the Documents Required When Applying for a Small Business Loan?

Restaurant owners looking for small business working capital loans typically require at a minimum 3 months business bank statements. It's also vital to supplement this with the eligibility criteria defined by the lender. For instance, some require other financial data like equipment invoices, tax returns, and additional financial statements, depending on the chosen business funding product and the unique qualifications of your restaurant business. These requirements update from time to time, so it's wise to stay informed about such changes.
In certain cases, external factors play a key part in loan approval. For instance, your venture's accomplishments, like a successful event catering service, might enhance your outlet's profile in the hospitality industry. Demonstrating such achievements, combined with the patience to grow steadily, could provide a beneficial cushion on your loan repayment term.
Regardless of your circumstances, it’s essential to identify accessible and affordable options, whether it’s refinancing an expensive loan for better terms or attracting venture capitalists. However, always ensure that you review the repayment term and potential for faster growth that a loan could offer your business.

Here’s a Secret. Get Pre-Approved for Financing for Your Restaurant before you need it! Why Would I, as a Business Owner Want to Get a Quote Now?

Here’s a simple answer. Meeting restaurant working capital needs hinges on access to capital, eligibility criteria, and up-to-date information on product financing. Don't you think a pre-approved finance quota could serve as a reliable cushion for your venture in case some need arises in the coming months? It's vital to understand the process of securing working capital, the costs entailed, the repayment term, and the prerequisites for getting approval.
Businesses should ideally seek to pre-qualify for capital and updates on eligibility terms, in essence, creating an understanding of the financial backing they could avail. Don't overlook the importance of getting the answers to these crucial questions ahead of time! Isn't it advantageous to know how the process operates for different types of business working capital financing products that could potentially be needed in the future?
Doing your research now, instead of waiting for a need to arise, could be the difference-maker in finding the best terms, lower costs, and the best loan for working capital. But of course, the very fact that you're reading this article is evidence of your drive and patience to make informed decisions.
Remember, knowledge, preparedness, and timely updates pave the way to better choices and informed decisions. In the world of finance for your restaurant, information is not just king, but the entire kingdom!

Jacques Famy Jr

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