Restaurant financing: long money for long assets, short money for payroll

On this page

• Three needs, three kinds of money
• A worked example: a $200,000 build-out on two terms
• A worked example: a cash advance repaid from card sales
• What SBA offers restaurants
• What a restaurant lender looks at
• When restaurant financing is a bad idea
• Questions to ask before you sign

Three needs, three kinds of money

Give each need its own kind of money. Use long-term loans for equipment and the build-out, and a line of creditline of creditA credit limit you can draw on, repay and draw on again. for payroll and food costs.

A restaurant has three cash needs. Equipment and a build-out last for years. Payroll and food costs come due weekly, before the sales that cover them. A second location needs both.

Pay for long-lived assets with long-term loans. Pay for timing gaps with a line of credit that you repay as sales come in. Mixing them is how owners end up with a short loan on a long asset, or a permanent balance on a line.

Meeting operating expenses is the most common reason firms seek financing. In the Federal Reserve Banks' 2026 survey, 56% of firms that sought financing named it.

A worked example: a $200,000 build-out on two terms

Suppose you borrow $200,000 for equipment and a build-out. Assume 10% a year with monthly payments. This is an illustration, not a quote.

• 3 years. Payment: about $6,453 a month. Total paid: about $232,324. Interest: about $32,324.
• 10 years. Payment: about $2,643 a month. Total paid: about $317,162. Interest: about $117,162.

The longer term cuts the payment by about $3,810 a month and adds about $84,838 of interest.

Now test coverage. Debt service coverageDebt service coverageCash available for loan payments, divided by those payments. Above 1 means the cash covers them. Full definition is the cash available for debt payments divided by the payments. A 7(a) Small loan of $350,000 or less needs at least 1.10:1 (SOP 50 10 8.1, Sec. B, Ch. 2, Para. C.2). A Standard 7(a) loan above that needs 1.15:1 (Sec. B, Ch. 1, Para. C). Suppose the restaurant produces $70,000 a year in cash before debt payments. A $200,000 loan is a 7(a) Small loan, so the 1.10 minimum applies. At that ratio it can carry $70,000 ÷ 1.10 = about $63,636 a year in payments, or $5,303 a month.

• The 3-year payment is over that limit. Coverage: $70,000 ÷ $77,441 = 0.90.
• The 10-year payment fits. Coverage: $70,000 ÷ $31,716 = 2.21.

A non-SBA lender sets its own coverage test. The arithmetic works the same way.

A worked example: a cash advance repaid from card sales

Suppose you take $50,000 at a factor rate of 1.35 and the provider takes 15% of daily card sales. Suppose card sales average $3,000 a day. These terms are assumed for the arithmetic.

• You repay $50,000 × 1.35 = $67,500, so the cost is $17,500.
• The daily holdback is $3,000 × 15% = $450.
• Time to repay: $67,500 ÷ $450 = 150 days.
• As an APR counting every calendar day, that is about 153%.

Now compare the holdback with your margin. Suppose the restaurant keeps 6% of sales as profit. On $3,000 of sales that is $180. The $450 holdback is 2.5 times the profit on those sales ($450 ÷ $180). The $270 gap each day has to come from somewhere else in the business.

Forum panelists told the FTC that these advances can have estimated APRs in the triple digits. The FTC also notes a concern that some providers may not conduct promised true-ups when sales drop.

What SBA offers restaurants

A 7(a) loan can finance equipment, leasehold improvements, inventory, supplies and working capitalworking capitalMoney for day-to-day costs such as payroll, rent and inventory. Full definition (SOP 50 10 8.1, Sec. A, Ch. 3, Para. A). Maximum terms depend on the use (App. 17, Para. A).

• Working capital and inventory: 10 years.
• Equipment: 10 years, or up to 15 years if the IRS asset class useful life supports it.
• Leasehold improvements: 10 years, plus up to 12 months to complete the improvements.

Three SBA rules shape a restaurant loan.

• Coverage. A 7(a) Small loan ($350,000 or less) needs debt service coverage of at least 1.10:1 (Sec. B, Ch. 2, Para. C.2). A Standard 7(a) loan needs 1.15:1 (Sec. B, Ch. 1, Para. C).
• Start-ups. A business in operation for 1 year or less counts as a start-up. A start-up needs equity of at least 10% of total project costs (Sec. B, Ch. 1, Para. C).
• Franchises. SBA's rule: a brand that meets the FTC definition of a franchise must be on the SBA Franchise Directory to obtain SBA financing (Sec. A, Ch. 1, Para. G.5).

The FTC adds two cautions for franchise buyers. The franchisor must give you the disclosure document at least 14 days before you sign or pay. A bank's approval of a franchise loan does not necessarily mean the franchise is a safe or good investment (FTC, September 2020).

If you already carry an advance, SBA will not refinance an active one (App. 14, Para. A.3). Working capital proceeds also cannot refinance existing debt (Sec. A, Ch. 3, Para. A.2.d.iii).

Sales tax is a trap for restaurants that fall behind. Loan proceeds cannot pay past-due payroll, sales or similar taxes that you collected and held in trust for a government (Sec. A, Ch. 3, Para. B.6). Catch up on those before you apply.

What a restaurant lender looks at

A restaurant lender looks at the numbers you already keep. On a Standard 7(a) loan above $350,000, the lender reviews three years of tax returns or financial statements plus an interim statement (Sec. B, Ch. 1, Para. C.2.a). SBA Express and 7(a) Small loans follow the lender's own procedures for similar non-SBA loans (Sec. B, Ch. 2, Para. C).

For a franchise, the lender must also review any credit information the franchisor provides. Examples are the number of failed franchisees and cash flow projections (Sec. B, Ch. 1, Para. C.2.a). Compare those with what current owners tell you.

Requirements for time in business and minimum sales vary by lender. None of the sources cited here sets them, so ask each lender for its current rules.

When restaurant financing is a bad idea

• An advance on a thin margin. In the example above the daily holdback is 2.5 times the profit on those sales.
• A short loan on a long asset. SBA's refinancing rule gives a 3-year loan on equipment with a 15-year life as its example of an inappropriate maturity (App. 14, Para. A.1.f).
• A second location before the first proves its margin. The new rent and payments start before the new sales do.
• Paying one advance with another. Each new advance adds its own cost on top of the unpaid cost of the last.
• Borrowing on a franchisor's projections. Build your own numbers. The FTC notes that some franchisors give banks unrealistic, overstated profit projections.

Questions to ask before you sign

• What is the payment in your slowest month, and does coverage still hold?
• Is the lien on the equipment only, or on all business assets?
• Will your landlord contribute to the build-out, and how does that change your rent?
• For an advance, what are the total repayment, the share taken from daily sales and the process for adjusting it when sales drop?
• Which fees come out of the money you receive?

None of the sources cited here lists typical restaurant loan prices, because they vary by lender.