Restaurant loans for good and bad credit

From rent, utilities and kitchen equipment to buying quality ingredients and paying your staff, restaurant owners have a long list of costs to manage. If you need extra funding to strengthen or grow your business, you might need restaurant financing. Keep reading to find out about the types of funding available, how to compare restaurant loans and how to find the right loan for your business.

Types of restaurant loans

There are several different types of restaurant loans available, so consider the following main options when searching for financing.

Equipment financing

Equipment financing provides the money you need to purchase essential business equipment. New and used equipment can sometimes be financed directly with the provider you’re buying it from, but you can also get equipment financing from banks, online lenders and specialist equipment finance companies.

With this type of loan, you break up the expensive upfront purchase price into manageable monthly payments. The equipment purchased is used as collateral for the loan. This reduces risk for the lender, which makes it possible to get restaurant equipment financing for bad credit.

Business term loans

Business term loans provide a lump sum you can use to pay for large one-time expenses like kitchen and front-of-house equipment. You’ll receive a specific loan amount to be repaid in installments over time. Term loans can go up to $1 million with terms from 3 to 10 years. There are also secured and unsecured loans available.

Business line of credit

A business line of credit is a lot like a credit card, but with a lower interest rate. It provides funds you can access when needed up to your pre-determined credit limit, and you only pay interest on the money you actually use.

Unlike a term loan, which has a fixed repayment period, lines of credit are revolving—once you repay what you borrow, those funds become available to withdraw again whenever you need.

Many lenders offer business lines of credit ranging from $10,000 to $100,000, but amounts of up to $1 million are available in some cases.

Canada Small Business Financing Program (CSBFP) loans

The Canada Small Business Financing Program offers business loans that are up to 85% backed by the Canadian government. Funding is provided to startups and small businesses with annual revenues of less than $10 million, and you can apply for financing through participating banks and credit unions.

There are two options to choose from:

• Term loans of up to $1 million to buy or improve land or buildings, buy or improve equipment, pay for leasehold improvements and pay for intangible assets and working capital costs.
• Lines of credit of up to $150,000 to pay for working capital costs.

There are also limits on the maximum interest rate lenders can charge, so you can find competitive rates with CSBFP loans.

Merchant cash advances

A merchant cash advance provides you with a lump sum in exchange for a percentage of your future debit and credit card sales. How much you can borrow is determined by your previous sales data, and this type of funding provides working capital for your restaurant.

Merchant cash advances offer fast access to funds, and there’s no collateral required. It’s also possible to qualify for funding if you have less-than-perfect credit. The downside is that high interest rates and fees may apply.

Where can I get restaurant financing?

• Canada Small Business Financing Program (CSBFP). This program provides small businesses that have less than $10 million in annual revenue with loans that are up to 85% backed by the federal government. Term loans of up to $1 million and lines of credit of up to $150,000 are available, and you can apply for funding through a participating bank or credit union.
• Banks. In addition to CSBFP loans, banks also offer business term loans, lines of credit and equipment financing. Loans come with strict eligibility criteria, so you’ll typically need good to excellent credit to qualify, but banks can offer some of the most competitive interest rates around. Learn more in our guide to bank loans for small businesses.
• Credit unions. Credit unions provide access to business term loans and lines of credit. While credit unions typically don’t offer the same large loan amounts as banks, you may find slightly more flexible eligibility criteria and competitive rates. However, you’ll need to become a credit union member to get a loan. Learn more in our guide to credit union business loans.
• Online lenders. Online lenders offer a convenient application process and fast funding, while also tending to have more lenient eligibility requirements than traditional lenders. But while some lenders are willing to work with you if you have bad credit, you’ll need to be willing to settle for a higher interest rate. Learn more in our guide to the best private business loans.

How to apply for restaurant financing

You can get a restaurant loan by completing the following steps.

Step 1: Identify your needs

The first step is to clearly define your restaurant’s needs and goals. For example, you may need to upgrade a few old pieces of equipment or purchase new appliances to expand your kitchen’s production capability. Also consider what type of financing you need and what sort of repayment schedule suits your business’ cash flow.

Step 2: Compare lenders

Compare lenders that offer the type of restaurant financing you need. Check eligibility criteria, loan amounts, business loan rates and fees offered.

Some lenders allow you to get pre-approved for a loan without affecting your credit score. Getting pre-approved provides you with a clear idea of the loan rate and terms you may be able to qualify for, making it easier to compare your options.

Step 3: Fill out an application

Fill out a restaurant loan application with your personal and business information. You’ll need to provide a detailed business plan with information about your revenue, financial projections, industry experience and qualifications. You may also need to submit to a personal credit check and have your business credit report pulled as well.

Step 4: Review and sign the loan contract

If you’re approved, the final step is to review all the details of the loan contract before signing. Depending on the lender, you’ll get funds via e-Transfer or direct deposit.

Am I eligible for a restaurant loan?

