Does a Restaurant Loan Make Sense to Fund Expansion?

It could. What’s more, a restaurant loan can be an important tool for fueling growth and expansion for a healthy restaurant (or any healthy business for that matter)—but remember, timing is everything when you run a small restaurant. This is particularly true when determining whether or not funding an expansion project or growth initiative with borrowed capital is the right choice.

Along with questions like, “Should I add seating? Is it time to hire a new employee? Does it make sense to extend hours?” —it’s also wise to consider whether or not a small business loan makes financial sense for your restaurant. In other words, is your restaurant in a good financial position and able to service expansion debt?

Is your restaurant ready to expand? Here are some signals it might be time to consider an expansion project:

Your clientele is growing: Whether you run your restaurant from the kitchen, or the front, it’s important to have a handle on your clientele. “It’s important to step out of the kitchen to get a feel for what’s really happening in the dining room,” says Ian Bramson, owner of the Eclectic Kitchen—a small restaurant in Portland Oregon.

“If people are waiting for food, it’s not a good thing,” he says. “If they’re waiting to be seated, that isn’t good either,” he added.

Although waiting is often part of the dining experience today, how you decide to manage your growing clientele and the wait will likely influence your approach to expansion and whether you hire a new server or an additional cook. It might also help you decide if you need to expand your seating to accommodate additional patrons.

You identify new menu items that can boost profits: Opportunities to grow often come in the form of additions to the menu. For example, if your restaurant currently serves a breakfast and lunch clientele, does it make sense to add a dinner service? Or does a liqueur license to serve drinks with dinner make sense?

Expanding your menu may require a short-term influx of capital to purchase the supplies you’ll need for the expanded menu. It might also require an investment in borrowed capital to ramp up for the additional hours if your restaurant is moving from a breakfast/lunch menu to add dinner.

You need more room: It’s not uncommon for a successful restaurant to run out of space. As your clientele grows the need to accommodate additional diners can encourage expanding your current location or moving into a new one to encourage growth. And, in anticipation of warmer weather, often a restaurant owner will make plans to add an outdoor eating space.

The above circumstances may be reasons to expand your restaurant, but how do you know if it’s a good decision to finance that growth? Does this describe your restaurant?

1. You have a healthy business with positive cash flow: A restaurant loan to fund expansion is a lot easier (and wiser) if you have a healthy business. A lender wants to know that you will be able to make the periodic payments associated with a loan to facilitate growth. You also need to consider the cost over time of borrowing to encourage growth and determine whether or not your business can support the additional costs to operate on a daily, weekly, or monthly basis.
2. You have a detailed plan for how you will proceed: A “seat-of-the-pants” approach to borrowing can be expensive in the short term (and the long run). Make sure you know how you will use the borrowed capital to help your restaurant grow and know exactly how much you’ll need. There are always costs associated with any borrowed capital; it’s important to make sure you understand those costs, know exactly what you’ll need to grow, and borrow only what you require so you can manage those costs.
3. The numbers make sense: Popular culture would have you believe that all you need is capital to grow—which is an oversimplification. It’s important to make sure the economics make sense before you borrow. Does the cost of the borrowed capital make sense from an ROI perspective? Will your cash flow be able to support the periodic payments? Do you have a contingency plan should something go wrong? In other words, if the expansion doesn’t generate the extra revenue you anticipated, will you still be able to service the debt? These are questions you should ask yourself before you apply for a loan to finance growth.

In addition to the option of a small business loan, an alternative some restaurant owners consider is to establish a line of credit that can be accessed when needed, repaid, and used again. They only pay interest on the funds they use and otherwise have the credit available to take advantage of opportunities that arise to improve the profitability of their restaurant. If you have a strong business credit profile and an established business, a line of credit could be an option for your business.

Recognizing opportunities to grow is an important part of running a small restaurant. Understanding when it makes financial sense to finance that growth is a critical part of building a successful business.