Do you need a restaurant loan?
Owning or running a successful restaurant or cafe is tough but consumer demand for quality food and a fine dining experience has fuelled growth in the industry over the past five years. Busier lifestyles and diminishing leisure time means this trend is likely to continue.
Getting approved for a restaurant loan comes down to your experience and knowledge of the industry and presenting a strong business plan to the right lender.
How much can I borrow?
- Restaurant commercial property: Borrow up to 80% of the property value (freehold) or up to 100% with a guarantor or using a residential property as security.
- Restaurant business loan: Borrow up to 50% of the business value (leasehold).
- Maximum loan term: 15 years.
- Maximum interest only term: 3 years.
- Loans over $5,000,000 are assessed on a case by case basis.
- A business plan is required if you buy the business as well as the property.
- Low doc options are available.
- Interest rate discounts vary from lender to lender and the strength of your application.
For an indicative funding approval, call us on 1300 889 743 or fill in our free assessment form to speak with one of our commercial business loan specialists.
How can we help?
The first thing we can do is help you to build a strong case with the right lender. By doing that, we may be able to negotiate a reduced interest rate and you may be able to borrow up to the maximum Loan to Value Ratio (LVR).
Getting the right commercial loan for your situation is more than just getting a low interest rate though. Having the right features to manage your loan over the long term is just as critical so have a look at the commercial loan features page to get a better idea.
Discover more about how the commercial loan process works and the other types of commercial properties we can help you finance.
What do the banks assess?
Restaurants, cafes, function centres and catering services operate within a small market so lenders tend to assess them differently than large commercial purchases like office buildings and warehouses.
Businesses operating within the hospitality industry operate within a small market and are quicker to be affected by poor management making them riskier ventures. This is especially true if you’re planning on getting a business loan to buy the leasehold.
Commercial lenders will generally require you to have at least 1.5 to 2 times the amount of income to proposed interest expenses. This is known as the ‘serviceability ratio’.
You don’t necessarily need a clean credit history. If you can provide detailed explanations of how you resolved such credit issues as defaults, there are lenders who will consider your case.
Your ability to pay back the loan is key so if you’re quitting your job to run a restaurant, cafe or catering service you’ll need to prove to the banks that you can run a successful venture.
The best way to highlight this is if you can show to them that you have significant experience in an operation equivalent to the business you’re planning to purchase, preferably from a managerial position.
The requirements for this will vary from lender to lender but it helps to submit a resume along with your loan application that shows:
- Relevant work references.
- Completed courses or certificates such as restaurant and catering management, barista training and having a Responsible Service of Alcohol (RSA) certificate.
- A business plan that details cash flow forecasts, market competition and business model.
Our brokers are specialists in restaurant loans and we can help you prepare your application to highlight your strengths as a borrower so you have a better chance of getting approved the first time around.
Call 1300 889 743 or complete our free assessment form today.
How are restaurants valued?
There are two going concern valuation types:
- Real property and business value.
- Lessee’s interest value.
These are dependent upon who owns the freehold title and who runs the business.
Generally speaking though, banks will take into consideration:
- Total revenue.
- Gross margin.
- Wages for revenue figures.
They’ll also consider the asset quality position, financial performance of each of the above aspects and how they impact the business overall, as well as the industry environment and existing market competition.
What security can I use for the loan?
- Mortgage over restaurant (or lease, if leasehold).
- Registered fixed or floating charge or Bill of Sale over the business assets of the restaurant.
- Directors’ guarantee.
- A specific charge/security over the restaurant’s liquor licence and, where appropriate for state legislation, related licenses for off-licence packaged liquor operations (not applicable in Western Australia and South Australia).
- A deed of consent between lessor/lessee and the bank.
Have you gotten financial advice?
As you start to really consider investing in or running your own restaurant, function or cafe, you should also seek out independent financial and legal advice first.
The good news is that initial consultations are sometimes free for accountants, financial advisers and lawyers.
However, even if you have to pay a few thousand for these professionals, you have a much better chance at avoiding really common financial potholes that can quickly put you out of business. They’ll also help you save a lot of money over the long term.
An accountant who specialises in the hospitality industry, for instance, can help you set up an entity structure that is more profitable for your situation while a specialist solicitor can help you ensure the Contract of Sale is in your best interest.
