Complete Guide for getting a Restaurant Business Loan With Bad Credit

Business Expansion

Jacques Famy Jr
Review By Todd Millman

Can I Get a Restaurant Business Loan With Bad Credit?

The short answer is yes, you can get a business loan for a restaurant even if you have a bad credit score, but it does depend on who you ask. If you contact the bank you do your banking with, it may be “no,” as they deem restaurants higher risk than other businesses. The good news is there are many other options besides banks to find the restaurant business funding you need.

Why Do the Banks Say No, and Other Business Funding Options Say Yes?

Traditional lenders and Banks are risk-averse because they must protect all their customers (depositors), whether business or non-business bank accounts. Under a State or Federal charter, banks must adhere to strict credit guidelines.

Due to the high default rates of business loans and business lines of credit versus other lending products like mortgages, personal loans, auto loans, and credit cards, banks take a conservative approach to lending to small businesses.

So, Who Can Help Me Get Small Business Loans When the Bank Says No?

The good news is that in the last 10 years, alternative business loan options have grown exponentially, and restaurant business owners with bad and/or business credit scores have many more options today than they used to. Alternative business lenders and alternative business lending marketplaces are great resources for finding products that can help a restaurant owner with bad credit get financing for their business.

Who Can Help Me Get Small Business Loans When the Bank Says No?

5 Best Business Alternative Loan Options for Restaurant Owners With Poor Credit

As a restaurant owner, accessing capital to cover expenses or grow your business can be challenging, especially if you need better credit. Traditional lenders may turn down your loan application based on your credit score, making securing the funds you need difficult.

Fortunately, alternative loan options are available that cater specifically to restaurant owners with poor credit. This section will explore the five best business alternative loan options for restaurant owners with poor credit.

These options can help you access the financing you need to manage cash flow, expand your restaurant, or invest in new equipment, even with a low credit score.

1. Short-Term Small Business Loans for Restaurants

Short-term business loans are small business loans that are shorter in duration than that traditional business loans. The terms range between three to eighteen-month terms in duration. This shorter term minimizes the risk and allows the business lender to lower credit standards from a bank's. The rates and costs are higher than those of traditional business loans to cover delinquency and default risk, so they cost more than bank business loans and lines of credit. This product is a great alternative for equipment financing and working capital loans.

Qualifications:

  • Annual revenue of the business must be in excess of $180,000
  • A minimum credit score of 500 and above
  • Over 6 months in business
  • No tax returns or financial statements are typically required

Requirements:

  • One page application
  • 3 months of bank statements

Terms:

  • Terms range from 3 months to 18 months in duration
  • Charge a factor rate, not principal and interest, which ranges from 1.10 to 1.45 of the loan amount
  • One time Fee at funding, which can range from 0% to 5% of small business loan balance
  • Loan Payments are either weekly or daily (Monday-Friday), depending on the business lender
  • Origination or closing Fees deducted at funding

Availability Approval to Funding:

  • Same day to 24 to 48 hours

Pros and Cons:

Short-term business loans are a great option once traditional restaurant business loans are unavailable. The terms are predictable and fixed, and there are no surprises, but it is very important to determine what you are using the money for in your business against the costs of the funding and the payments that will cut into your bottom-line cash flows.

5 Best Business Alternative Loan Options for Restaurant Owners With Poor Credit

2. Business Line of Credit for Restaurants

There are now business lines of credit that banks do not issue but alternative lenders who are great news, but these products have different features and function differently than bank business lines of credit.

Rates may be either factor rates or principal and interest rates which function differently, so it’s important to get full disclosures from the business lender. They can be revolving lines of credit like credit cards and traditional lines of credit where a business can draw off the line at any time as long as you are below the credit limit.

Still, there can be conditions to that, so check how the business line of credit works from the business lender offering you the terms.

Qualifications:

  • Annual revenue of the business must be in excess of $180,000
  • A minimum credit score of 500 and above
  • Over 6 months in business
  • No tax returns or financial statements are typically required

Requirements:

  • One page application
  • 3 months of bank statements

Terms:

  • Terms range from 3 months to 12 months in duration
  • A revolving credit line operates similarly to a credit card which allows for draws at any time, given you don’t exceed the credit limit.
  • Charges a Factor Rate of 1.10 to 1.45 of the loan amount (This is not interest rates) or principal & interest, which ranges from 4.99% to 18.99%
  • Payments are either Monthly, Bi-Monthly, Weekly, or Daily (Monday-Friday), depending on the business lender
  • Origination or closing Fees deducted at funding

Availability Approval to Funding:

  • Same day to 24 to 48 hours

Pros and Cons:

Business lines of credit are very flexible in that you can draw funds at any time as long as you don’t exceed your credit limit. They tend to have lower credit limits than that term loans but can be affordable and have reasonable payments. It’s important to understand all the features and functions of the business line of credit that you are being offered. Ensure you ask about monthly service fees, the number of draw limits within a time frame, is the line a factor rate or principal & Interest Rate, does it expire and when, and how to renew.

