How can you finance your restaurant with a bank loan?

When it comes to opening, buying out or upgrading a restaurant, the search for financing is a decisive step. Unless you can finance the venture out of your own funds, you'll need to obtain a bank loan, which means you'll have to turn to your bank. Here are a few tips to help you meet the requirements of the banking sector and secure your loan.  

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Bank loans as a source of financing for your restaurant 

Bank loans are still the most common form of financing in the restaurant business. This credit can be obtained directly from the bank or through a broker, who will take care of all the formalities and negotiations. A loan may be offered at a fixed or variable rate. For equipment purchases, the term of the loan generally does not exceed 7 years, or 84 months. For real estate purchases, it can be up to 20 years.

Whether you do it yourself or use the services of a broker, convincing your bank to support your project requires careful preparation. Only then will they be able to judge the viability and future profitability of your business. 

All expenses related to the opening of your establishment must be listed and quantified: the purchase or rental price of the restaurant, costs related to the creation of your restaurant and the fees of the professional accompanying you in this operation, the fitting out of the establishment, the equipment of the kitchen and dining room, the possible purchase of existing stock, the need for working capital, recruitment, communication, etc. The aim is to estimate the total sum required to launch your business. You'll then be able to determine the amount of your personal contribution and the amount you'll need to raise through various means. 

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Convincing the bank to grant you a loan

Your bank's decision whether or not to grant you the loan you have applied for is based on several criteria. 

The amount of your personal contribution

Banks are not the only source of financing for your restaurant opening or buy-out project. You also need to provide a personal contribution. As a general rule, banks require a deposit equivalent to 30% of the investment.

This percentage may vary depending on : 

• the amount of financing required ; 
• the nature of the goods to be financed ; 
• your experience in the restaurant sector and as a manager ;
• your relationship with your bank; 
• your establishment's profitability potential; 
• the risk involved in your project;
• etc. 

The soundness of your financing file

A favourable response from your bank also depends, above all, on the soundness of your business plan and in particular the financial part, which will enable them to judge the potential, seriousness and viability of your project. Your business plan should therefore include information such as :

• amount of initial investment and financing methods (equity, grants, loans, etc.);
• estimated sales and how they are calculated;
• estimated income and expenses ;
• your estimated profits.

Based on this data, don't hesitate to highlight several ratios such as : 

• Purchase of raw materials/sales or food cost, which should not normally exceed 30%. 
• Rent/sales not to exceed 9 or 10%. 
• Personnel costs/Sales, maximum 30%. 
• Gross margin/sales, generally around 70%. 
• Promotion/sales budget of around 4% at launch, then 1 to 2%.
• Net income/sales around 10%. 

These elements are crucial to enable your bank to determine your creditworthiness and verify that your expenses will be well in excess of your income, all to guarantee repayment of the loan. 

In the case of a business takeover, it's important for the bank to have access to the restaurant's latest balance sheets. This will give them an idea of the restaurant's financial health. It will also study the geographical location, the competition, the planned development strategy and your own financial situation.‍

👉 To find out more: 7 steps to a restaurant business plan

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Previous experience in the sector

Previous experience in the catering sector can be an asset in securing a loan, as it reassures banking institutions. If you don't have any, we advise you to take part in specialized training courses (in addition to the mandatory training required to obtain your license and operating permit) and thus put all the chances on your side. Please note that being a novice in this field doesn't mean you have to give up on your bank loan - the opposite is just one more argument in your favor. 

👉 Further information: Restaurant training: what are the manager's obligations?

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Searching for banks

Commercial banks

Traditional commercial banks are often the obvious choice for obtaining a bank loan. Find out about the different banks in your area and make an appointment to discuss your needs. Large national banks as well as small local banks may be options to explore. Be sure to check interest rates, repayment terms, collateral requirements and associated fees.

Financial institutions specializing in catering

Some financial institutions specialize in financing foodservice businesses. These include lenders specializing in the food industry and foodservice equipment. These institutions may have a better understanding of the specific needs of the foodservice sector and offer more favorable loan terms. Look for these specialized lenders and learn more about their products and services.

Government financing programs

In some countries, there are government financing programs designed to support small businesses, including restaurant businesses. These programs may offer loans at reduced interest rates, loan guarantees or other benefits. Check with local government agencies or economic development organizations for available financing options.

Credit unions

Credit unions are not-for-profit financial institutions that offer banking and lending services to their members. They can often offer competitive interest rates and flexible repayment terms. Find out more about the credit unions in your area and see if you're eligible to become a member and benefit from their financing services.

Professional networks and restaurant associations

Professional networks and restaurant associations can be a valuable source of information and recommendations for finding lenders specializing in the restaurant industry. Join these groups, attend events and make contacts with other professionals in your sector. They can share their financing experience and point you in the direction of potential lenders.

When researching banks and lenders, be sure to compare the offers available in terms of interest rate, repayment terms, maximum loan amount and flexibility of terms. It's also essential to understand collateral requirements, as some banks may ask for personal guarantees or collateral against your company's assets.

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The procedure

Required documents

Banks will usually ask for documents such as :

• your business plan,
• your personal and professional financial statements,
• your tax returns,
• your bank statements,
• your proof of income,
• your equipment quotes,
• and any other relevant documents.

Submit your request

Once you've found the bank and gathered all the necessary documents, you can submit your application.

1. Write a cover letter

A cover letter is an excellent opportunity to make a positive first impression on the bank or lender. It should briefly explain who you are, what your restoration project is, what you want to achieve and why you need the loan. Highlight your skills, experience and passion for the restaurant business. Be clear and concise in your letter, highlighting the strong points of your application.

2. Prepare to answer questions

Once you've submitted your loan application, the bank or lender may ask you for additional information or ask you specific questions. Be prepared to answer these requests quickly and accurately. This may involve providing additional details on your business plan, clarifying certain financial figures or discussing your repayment strategy. The more prepared and responsive you are, the greater your chances of success.

3. Introduce yourself professionally

When you meet a bank or lender representative, make sure you present yourself in a professional manner. Dress appropriately, be polite and respectful, and demonstrate confidence. Be prepared to explain your application in detail and demonstrate your knowledge of the restaurant industry. Show your motivation and determination to succeed.

Negotiate loan terms

Interest rates have a direct impact on the total cost of the loan. Try to negotiate lower interest rates by highlighting your solid credit history, experience in the restaurant industry or any other feature that could be perceived as reducing risk for the lender. You can also offer additional collateral to secure the loan and potentially obtain more favorable interest rates.

Repayment terms may be negotiable to some extent. Discuss repayment schedule options that match your cash flow and business cycles. You can try to negotiate flexible maturities, grace periods or deferred repayment periods to give you more financial leeway.

When reviewing the terms of the loan, be aware of any additional fees and charges. These may include application fees, guarantee fees, annual renewal fees or any other expenses associated with the loan. Try to negotiate the reduction or elimination of certain fees, or look for alternatives that offer more advantageous charges.

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Are you opening or taking over a restaurant? Contact an Innovorder expert to get personalized advice for your restaurant!