Opening a restaurant is the dream of many, and with the Australian restaurant industry worth $14.1 billion in 2023, it can be a profitable venture.
However, with the average cost of opening and establishing a restaurant sitting around $650,000, aspiring restauranteurs will need a solid financial game plan and funding to get their business up and running.
To help set your plans in motion, we’ve compiled everything you need to know about restaurant financing so you can make the best financial decisions for your future restaurant.
Let’s dive in.
- What is restaurant financing?
- Why do restaurants need financing?
- What do you need to do before applying for restaurant financing?
- Restaurant financing options
- How do you compare restaurant financing options?
Opening a restaurant?
Download our free costing template that covers all essential costs, from securing your location to opening your doors.
What is restaurant financing?
Restaurant financing refers to the various ways restaurants can obtain funding to start, operate, or expand their business. Financing can come from multiple sources, including loans from banks or other financial institutions, investments from private individuals or venture capitalists, crowdfunding campaigns, or personal savings.
Why do restaurants need financing?
It’s a common misconception that restaurants only need funding to help get the business up and running. While this is one of the reasons for restaurant financing, there are other occasions when a restaurant would need funding.
- Startup costs, e.g. the costs of leasing or purchasing a building, equipment, supplies, and inventory.
- Operating expenses to help with ongoing costs such as rent, utilities, payroll, and inventory.
- Expansion costs such as opening a new location, renovating, rebranding or buying new equipment.
What do you need to do before applying for restaurant financing?
Before applying for restaurant financing, there are several steps you should take to increase your chances of getting approved and to ensure that the funding is used effectively.
Write a business plan
Any new business venture will need a well-written business plan outlining your restaurant’s goals, objectives and business strategy.
Your business plan is an essential document, especially in the early days of setting up your restaurant, as it will help keep you focused and on track to reach your goals.
By outlining a clear roadmap of how your venue will take shape, operate and generate revenue, your business plan will provide a clear framework for your restaurant to keep on top of its finances and help visualise a pathway to further growth and expansion.
Plus, a written business plan is often required when applying for restaurant financing and pitching to potential investors.
Establish a clear financial plan
Before you start researching or applying for restaurant financing, it’s important to know how much you will need and how the funds will be used.
Take the time to map out exactly what you’ll need to open or expand your restaurant – from pricing up equipment costs to forecasting wages and budgeting for renovations. Once you have a rough idea of how much money you’ll need, you’ll better understand which funding options will best suit your plans.
Tip: use our free opening a business cost calculator to help calculate the startup costs of your business.
Improve personal credit
Many restaurant financing options will require a financial background check, so it’s essential to understand your credit score before applying and take steps to improve it if necessary. This can be done by paying off debts, making on-time payments, and correcting errors on credit reports.
Prepare financial documents
To ensure your restaurant financing applications go as smoothly as possible, it’s important to prepare your financial documents, such as tax returns, bank statements, and income statements. These documents will help lenders or investors gain a better understanding of the financial health of your restaurant, making it easier for them to approve your finance.
Restaurant financing options
There are several financing options available for restaurants ranging from bank loans to government financing. We’ve outlined some of the most popular restaurant financing options and the pros and cons of each to empower you to choose the best option for your restaurant’s needs.
Bank loans
Bank loans are a popular funding source for first-time small business owners, and many banks offer a range of options. To understand which is the best option for your business, compare the following:
Applying for a bank loan has a couple of advantages – mainly that this is one of the most proven and reputable ways to obtain finance. The loan can often be tailored to your specific needs, and you can repay the loan over a longer period.
On the flip side, bank loans often have an overly complicated application process with lengthy approval times, which may not be the best option for your restaurant if you need funding quickly.
Merchant cash advance
A merchant cash advance (MCA) is a financing option where a lender provides a lump sum payment, and the business repays through its future credit and debit card sales, plus a fee.
Depending on the size of your restaurant and its credit card sales, a merchant cash advance can range from a few thousand dollars to hundreds of thousands of dollars. However, the repayment period of an MCA is generally shorter than that of a traditional bank loan, with most merchant cash advances being repaid within 6-12 months.
