There is a chance you may have already applied to a restaurant business loan, or you may be considering applying for one. This article will walk you through the process to properly apply for a loan that works for you.
As a restaurant owner, you have to ensure that there is always an adequate amount of cash at your disposal. When there is a constant stream of customers, and sales are high, the business will generate the funds that you need to pay for your regular expenses. But there may be times when business is down. During these periods, you may need less cash, but you will still have to find the funds for fixed expenses like electricity, rent, wages, and license fees.
A restaurant business loan could offer the best solution. These loans are available from a wide range of lenders including banks and other financial institutions.
Remember that a restaurant business loan can be difficult to obtain. Lenders need to be sure that they will get their money back. A report on CNBC.com states that 60% of new restaurants fail within their first year. By year five, this percentage climbs to 80%. Even if these statistics are off the mark, it is no surprise that lenders are wary about advancing money to restaurant owners.
Now, the good news: here you have some steps you can take to ensure you have the best possible chance of getting your restaurant business loan approved.
4 Steps To Get Approved for a Restaurant Business Loan
1. Get your paperwork in order
Lenders are reassured if you can produce documents that substantiate your claims. It is a good idea to keep your personal tax returns handy and show them to the bank’s officials. Ideally, you should prepare copies of the last three years’ returns.
Make sure your bank statements are in order. They provide proof of your sales volumes and expenses. If a significant portion of your sales is in cash, you can show the deposits that you have made into the bank and tie up these figures with your sales records.
2. Keep your credit report ready
The lender will access your credit report directly. But, it is important for you to familiarize yourself with its contents. If you have delayed payments in the past, you should be in a position to explain the reasons. The loan officer will be particularly interested in knowing about how the problem was eventually resolved.
Obviously, your chances of getting your loan approved increase with a higher credit score. A score of 700 or more is considered to be good. Even if your score is in the 600–700 range, you have a chance of getting your loan sanctioned. However, a lower score will require you to put in a greater degree of effort to convince the lender about your creditworthiness. What determines a good credit score? Find out here.
3. What will you use the loan amount for?
This is of great concern to the lender. It is vital that you are in a position to explain to the lender the purpose for which you are taking the loan.
The money that you borrow must be used within the business: equipment, tableware, even a marketing campaign that requires additional funds. Consider the benefits that your business will derive after the investement and prepare the relevant details to be shown to the banker.
4. Use this strategy to get your loan approved
It can be difficult to get a restaurant business loan since lenders are aware that a large percentage of restaurants fail. They need to be convinced that your business will succeed.
One way to do this is to tell them the amount of the investment that you have made out of your own funds. The higher your own stake, the greater is the likelihood of getting your loan.
For example, if you are buying restaurant equipment, you could put up, say, 30% to 40% of its cost. Most lenders would be willing to finance the remaining amount. If you ask for 100% financing, your request will have a higher probability of being denied.
To sum up, a restaurant loan is a great way to start up, maintain, or upgrade your restaurant business. But it’s also a risky and complicated process. Don’t be discouraged, and, as a first step, make sure you gather all the tools you’ll need.