Restaurant Equipment Financing
How To Get Financing for Restaurant Equipment
The back of house equipment in your restaurant keeps it running. Without a stove to prepare food, a walk-in refrigerator to store meat and produce, or a delivery truck for the catering side of your operations, you might as well shut your doors. If a key piece of equipment broke unexpectedly, or you’re just getting started and need to equip a full kitchen, you’ll likely need to finance these purchases.
The average cost to equip a restaurant kitchen ranges from $40,000 to $200,000 depending on the type of restaurant, your menu, and your equipment needs. That’s only for the equipment, if you need to build out or renovate the space, the numbers can climb much higher. Most small business owners don’t have that much capital on hand. Restaurant equipment financing is a necessary part of opening and keeping a restaurant up and running.
If you’re ready to apply for a restaurant equipment loan now, you can apply online in just a few minutes. But if you’re still unsure how much you need to borrow, or the best loan product to meet your needs, read on.
Top Considerations Before Applying for Financing in the Restaurant Industry
It’s helpful to view borrowed capital as a tool to help your business succeed. Used properly, it supports your continued success. But, like any tool, you need to know its intended purpose and the best way to use it.
Asking yourself these questions, and getting clear on the answers, will ensure borrowing success.
Are you already an owner or are you looking to open or acquire a new business?
The longer you’ve been in business, the less risk you present to a lender. A history of successful operations indicates to them that you know how to run a business and will be able to repay the loan. Existing business owners will find it easier to get funding.
A history of cash flows also helps predict possible cash flow gaps, indicating when you might need to borrow. Past customer behavior can also help you forecast how an expansion could impact your sales revenues. This data can go into a loan application, and you could have assets such as equipment to pledge as collateral.
If you’re opening a new restaurant, or just opened, you have different funding needs. You might be leasing your walk-in refrigerator, and think owning it would be a better financial decision. You might need working capital to purchase food supplies.
Without a long business history, a lender could ask you to pledge personal assets – such as investment or retirement accounts – to secure the loan. It’s unlikely you’ll get funding from a traditional bank, either. Your business’s stage in the business cycle will inform both how much to borrow and which lenders to approach.
Why do you need the funds?
Are you planning on buying a delivery van, or a new oven? Maybe you need access to funds for working capital needs – to make payroll or pay rent during a slow period. Knowing why you need the money is an important piece to successful borrowing.
The “why” often leads to “how much” you need to borrow. If you don’t borrow enough money, you could end up having to take out another loan to complete the purchase or project. If you borrow too much, you’re paying interest and other fees you could have avoided.
Lenders also set ranges that they’re comfortable lending within. If you need a small loan for $5,000 and the bank where you’re considering applying for a loan doesn’t approve loans for less than $50,000 it would be a waste of time to proceed with them. Having an answer to why you’re borrowing, and knowing how much you need to borrow, can point you to the right lender.
What can you afford to borrow?
Before you borrow, put the potential loan’s payment into your budget? Can your business cash flows support both the monthly loan payment and your other expenses? If not, reconsider borrowing (or consider borrowing less).
A loan payment consists of a portion of the loan’s capital spread over the repayment term plus interest. Therefore, since borrowing less money would reduce the base on your loan payment, taking out a smaller loan leads to a smaller loan payment. Make sure that your lender gives you an estimated loan payment before you take out the loan.
Your restaurant’s cash flows must cover the loan payments. When making a budget include a plan to pay back the loan. And try to plan for the unexpected, such as bad weather cutting into revenue from your patio seating.
Establish the funding timeframe
How long will that new stove or industrial stand mixer last? If you anticipate replacing it in three years, don’t take out a five year loan to purchase it.
When borrowing, apply a matching principle. The loan’s term should end when the equipment’s useful life is done. It makes no sense to still be making loan payments on equipment you then need to replace.
Lenders often have standard repayment terms for each of their loan products. Banks may tie you into a two, three, or five year loan, but with alternative lenders your repayment term could be just a few months. Since you’re repaying the loan over a more concentrated timeframe, a shorter repayment term does mean a higher loan payment.
But for smaller dollar purchases, a short-term loan is often your best choice.
What is your business and credit history?
Lenders include your personal credit score and business history in your loan application when evaluating your risk as a borrower. If you have a lower credit score, they could worry that you won’t repay the loan. If it’s too low, some lenders will refuse to extend credit.
Risk is offset by charging a higher interest rate, so small business owners with poor credit will both find it harder to borrow and will pay more for a loan. Before applying for a loan, request a free copy of your credit report and check your credit score. Then compare it to the credit score ranges at your bank or lender to get an idea if they’ll even work with you.
With equipment financing, since the equipment you’re buying with the loan serves as its collateral, a lender may approve your loan if you have a lower credit score. But you still may pay more for the loan than if you had a higher score.
Best Business Loans Available for Restaurant Equipment
While an equipment financing loan is an obvious place to start, it’s not always the best choice for your business.
Equipment Financing Loans
Equipment financing loans are similar to auto loans – they fund the purchase of a specific piece of machinery.
The funds from an equipment financing loan can only be applied to the equipment purchase, and the lender will only extend enough credit to cover the purchase price. The equipment serves as the loan’s collateral, so you’ll pay a lower interest rate than an unsecured loan. However, that collateral piece creates some hassles.
Depending on the loan’s amount, the lender may want to have the equipment inspected and an independent appraisal performed. This will delay the loan’s approval and make the time from application to funding longer. If you’re trying to scoop up a stove from a competitor who went out of business, you could lose out on the opportunity.
Short-Term Business Loans
If you don’t want to deal with an equipment appraisal, and are buying a less expensive piece of equipment, a short term loan might be best for meeting your needs.
A short term business loan has the same underwriting and approval costs for banks as a long-term loan, but because they make more money off long-term loans, banks are reluctant to lend for short terms. Alternative lenders offer short term business loans with terms of just six to twenty-four months, but at higher interest rates than a bank, 9% to 45%.
To apply for a short term loan at Shield Funding you must have been in business for a minimum of two years and need a credit score of at least 650. Your restaurant’s minimum monthly revenues must exceed $10,000, but you can borrow as little as $15,000, and there are no prepayment penalties. If you know that you can pay off the loan quickly, a short term loan could be better for your business than an equipment financing loan.
Bad Credit Business Loans
Unfortunately, the ups and downs of the restaurant industry could have caused some damage to your credit score. If you had to borrow or take out credit card advances to get through the pandemic, traditional lenders may no longer be willing to work with you.
Alternative lenders offer bad credit business loans to borrowers with less than stellar credit or whose business is in an industry banks tend to avoid – like restaurants. While your credit score could disqualify you for bank financing, other factors also lead to a loan application’s rejection. Banks are very picky about lending and reject about the same number as loan applications as they approve.
Traditional lenders typically require that applicants have two years of tax returns, strong and consistent revenues, and few to any blemishes on their business history. The loan application and underwriting process can take months, which is frustrating for newer business owners with immediate needs. And since the restaurant industry is known for its high turnover, many banks automatically reject applicants in this industry.
Alternative lenders can approve a loan application within 24 hours and disburse funds in a few days. As long as you have monthly revenues above $8,000 and a credit score above 500, you can qualify for financing with an alternative lender. Shield Funding gives borrowers loans in amounts ranging from $5,000 to $1 million, at rates of 12% to 45%, for terms of two to eighteen months.
If you’re ready to borrow for your restaurant now, apply for a loan today! It takes just a few minutes online, and your loan could be funded within a few days.