Eligibility requirements for restaurant loans vary from lender to lender, but you’ll generally need to meet:

• A monthly or annual revenue requirement
• A minimum time-in-business requirement
• A minimum credit score requirement

In some cases, you may also be required to provide an asset as collateral for the loan.

What documents do I need to apply for restaurant loans in Canada?

These will also vary among lenders, but you may want to prepare the following:

• A detailed business plan
• A statement of your financial needs
• Your business and/or personal bank account statements
• Profit and loss statements
• Your business ownership documents

Check the lender’s application guidelines for full details of the paperwork you need to provide.

How do I compare restaurant financing options?

With so many types of financing available, choosing a restaurant loan can be overwhelming. Focus on these key factors when comparing your options.

Eligibility criteria

Check the requirements you’ll need to meet to qualify for funding. The age of your restaurant, annual revenue and your personal credit score, among other factors, can all affect your eligibility.

Loan amount

Be sure the lender’s maximum amount covers what you require. But avoid applying for too much. Taking on more than you need can lead to paying unnecessary interest charges and ultimately throw you into a cycle of debt.

Loan term

A longer loan term means lower monthly payments, but it also means you’ll pay more interest over the life of the loan.

APR

Check the interest rate and fees to calculate how much your business loan will cost. The key figure to look at when comparing loans is the APR, which reflects both the interest rate and most fees. Keep in mind that the APR doesn’t include penalty fees for things like late or missed payments.

Repayments

Check if you can tailor the repayment schedule to suit your business. If you want to pay off the loan early, will you be charged a prepayment penalty?

Can I get restaurant equipment financing for bad credit?

Yes, it’s possible to get restaurant equipment financing for bad credit. Because the equipment you purchase is used as collateral for the loan, the lender’s risk is reduced. If you can’t keep up with repayments, the lender can seize the equipment and sell it to recover their losses.

However, you may struggle to qualify for a loan with traditional lenders like banks, who tend to have quite strict eligibility requirements. You may need to consider online lenders that are willing to work around bad credit. Rather than focusing on your credit score, they’ll look at the overall health of your business and whether you have enough revenue to afford repayments.

Unfortunately, you can expect a higher interest rate on restaurant equipment financing, because lenders perceive bad credit borrowers as higher risk. The good news is that if you manage your restaurant equipment financing repayments responsibly, your credit will improve and you have a good chance of getting a more favourable rate on your next loan.

How to increase your chance of getting approved for restaurant loans

Consider providing collateral

Using business assets as collateral can boost your chance of approval. Since this provides more security for the lender, you may score a lower interest rate. However, you risk losing the asset if you can’t keep up with repayments.

Improve your credit score

The lender may check your business credit report as well as your personal credit score. If your restaurant is a relatively new business with limited credit history, the lender will pay close attention to your personal score. Taking steps to improve your credit score like paying off high-interest debts and correcting inaccurate listings in your credit report can increase your chance of getting approved.

Put together a detailed business plan

The lender will want to see evidence that your restaurant has a strong future, so compiling a detailed business plan will increase your odds of getting approved. Include information about your qualifications and industry experience, detailed financial statements, bank statements, tax records and how you plan to use loan funds.

Bottom line

While it can be difficult to get a loan for a restaurant, there are plenty of lending options available. Consider your financial position and needs carefully, then compare restaurant loans from a range of lenders to find the best financing option for your business.

Frequently asked questions

• Can I get restaurant equipment financing for bad credit in Alberta?

  Yes, it's possible to qualify for restaurant equipment financing for bad credit in Alberta. The equipment you purchase with the loan amount is used as collateral for the loan, which reduces the level of risk for the lender. They will focus on your business's financial position and whether you will be able to afford loan repayments.

• Can I get restaurant equipment financing for bad credit in BC?

  Yes, it's possible to qualify for restaurant equipment financing for bad credit in BC. Rather than considering your credit score, the lender will check your business' financial strength when assessing whether you can afford repayments. Because the equipment you purchase is used as security for the loan, the lender can repossess and sell the equipment to recover their losses if you can't make on-time payments.

• Can I get restaurant equipment financing for a startup?

  Potentially, yes. It may be more difficult to secure a traditional business loan, but you have other startup financing options. Finding a partner or an investor, running a crowdfunding campaign or applying for a loan through the Canada Small Business Financing Program (CSBFP) could potentially get you funding as well.

• How long does it take to get restaurant financing in Canada?

  It can take anywhere from one business day to over a month to receive funding. Timing varies by the type of restaurant financing you're seeking, the lender you're applying with and the amount you're borrowing. Factors like missing required information on the application will slow down funding. Online lenders tend to offer the fastest loan turnaround time.

• Is it hard to get a restaurant loan?

  It can be more difficult to get a restaurant loan than it is to access financing in some other industries. This is because lenders view the restaurant industry as volatile and risky. However, there are many lenders and loan options available. Taking steps to improve your credit score and providing collateral can improve your chance of qualifying for a loan.

To make sure you get accurate and helpful information, this guide has been edited by Leanne Escobal as part of our fact-checking process.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio