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How to get a business loan to start and grow a restaurant

Published By Janet Gershen-Siegel at August 29th, 2017

If you love to cook or you love to eat but know you can do better than the restaurants and cafés in your area, you might be dreaming about opening your own restaurant.

Like all businesses, getting started with a restaurant is probably going to mean you will need to borrow capital. Often, that will be a business loan.

Getting a business loan if you have good or decent personal credit

Having good or decent personal credit will always help you when applying for a business loan. When you consider what credit score is needed for business loan, the higher, the better.

You will often do best by going to a lender which participates in the SBA (Small Business Administration)’s lending programs. SBA 7(a) loans can be used for opening a new restaurant or help you acquire, operate or expand an existing one. Under certain circumstances, your business could qualify for a CDC/504 loan, but that one is for real estate or equipment. You won’t be able to use it to make payroll.

Getting a business loan if you have bad credit

If you aren’t blessed with great personal credit, then you may be wondering just how to finance a business with bad credit.For one thing, if you are brand new to the restaurant business, a lender may very well be looking for a personal guarantee from you. Or they might want you to take a second mortgage out on your home. Another possibility is that your down payment amount might have to be high. Because the lending institution cannot be sure if you will be able to pay their loan back, it is understandable that they would want more up-front cash.

One way some restauranteurs get that kind of up-front cash is by turning to venture capitalists and other investors. However, this means you will be giving up a degree of ownership and it should be seen as more of a last resort.

Another method is by lining up local funding from within your community. That can be from future customers, family, and friends. These kinds of smaller investors will still have a stake in your restaurant business, but it would not be as high a percentage as a venture capitalist would want. They would also, most likely, be satisfied with less of a return on investment than a venture capitalist would want.

Don’t want to deal with investors? Then if you don’t have up-front cash, you should be prepared to put up collateral. Collateral for a restaurant or café business can be anything from inventory to real estate if you own the land or building where your business is, to fixtures such as ovens and freezers.

Preventing business loan denial

While you cannot absolutely guarantee an approval, you can take some steps to make it a lot harder for a lender to want to deny your restaurant a loan.

Make sure you have a DUNS number

Without a DUNS number, your business has no credit score at all. Hence a lender either denies you a loan or depends on your personal credit history. So get a DUNS number from Dun & Bradstreet. They’re free.

Make sure you aren’t already using too much credit

If you are using over 30% of your available commercial credit, then lenders are not going to want to fork over cash to you. This makes it harder for you to pay back any loan.

You need to show a responsible repayment history

This one goes directly to the heart of reasons to get a loan – or not. Lenders understandably will take a good, hard look at your history.

You should be able to demonstrate cash flow

This is, of course, impossible in a brand new business. Therefore, you will need to prove in other ways that you can pay back any business loan.

Iron these problems as well as you can before trying to get a business loan for your restaurant business.

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