3. Business Cash Advance for Restaurants

A business cash advance, also known as a future purchase sales receivables agreement, is a purchase of future sales receivables at a discount to receive a lump sum (or specified amount) of money now.

Small business owners can raise money quickly by selling a portion of their future sales at a discount to a funder in exchange for immediate cash for the business. It’s a great way to receive the cash advances you need to keep your company running smoothly.

The business funding costs are based on a fixed cost or “factor rate,” which is not principal and interest, so there is no benefit to paying off early unless the funder adds an early payment discount feature. This is unlike principal and interest, which is calculated by principal balance daily.

The repayment method is a fixed monthly percentage of future sales deposits in your business bank account. The payments can be flexible as the fixed repayment percentage is connected to your future sales deposits. Typically these agreements have an established, fixed, daily (Monday through Friday), or weekly payment auto ACH out-of-business bank account based on current sales volume.

But what is different is you can submit your bank statement from the prior month within a certain time frame after the month has ended for an “adjustment” or refund if the ACH payments taken exceed the monthly fixed-rate (specified rate) of total deposits. The payback amount, also known as the specified percentage, is the amount the business owner will have to pay back. A business cash advance is not a small business loan because if there are not future sales, the obligation does not need to bet met.

Example of a Business Cash Advance Quote:

  • Advance Amount (Purchase Price): $25,000
  • Payback Amount (Specified Amount): $29,000
  • Future sales withheld (Specified Percentage): 9%
  • Fixed Payment ACH Weekly: $450

Qualifications:

  • Annual revenue in excess of $180,000
  • A minimum credit score of 500 and above
  • Over 6 months in business
  • No tax returns or financial statements are typically required

Requirements:

  • One page application
  • 3 months of bank statements

Terms:

  • Terms from 6 to 18 months
  • Factor rates from 1.18 to 1.45
  • Weekly or daily (M-F) payments
  • Origination Fees

Availability Approval to Funding:

  • Same day to 24 to 48 hours

Pros and Cons:

A business cash advance is more lenient with personal credit score, business credit score, and bank statement health than that short-term business loans or business lines of credit. Still, it comes at a price and is more costly than traditional financing. The terms can be more flexible in repayment, but you need to do a cost/benefit analysis before making the decision to move forward with this type of business financing. Clearly, this is a very popular business loan product when used properly for the business.

Business Cash Advance for Restaurants

4. Merchant Cash Advance for Restaurants

merchant cash advance, also known as a future purchase sales receivables agreement, like a business cash advance, is also a purchase of future sales receivables at a discount to receive a lump sum (or purchase amount) of money now.

Small business owners can raise money quickly by selling a portion of their future sales at a discount to a funder in exchange for immediate cash for the business. Like a business cash advance, a merchant cash advance’s costs are based on a fixed cost or “factor rate,” which is not principal and interest, so there is no benefit to paying off early unless the funder adds an early payment discount feature, unlike principal and interest which is calculated by principal balance daily. The payback amount, also known as the specified percentage is the amount the business owner will have to pay back.

The repayment method of a merchant cash advance is also a fixed monthly percentage of future sales but is based on credit card sales. The payments are flexible because the repayment is based on a fixed percentage of future credit card batches.

There is no fixed daily Monday through Friday or weekly payment auto ACH out-of-business bank account based on current sales volumes like a business cash advance would have. There is no need for an “adjustment” or refund monthly like a business cash advance because the payments are connected to the future credit card sales directly, so the amount a business owner pays fluctuates to the flow of future credit card batch volumes as the agreement states a fixed percentage (specified percentage) is deducted to repay the advance upon every credit card batch

Example of a Merchant Cash Advance Quote:

  • Advance Amount (Purchase Price): $25,000
  • Payback Amount (Specified Amount): $29,000
  • Future Credit Card Batches withheld (Specified Percentage): 9%

Qualifications:

  • Annual revenue in excess of $180,000
  • Credit card sales of $10,000 plus per month
  • A minimum credit score of 500 or above
  • Over 6 months in business
  • No tax returns or financial statements are typically required

Requirements:

  • One page application
  • 3 months' bank statements
  • 3 months of merchant processing statements

Terms:

  • No set length of term, but estimated times to pay are between 6 to 18 months
  • Factor rates from 1.18 to 1.45
  • Daily (M-F) payments through holdback percentage of credit card batches
  • Origination fees

Pros and Cons:

Merchant cash advances have higher approval rates and are easier to obtain than any other business funding product regarding personal or business credit scores. Obviously, you need to be a business that accepts customers' credit cards daily to qualify. Still, the credit and bank statement tolerances are more lenient than any other.

