Restaurants are a tough business. Many people still believe that 90% of restaurants fail the first year. However Adam Ozimek, a Forbes contributor, explored that myth and claims that only 17% of restaurants close their doors within the first year. Ozimek also states that many of the restaurant that closed were profitable at the time. This can be due to family issues, retirement, or simply transitioning into a new industry. No matter what the lifespan statistics are, we cannot deny that Americans love to dine out. 90% of Americans do not like to cook, reported CNBC in August 2017. Armed with this new information, you would think lenders would view restaurants as a lower risk, however that is not the case.
Restaurant owners may find themselves desperate to replace old or outdated equipment, or simply wanting to upgrade existing equipment. There is still hope to find financing, let us explore a few of the financing options available.
Traditional Bank Loan
Traditional banks will generally offer the best rates available. But this is only offered to very well-qualified borrowers. To qualify, the banks will want excellent credit, collateral, a 20% down payment, and proof of profitability. Oftentimes, the equipment alone will not be enough collateral and the bank will require additional collateral to approve the loan. The lengthy approval process and strict requirements, makes a bank loan difficult for some borrowers to obtain
Small Business Association (SBA) Loan
The traditional bank process can take a very long time. If you need have less than perfect credit or the money now, traditional banks are not a good option. The SBA loan process is notoriously lengthy as well. However the SBA Express loan program will expedite the application process. This loan option is found under the SBA CDA/504 loan program, which is probably the best loans for restaurant equipment. The SBA loan program works with lenders and guarantees the loan, making it easier to qualify.
Equipment Financing Loan
Equipment financing uses the equipment as collateral for the loan, and the approval process is super quick. The downfall is the interest can skyrocket up to 30%! These loans are considered high-risk and the interest rates generally reflect that. Another downfall about this loan is the equipment could become outdated before the loan is repaid. This can make the loan upside-down when it is time to replace the equipment again.
Business Line of Credit
- A business line of credit can be a great option to finance restaurant equipment. The beauty of a line of credit, is you only use what you need. Therefore you will only be charged interest on the amount used. It is similar to a credit card, but usually has lower interest rates. However since this is an unsecured loan, lenders do have stricter requirements. Even if is backed by the SBA.
- No matter which financing option you choose for your restaurant equipment you will need to know how to qualify. You will need need good credit, proof of profitability, and in some cases, a downpayment of 20% or more. It is also important to know the lifespan of the equipment before you look for a loan. Typically, the term of the financing should not exceed the lifespan of the equipment.