The process of opening a new restaurant has its own set of struggles. You need a substantial amount of money to pay for business expenses such as kitchen equipment, commercial space, equipment, facility improvements, and more. Most restaurant owners take on a business loan to pay for start-up costs.
However, first-time restaurant owners have a hard time qualifying for a loan for several reasons. For one, the common (but false) belief is that restaurants are likely to fail within their first year. Another reason is the owner’s lack of management experience. But there are other ways to secure financing. Here are ways how to get a loan to start a restaurant:
1. Make a Business Plan
When applying for a business loan, almost all potential lenders ask for a business plan. Lenders want to know how prepared you are about starting a restaurant business. Make sure to include the following information in your business plan:
2. Find Your Niche
With the number of restaurants popping up everywhere, it’s no surprise that restaurant loans are the most common type of SBA loan. Since restaurant businesses are a very common venture, competition is tough and lenders doubt if you will be able to pull it off. To stand out from the sea of restaurants, make sure to find a niche. For instance, you might want to open a pizza shop if there are no pizzerias in your area. This narrows down your target audience and gives lenders assurance that your business will be profitable.
Moreover, if you happen to be situated in a great location, be sure to know how much traffic it receives. Include this information in your business plan.
Related: How to Attract Customers on Your Restaurant’s Opening Day
3. Know Your Costs
It’s extremely important to state an estimate of the amount you’d want to borrow when you apply for a loan. If you ask for less than what you need, you might not be able to address the needs of your restaurant. Asking for more, on the other, hand would plant doubt in lenders which may lead to the rejection of your loan.
Even if you’re not opening your doors yet, you should already know how much you need to keep your restaurant’s operations up and running. Be sure to calculate the costs of your payroll, equipment, utilities, and real estate.
4. Financial Information
Private lenders and the Small Business Administration need to verify your financial information before issuing a loan. Lenders would want to see your credit report, bank statements, proof of income, and tax returns from the past three years. Keep these documents readily available in case the lender asks for it.
5. Work on Building Your Credit
One of the biggest red flags for lenders is a poor credit history. If you’re a start-up business, it’s possible that you will not be able to qualify for a larger and more comprehensive business loan. Your credit score will tell lenders how responsible you are in paying your debts. Essentially, it determines your credit worthiness.
To qualify for loans, you must make sure that you have a credit score of 580 or higher. Aside from that, you should also make sure that you don’t have past bankruptcies. Paying your loans on time, checking your credit report regularly, and decreasing credit utilization ratio are just some of the ways to improve your credit score.
6. Make a Lender List
For obvious reasons, your lender plays an important role in your restaurant business venture. When choosing the best lenders to finance your company, make sure to list down potential lenders. To save time and effort, narrow it down to lenders that are familiar with the food service industry and restaurant business loans.
If you can, visit the lending companies and talk to them yourself. Ask for the terms for the loan and compare each to one another. It’s up to you to decide which term will best suit the repayment capabilities of your restaurant.
How to Get a Loan to Start a Restaurant
If you’re thinking of applying for restaurant loans, then you have to make sure that you’ll meet the requirements the lenders have set. If you want to know more about how to get a loan to start a restaurant, heed the tips above. These things, no matter how simple, can do a lot in helping your business succeed. Most importantly, be sure to find the lender that offers the best loan terms and interest rates.