Pros and Cons of Taking Restaurant Loans with Bad Credit

Its is important to weigh the pro's and con's of getting restaurant business loans regardless of your credit score. Always consider the following before pulling the trigger on restaurant business loans.

Pro's

  • Access to credit despite bad credit score.
  • Potentially build business credit score and personal credit score for better financing in the future.
  • Can provide essential equipment financing for critical equipment to operate the restaurant business.

Con's

  • Adds debt on a business that has bad credit for potential overleveraging.
  • Merchant cash advances have higher rates and costs than traditional financing.
  • If you fall behind or default credit will be damaged and you will not be able to obtain future financing.

What restaurant types qualify for Bad Credit Business Loans?

Pretty much anything in the food and beverage industry can be considered for restaurant business loans, despite the credit history.

  • Restaurants Dining-in or Take Out
  • Bars/Nightclubs
  • Coffee Shops
  • Bakeries
  • Dessert Stores (Ice Cream, cakes, pastries)
  • Restaurant wholesalers

What lenders offer Restaurant Loans with Bad Credit?

  • Merchant Cash Advance Companies
  • Online Lenders
  • Invoice Factoring Companies
  • Short-Term Business Lenders
  • Equipment Financing Companies (in some cases)

How to apply for a Restaurant Business Loan with Bad Credit: 6 Steps

Step #1 Application: You will need to complete a small business loan application which includes both business information and personal information for consideration of financing.

Step #2 Documentation: Along with the application you will typically need to supply your 3 months most recent business bank statements. (in rare cases for large business loan requests a tax return may be requested)

Step #3 Receive Offers: Consider offers from more than one lender to compare and shop products, rates, fees and terms because this type of financing is more than traditional financing and you need to find the best deal possible. Make sure the lender gives you proper disclosures describing the product features, rates, terms and conditions clearly for consideration.

Step #4 Selecting an Offer: Sometimes the offers you will receive because of your bad credit will not pass your cost vs. benefit analysis so don't be afraid to decline offers. If you due find an offer that works for you and the restaurant need accept offer and request agreement to review.

Step #5 Final Underwriting: Once you check agreement and match rate and terms offered on your offer, proceed to sign and provide any closing documents lender requests for final approval and funding.

Step #6 Clear-to-Fund: After the lender receives your signed agreement and closing documents, underwriting will prefer final review to clear conditions and perform verifications for quality control and anti-fraud measures.

Step #7 Disbursement: After a clear-to-fund is declared, pre-payment process is set up and then funds are sent via ACH or wire into your business bank account to complete funding!

Frequently Asked Questions

Can I get a business loan with a 500 credit score and 550 Credit score?

A poor credit score and poor personal credit history will not prohibit you from getting funding for your business but may limit the business financing options. Poor credit scores below 500 may pose a greater problem with an alternative lender.

Can I get a startup business loan with bad credit and no collateral?

Getting a startup small business loan is difficult, let alone content with bad credit. It is unlikely you will be able to find a small business loan to start a business if you have a bad credit score. Down payment, personal guarantee, and collateral may help, but if you have bad credit, it will be challenging to get a small business loan.

Where can I get Bad Credit Business Loans?

Alternative Lenders, such as online lenders, are a great source to assist you in your search verses traditional lenders who would unlikely be able to help.

What are the most common uses of small business financing by restaurant owners?

- Working Capital Loan
- Cash Flow
- Restaurant Equipment Financing
- Business Expenses
- Debt Refinancing

Can I get an SBA Loan with Bad Credit?

Traditional small business loans, like SBA loans, require good and business credit and do not accept bad credit scores.

Does Invoice financing evaluate personal credit?

Invoice financing does not evaluate credit, so it is ok if you have bad credit. Within the food and beverage industry, restaurants are not an industry that utilizes this product because they don't invoice customers. Wholesalers and/or distributors who service restaurants may find this product helpful and may qualify.

Can I get Business Credit Cards with Bad Credit?

Credit scoring models for business credit cards do not allow bad credit scores.

Alternative Business Loan Options for Bad Credit

Marketplace business funders and online business lenders are greater sources to find alternatives when a bank says no to a restaurant owner because of bad credit. These funders and lenders can be found easily with a quick Google search and can provide the business loan products mentioned in this article.

If you found this article helpful, AdvancePoint Capital offers all of the products mentioned and can help your restaurant get business funding regardless of bad credit.

Jacques Famy Jr

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