Education

How to use a restaurant business loan to finance your expansion

28 Sept 2022

If you’re running a successful restaurant, you might be thinking about expanding to a new location. Growth in any sector can be challenging, so it’s important to have a solid plan in place and understand the different finance options available to you.

Restaurant/cafe

When expanding your restaurant business, you’ll need to find enough capital to fund the process from start to finish. Your existing restaurant should be profitable, and you’ll need to work out whether investing in a new location is likely to pay off – or not. 

Create a business plan

Even if your current restaurant business is a success, you’ll still need to write a business plan for your new one. Doing so will help you to set your objectives and articulate how you’re going to make your expansion project economically viable.

It will also help you assess the success of the new location once it’s up and running. In some cases, business loan lenders will need to see your business plan before lending to you. Here are a few things your business plan should cover: 

  • Expansion concept

  • Target customers

  • Staffing requirements

  • Market analysis

  • Cash flow projections 

  • Premises rental

  • Energy costs

Opening a new restaurant could cost thousands to millions of pounds. The amount of cash you need to raise will depend on the size of the restaurant, the location and a number of other factors. That’s why careful thought and planning is key. 

5 types of business finance for restaurant expansions

If you want to use a business loan to finance your expansion, there are a few different options to choose from. 

What you’re planning to use the money for (e.g. a premises or new equipment), how much funding you need and your business’ financial circumstances are just a few of the things that will determine which type of finance you might end up choosing.  

1. Term loans

A term loan can be used to fund a restaurant’s expansion. 

Term loans enable businesses to borrow a set amount of money over a specific period of time (known as the ‘term’). Interest rates are fixed or variable, and many term loans come with repayment periods of between six to 24 months. 

Business loans in general are either secured or unsecured. A secured loan requires the borrower to provide collateral for the loan in the form of a business asset, such as machinery, vehicles or a commercial property.  

Unsecured loans don’t involve security, but may require a personal guarantee

A business might choose an unsecured loan if they want to borrow more than their assets are worth or would rather not offer assets as security. However, mainstream banks tend not to lend more than £40,000 in unsecured finance.

2. Commercial property finance

Restaurants looking to buy a new property or extend or refurbish their existing one can explore the different types of commercial property finance options on the market today. 

Commercial property finance is an umbrella term that includes everything from long-term commercial mortgages to short-term bridge loans.

When it comes to commercial mortgages, most lenders provide up to 75% of the property’s total value and the business makes up the difference. Bridge loans are used to “bridge” a gap in funding while longer term finance is arranged. 

3. Equipment finance

Equipment finance can help restaurant businesses to buy or lease the items they need to operate and grow with confidence. Repayments are spread over a set period of time, helping the restaurant to preserve its cash flow.

There are three main options to choose from when it comes to equipment finance: finance lease, operating lease and hire purchase. 

Hire purchase allows the business to own the asset at the end of the contract. 

With a finance lease, the business rents the asset then returns it at the end. The business is responsible for paying for most of the item’s cost over the period of its life and is responsible for maintenance.

An operating lease involves the rental of the equipment for a shorter period of time, and the business is responsible for keeping it in good condition during the agreement period.

Examples of things a restaurant can lease:

  • Cooking equipment

  • Food equipment

  • Refrigeration equipment 

  • Epos and cash registers

  • Furniture for the restaurant

  • Ice machines

  • Cold rooms

  • Coffee machines

4. Crowdfunding

Some restaurants use crowdfunding to start or expand their enterprise. 

Like equipment leasing, crowdfunding falls into three main categories.

Donation/reward crowdfunding is when people donate to a project or business, in this case a restaurant, in return for rewards such as free meals or early access.  

P2P crowdfunding, otherwise known as debt crowdfunding, is when a pool of investors lends the restaurant money which must be repaid, plus interest. You can read about how Simmons Bar used P2P crowdfunding to open a new location here.

Equity crowdfunding is when people invest in a business or venture in return for shares in it. If the restaurant is successful, the shares may go up – and vice versa. 

5. Merchant cash advance 

A merchant cash advance is a type of business finance designed for businesses that take customer card payments – including restaurants. 

Quick to arrange (they can be available in a matter of days), merchant cash advances provide companies with a quick cash injection that is subsequently repaid through a percentage of its credit and debit card payments. 

This method can be convenient from a cash flow perspective, because the repayments align with how much trade the restaurant does.  

Merchant cash advances can be used for any business purpose, such as renovation and refurbishment, purchasing stock and working capital.

Businesses don’t always require funding for growth – sometimes they need cash for day-to-day operations or to support cashflow during seasonal troughs. 

If you’re looking to secure funding for a restaurant for growth purposes or otherwise, use Funding Options to see what you could be eligible for today.

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