How to Finance a Restaurant Purchase
Restaurants are always opening up in every city and town across North America. But how are all these restaurants being financed? This is an important question that every aspiring restaurateur should ask.
Opening a restaurant includes substantial upfront costs for the equipment and products you’ll need. There’s also lots of time and prep work that goes into creating menus, acquiring permits and licensing, and hiring the right staff.
Marketing your restaurant comes next, and in a world where restaurants are on every street corner, you will have to find a way to stand out from the crowd.
Every restaurant purchase starts with the need for capital. But what are the best ways to raise capital when opening or upgrading a restaurant?
The Best Financing Options For Opening a Restaurant
1. Restaurant Equipment Financing
Instead of buying the equipment you will need for your restaurant – and there will be a lot of it – you can lease or finance it. It allows you to find an affordable monthly fee to pay through a custom package made for you.
Equipment leases or finance plans can range from 12 months to 60 months. This gives you lots of time to establish your restaurant with the equipment you need.
This model is great for planning ahead as your costs are fixed and clearly defined.
2. Business Line of Credit
A business line of credit will give the business owner a type of flexibility that they wouldn’t get out of a business loan. This makes a business line of credit one of the quickest and most convenient tools for a restaurant owner, especially early on in their venture.
Like a traditional line of credit, the business owner will only have to pay for what they use. If you are set up on a line of credit with a maximum of $100,000, but you only use $25,000, then that’s all you’ll need to pay back.
A business line of credit is a great emergency backup in case something goes wrong. If you need it, it is there for you to use. If you don’t need it, then you are not charged for it.
It’s simple and easy.
3. Restaurant Business Loans (Unsecured)
An unsecured business loan is a loan that requires no type of collateral asset. The lender is aware of the risks, and both sides proceed knowing what could happen.
The potential restaurant owner will need to have a good credit rating, have an excellent financial history, and be able to forecast consistent cash flow. The business owner should be prepared to show the lender that they have a plan ready and that they will be able to make monthly payments.
The lender charges a higher interest rate on the loan because they are taking on a high risk. And while the high-interest rates will make the loan more expensive for the business owner, they won’t have to worry about leveraging their assets like their home and vehicles.
4. Restaurant Cash Advances
A restaurant cash advance is the sale of future business revenue for money right now. Usually, a restaurant owner will sell off 5 to 20% of its future business revenue so the funding company will give them a large amount of money to start their restaurant.
There are risks on both sides of this. For the restaurant owner, you could end up paying back more than the amount you received if your restaurant does well. If the restaurant does not do well, the lender will be out the initial amount plus the percentage they had anticipated.
What Is Best for Me?
Well, that depends on a lot of things, like if you’re a first-time business owner, if you’d like to lease your equipment or own them, and much more.
We recommend meeting with an experienced commercial real estate expert to weigh all of your options. They will help you balance the pros and cons, so you can make an informed financial decision.
New restaurant owners in the Toronto area can meet with the CHI Real Estate team. We are experienced in connecting quality restaurant properties for sale in Toronto with clients that are looking for them.
Are you interested in seeing what options are available to you? Get in touch with our team today by calling 647-347-9723.