You'll need to pay for facility improvements, kitchen equipment, serving equipment, signage and a whole lot more to open your restaurant. Most restaurant owners require a loan to meet these start-up costs. Getting a loan for a first-time restaurant can be challenging because of the perception that the restaurant is likely to fail during its first year, as well as concerns about a lack of owner experience.
The Small Business Administration requires you to provide 20 to 30 percent of the loan amount to be eligible for a loan, and alternative lenders may charge high interest rates. You may need to take out a second mortgage on your house to guarantee the loan. Request funds through family, friends, or potential customers. Use a crowdfunding portal to raise funds through the community. If your idea has real potential, you also may find future customers through crowdfunding.
Find Your Niche
Restaurant loans are the most common type of Small Business Administration loan. Non-SBA lenders may be reluctant to provide loans to new restaurants because of a popular, though untrue, belief that many restaurants fail during their first year. Overcome stiff competition and lender doubts by finding a market niche. For example, if your area has no pizzerias, be sure to include this in your business plan. If you have a great location, find out exactly how much customer traffic will pass by and write this in your business plan.
Make a Lender List
Save time by focusing on lenders with an expertise in the food service industry and a history of making restaurant loans. Eliminate lenders that lack experience with restaurant loans. Locate your local SBA office and request a list of lenders in your area specializing in restaurant loans. Obtain a list of Community Development Financial Institutions in your area by checking cdfifund.gov.
The SBA and private lenders require extensive financial information to issue a loan. Download the SBA loan application checklist at sba.gov, which is a guideline for documentation for SBA and non-SBA loans. Obtain your credit report. Collect your bank statements and pay stubs for proof of income. Print out your tax returns for the past three years. Work with an accountant or prepare a three-year projection of profit and loss for the restaurant yourself.
A business plan may be the most important part of applying for a first-time restaurant loan. Describe the restaurant, proposed location and potential customers. Write a kitchen and front house staffing plan. Include information about competitors, pricing and unique foods and customer service you will offer. Write an executive summary with goals for first-year profit, including start-up funds required. Conclude the plan with financial projections, including income and expense and projected profits for at least three years.
- Foodstart: 10 Things to Know Before Applying for a Restaurant SBA Loan
- Entrepreneur: Planning for a Restaurant
- SBA.gov: Loan Application Checklist
- Bloomberg Businessweek: The Restaurant-Failure Myth
- New York Times: When Banks Won't Lend There Are Alternatives
- Department of the Treasury: Community Development Financial Institutions Fund
- Hannes Magerstaedt/Getty Images Entertainment/Getty Images