Merchant cash advances are often used by businesses that struggle to obtain traditional forms of financing, and it can be helpful for restaurants that need quick access to funds for unexpected expenses, inventory purchases, or expansion projects.
On the downside, merchant cash advances can be expensive, with fees and interest rates often higher than traditional loans. Therefore, it’s essential to carefully review the terms and fees associated with an MCA to ensure it’s the right financing option for your restaurant.
Business line of credit
A business line of credit is similar to a personal credit card and allows businesses to access a pool of funds they can draw from as needed, up to a predetermined credit limit. Businesses can borrow and repay funds as often as they need, as long as they stay within the credit limit.
Business lines of credit are typically used to finance short-term needs, such as inventory purchases, payroll expenses, or unexpected expenses. The advantage of a business line of credit is that businesses only pay interest on the amount borrowed, not on the entire credit limit. This can make it a more cost-effective financing option than a traditional bank loan.
Business lines of credit can be obtained from a variety of sources, including banks, credit unions, and alternative lenders. It’s important for businesses to shop around and compare multiple options before choosing a business line of credit, as terms and fees can differ depending on the lender.
Equipment financing
From fridges and freezers to point of sale software, investing in restaurant equipment is a costly undertaking. It’s estimated that an average restaurant fit-out in Australia costs between $1,800 – $3,400 per square metre, so having the upfront capital isn’t always feasible.
If you need help financing your restaurant equipment or are looking to upgrade your current fit-out, several online retailers specialising in new restaurant equipment offer flexible finance plans.
SilverChef, for example, offers a range of equipment financing plans for hospitality businesses.
Their Rent-Try-Buy plan offers a 12-month rental plan with the option to return, upgrade or purchase the equipment at the end of the year. Or, Their Lease to Keep scheme allows you to spread the equipment cost over a certain period, and you’ll own the equipment at the end.
Purchase order financing
Purchase order (PO) financing is a short-term option that allows restaurants to fund the cost of fulfilling a customer’s purchase order, such as catering or event services.
With PO financing, a lender provides the necessary funds so you can purchase the ingredients or goods needed to fulfil an order. Once you receive payment from the customer, you can repay the lender for the loan, along with any fees and interest.
Government funding
The federal and state governments regularly offer financial assistance packages, grants and loans to help new and existing small businesses.
For example, the federal government offers a $150,000 instant asset write-off for small and medium sized businesses. To be eligible, assets must cost less than the instant asset write-off threshold and be purchased and used in the year the write-off is claimed.
State governments often launch new initiatives throughout the year, so it’s essential to keep up to date with the most recent support available for your business in your state or territory. Keep an eye on your local state government website or the Australian Government’s business advice website for more information.
How do you compare restaurant financing options?
Comparing restaurant financing options can be a complex process, and there are several factors to consider, from the lender’s reputation to interest rates and fees. To ensure you choose the best option for your restaurant, we’ve outlined some of the most important factors to consider when comparing restaurant financing options.
- Interest rates and fees: one of the most important factors to consider when assessing your financing options. Different lenders will inevitably have different rates and fees, so it’s important to conduct thorough research and choose an option with competitive rates and reasonable fees.
- Repayment terms: take the time to compare the length of the repayment term, the frequency of payments, and any penalties for late payments or options for early repayment.
- Funding amount: assess the amount of funding available through different financing options to ensure it’s enough to achieve your goals.
- Eligibility requirements: research the different eligibility requirements, such as credit score, time in business, and annual revenue, to minimise the risk of rejection.
- Application process: assess the complexity of the application process and how quickly you’ll be able to access the funds.
Restaurant financing: kickstart your business
Opening a restaurant is an exciting venture, but raising enough capital to bring your business to life can be challenging. Fortunately, there are lots of restaurant financing options available to help aspiring restauranteurs get their ventures up and running and assist existing businesses in expanding their operations. With careful planning and a willingness to research alternatives, you can estimate how much it will cost to open your own restaurant and find the best financing options for your needs.
Opening a restaurant?
Download our free costing template that covers all essential costs, from securing your location to opening your doors.
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