Restaurants are typically small businesses, which means that they frequently need to secure a business loan or capital funding. This funding can be used for a wide range of things, including supporting everyday operations, helping to expand the business, making large purchases of capital equipment, or anything else needed to support the company’s ongoing operations or growth.

When seeking loan options, many factors must be considered, such as the interest rate, fees, and repayment schedule. These factors can vary widely, but understanding the differences between these options can help you make the best financial decision for your restaurant.

Common lending options for restaurants include:

• Traditional bank loans: When you think of a small business loan, many people tend to think of the traditional bank loan, which can often offer competitive interest rates and repayment terms. However, your company generally needs to have a proven track record of financial success and a solid credit record before a bank will consider offering a loan. Sometimes, restaurants – and especially new restaurants – can have a difficult time securing a bank loan as the industry can be considered risky for many banks.
• SBA loans: SBA loans are common for many small businesses. They are issued by banks or credit unions but are partially guaranteed by the US Small Business Administration, which removes some of the risk for the lender. These SBA-certified loans tend to have good repayment terms and competitive interest rates. The SBA 7(a) loan option is often used by restaurants for a variety of operational and growth needs. Because these loans can be a bit easier to secure than a traditional bank loan, they may be a great option for many restaurants, but you will still need a good credit record to qualify.
• Business lines of credit: Small businesses can secure lines of credit from either traditional lenders or online options. Online lenders can have more flexible qualification criteria, but that usually comes with higher interest rates than traditional lenders. Despite this, business lines of credit may be a good option when looking for working capital or to cover an emergency.
• Merchant cash advances: Merchant cash advances can provide your business with an upfront amount of funding, which is then repaid by taking a percentage of your debit and credit card sales. In addition to this repayment option, this type of lending also usually includes a fee, which can make it a more expensive option than some of the alternatives. However, it’s a good option for many restaurants that don’t have a strong credit history but do have solid credit and debit card transactions. But because they cost more, you will want to be sure that you are using this type of financing very cautiously and only when absolutely necessary.
• Online term loans: Online term loans are often a good option for newer restaurants or those without a stellar credit record who cannot secure SBA or traditional lending options. These loans can be very flexible, but it’s important to do your research on the lender and fully understand the terms of the loan before committing.
• Asset-based financing: With this type of lending option, you can secure a loan or line of credit by using your company’s assets as collateral. Collateral assets can include equipment, inventory, or accounts receivable. Restaurant equipment financing, a specialized type of asset-based financing, is commonly used to help these small businesses make large equipment purchases. Inventory financing can also be used to finance operational expenses. For companies that do not qualify for traditional loans, asset-based financing can make it easier to secure the loan as the lender can rely on the collateral to remove some of the risk.

Each of these lending options comes with different terms and costs. Therefore, it’s vital that you first determine what you need funding for and what type of loan you can qualify for before you identify the best option. If your business has a strong performance history and a good credit record, you can likely secure a traditional loan, which is usually the best option. But if you just need a bit of funding to address a cash flow issue, then a traditional loan – even if it’s cheaper – may not be the best option. Looking at an online lender can often get you the funds quicker since you won’t be required to produce as much documentation to secure the financing. It might be slightly more costly, but if it’s short-term, it can be manageable. The reality is that the best option can only be determined by first identifying why you need the funding and your ability to repay the loan.