You’ve tasted success with your restaurant, and now you’re looking to savor more of it, perhaps by adding more seats, sprucing up the décor, or even taking a leap to open a brand-new location. As enticing as expansion can be, it often comes with a side dish of financial challenges. How do you fund this vision? It’s great if you have the cash to run with it, but most restaurateurs need some financing. Here, we simmer down the essentials for you, show you how to analyze what options are available, and help you make an informed choice on financing your restaurant expansion.
Understanding Your Restaurant Expansion Goals
The first step toward seeking funding is to clearly define your expansion objectives. When it comes to financing your restaurant expansion and how lenders see your request, there are two different types of expansion:
Enhancing a Current Location –This could include refurbishing your current venue with new furnishings, adding major new equipment or perhaps expanding your existing space to cater to more customers.
Opening a New Location – Sometimes this means opening another location of the same concept, and other times it will mean opening a new concept altogether. For this discussion, we’ll treat these as one. However, note that in general, it’s easier to finance a new location of an existing concept.
Recognize that most lenders see these two scenarios quite differently. When you’re enhancing your current location, lenders will very heavily weigh the historical performance of that location. However, if you’re opening a new venue, lenders won’t rely solely on the historical performance of existing locations.
With each type of expansion, there are different loan options available and different nuances to the financing process. Let’s see what options are on the menu for each one.
Financing Options for Enhancing a Location
When spicing up your current restaurant, you have the most options available to you. Here’s an overview of the types of financing you can consider:
SBA Loans: These are the staple grains of loans. They’re foundational and versatile, with long repayment periods and reasonable rates. They are available for a wide variety of purposes and from many lenders. The downside? They are usually time-consuming, paperwork-intensive, and require strong credit and business financials. (Note – a few lenders now offer quick-fund SBA options up to $150,000 based solely on revenue!)
Term Loans: While SBA loans are term loans, many other non-SBA term loans exist. These provide a lump sum upfront with regular repayments. Like SBA loans, they are great when you know exactly how much your expansion will cost. Some non-bank lenders now make term loans and offer reduced paperwork and options for you even if your credit is less than perfect. Terms are usually from 1 to 5 years.
Lines of Credit: These can be great options to offer more flexibility than term loans. With business lines of credit, you can borrow up to a limit and pay interest only on the amount borrowed. These are ideal for expansions that will incur expenses over a period of time, or where the exact cost of the improvements is tough to quantify.
Equipment Loans: For that essential appliance or that plush seating, these loans are exclusively meant for equipment needs. Equipment loans for restaurants allow you to upgrade furnishings, kitchen or cafe equipment, or technology items without hefty out-of-pocket costs. Equipment loans can be great for not requiring additional collateral and not requiring as much financial paperwork as other loans.
Real Estate Loans: These loans aren’t fast, but they can be extremely valuable if you own your business property. The most common way to use them is to get a refinance loan and include cash-out to tackle your expansion plans. If you are looking to buy your restaurant location, you can get a purchase loan which often includes funds to make improvements simultaneously.
Cash Advances: These are quick solutions for immediate needs. They come at a higher cost and are not usually a first option. But they serve an important role in the small business landscape. These can be POS loans from your POS vendor, but usually, better terms can be found elsewhere. These are available to owners with weaker credit, businesses with paper losses, and borrowers who want cash quickly. They are best used when they have a fast path toward creating new revenue or increased profitability. This allows them to be paid back on a quick timetable usually.
Prep Work: How to Finance Opening a New Location
For a new location, the financing process can be more challenging. There are still several options available, but they will be harder to find, take longer, and require more information than loans for your existing location.
Also, the loans available to you depend partly on how much funding you need. If you have most of the cash available to you and only need financing for a modest amount of a new location’s expenses, you may be able to borrow solely based on the performance of your existing location.
For example, if your existing location has good revenue and you’ve been in business for a few years, you can get a term loan, line of credit, or cash advance that will be connected to the existing business. Rather than looking to the new location to pay the loan, these lenders will look to the existing location to support the new debt.
However, for other loan types, you won’t find lenders who will only make the loan to the existing business. These lenders will need information and projections about the new location.
Assuming you need most of the cash to open the new location, you must have a plan. Ideally, you’ll have a business plan for the new location. But even if you don’t have a full plan, it’s important to put together key information to show lenders, including:
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- Location/market analysis – why have you chosen this location, and why will it succeed?
- Business model – concept, menu, pricing, etc. – particularly important if the concept is new
- Management – who will run it, what’s their experience, and why will they be successful?
- Start-up costs – how much will it cost to get to the opening? (i.e., leasing, staffing, build-out, inventory)
- Operating projections – what are the monthly revenue and expense projections, and what are the assumptions included (e.g., staffing, hours, covers, etc.)
Loan Options for a New Location
What kind of loans can you possibly get for expanding to a new location?
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- Equipment Loans: These are a good option to finance the furnishings and equipment for a new location. Since the equipment serves as collateral, these loans are more available for new locations than most other types.
- SBA and Term Loans: These are the most common options and can be found with banks and some non-bank lenders. They will require detailed business plans and a compelling case for how the loan will be repaid. These will also often require collateral if you have any, such as another building or personal home.
- Lines of Credit: These are available but become a bit more intricate. Lenders prefer to make these to seasoned restaurants with a consistent revenue history. It’s possible to find these for a new location, but lenders will also want a personal guarantee from an existing location, or both.
Loan Brokers – Your Financial Sous-Chef
The small business lending world is confusing and complex. Imagine having a seasoned financial sous-chef by your side. A finance broker is exactly that sous-chef in small business loans.
If you have a strong relationship with your existing bank, you might reach out to them for help. But once you exhaust that option, you are faced with thousands of lenders offering dozens of loan options. This is where a finance broker makes a huge difference.
A good finance broker can provide:
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- Deep Knowledge – They’ve seen countless expansion stories and know the pitfalls to avoid.
- Broad Network – They’re familiar with the array of financial options in the marketplace and the lenders that make them. They can introduce you to lenders you may not find on your own.
- Focus and time – They aren’t busy running a restaurant like you. Their sole focus is the world of business loans and helping you get what you need.
- Negotiating power – They know what lenders want and need to hear to get comfortable making a loan. They can negotiate better terms, and sometimes, a good broker can get approval from a lender where an owner would be denied.
Final Tips on Getting a Loan for Expansion
These four keys will help guide you to the best option for financing your restaurant expansion:
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- Be Clear: Just as you’d be precise with your recipes, clarity in your financial needs and how you present them is crucial.
- Stay Informed: Regularly taste-test the industry. Network with peers, attend seminars, talk to any experts you can find, and stay updated.
- Plan Ahead: Anticipate the unexpected. Understand loan timelines and set realistic expansion plans. New financing often takes longer than expected.
- Get Help: A master chef seldom works alone. Whether it’s your accountant, a finance broker, or your bank, open communication channels and accept help.
Your restaurant’s expansion is a testament to your hard work and vision. As you embark on financing your restaurant’s expansion, remember that, like in any kitchen, the right ingredients and partners can make your dish an instant classic.
This Guest Article was written by Mike Spitalney. Mike is the CEO and founder of Everfund, a leading small business financing advisory firm. Mike is on a mission to help small businesses get the best financing for their needs and avoid the big C’s (confusion, clutter, complexity) of today’s lending world. Over two decades, Mike has helped thousands of businesses thrive and grow using a variety of short and long-term loan options, from working capital loans and lines of credit to SBA and bank loans. Contact Mike to learn more or discuss your business needs, or grab a seat with the Fork CPAs to get your financials financing-ready.