For example, if you make an agreement with the vendor that certain machines or appliances be fixed or replaced before you sign the contract, you’ll want to make sure that there is a null-and-void arrangement in the Heads of Agreement just in case they fail to undertake such work.
Similarly, a hospitality business broker can help you negotiate with a vendor on your behalf.
Have you got a mentor?
There is no formal qualification required to operate in the industry but experience and training in hospitality are desirable and can assist profitability.
Sounds a little cliche but having a mentor who has worked in the industry for a number of years, owning and managing a restaurant can work in your favour on so many levels:
- From the initial business loan application stage, it shows to the lender that you’re serious about running a successful business and you’ll have a better chance of getting your loan approved.
- To keep the business afloat for many years to come, a mentor can not only help you avoid costly mistakes but help you to focus on proven strategies to increase profit.
If you don’t know someone personally in the industry, it may be worth joining Restaurant and Catering Australia, the national association that leads and represents restaurants and catering businesses across the country.
They can provide plenty of resources and support including training and tips on business strategy.
Of course, you’re probably best off getting advice from the current owner. What has worked and what hasn’t worked for them in the past?
Starting a strong relationship with them couldn’t hurt. They’ll offer help because they too want you to be successful. Have a decent handover period when buying the leasehold.
What kind of restaurant are you going to run?
There are three main restaurant categories:
- Quick-service: These are usually fast-food restaurants with drive-thru windows and take-out service. The types of food served include hamburgers, chips, charcoal chicken and pizza.
- Midscale:This can include full service (where patrons place and receive orders at their tables), limited-service (where patrons place orders at a counter and receive their orders at their table), and salad bars and buffets.
- Upscale: These restaurants are about offering a fine dining experience not value for money. People will be willing to pay more as long as service and quality are met.
If you’re getting a business loan for the leasehold, you’ll have to really think about your patrons and what their needs are.
For instance, if you purchase a cafe or restaurant in a community made up of largely working class families, they may not appreciate their quick-service establishment turned into an upscale restaurant.
Service is one thing but the food delivered is obviously the most important component of the dining experience.
What kind of food are you going to serve?
You’ll want to delight your patrons but not necessarily surprise them. If people are expecting a hip, inner-city cafe, don’t give them a steakhouse.
Here’s a breakdown of popular styles of restaurants:
- Seafood: Usually quick-service (fried food) or midscale. Prices change all the time and many kinds of seafood are seasonal. Be sure to choose a supplier that offers quality products.
- Steakhouse: Midscale or upscale service and family-orientated. Comfort is emphasised and they tend to have a western-themed ambience and decor. Upscale versions of this restaurant type tend to have a formal atmosphere and a wider selection of meats with larger portions.
- Family-style restaurants: Targeted towards families and seniors. The service falls between quick-service and full-service. They can be a little pricier than fast-food restaurants but in return you tend to get table service and comfortable chairs and booths.
- Ethnic restaurants: Think Asian, Mediterranean and Indian. These eateries range from quick-service (such as late-night kebab and pide stores) to upscale establishments.
- Cafe/coffeehouse:Home to arguably the world’s most popular beverage, coffee, cafes in the right location can serve hundreds of people a day. Despite the limited floor space and seating, there can be a massive rush during lunch for people after a quick meal or snack.
- Bakeries: These businesses tend to have heavy competition so you’ll need to differentiate yourself from your competitors. For example, you may want to offer a full dining experience rather than just a glass showcase.
Once you understand what you want to offer people, you then have to think about ways to stand out in a competitive environment. You need to carve out your own niche based on your own skills, experience and personality.
If you’re good with people, for instance, you might want to go with a food-service business so you have more opportunity to connect with customers. If you’re happier cooking, you might want to go with a commercial venture like a bakery, catering service or a function centre.
Call 1300 889 743 to discuss your restaurant plans with one of our experienced commercial brokers.
What are the benefits of buying a leasehold business?
There are huge differences between buying the leasehold (the business by itself) or the freehold going concern (the property and the business), not least of which are the business and tax implications that come along with it.
Leasehold arrangements don’t require you to outlay money for the property. As a result, they tend to offer a much higher yield on investment than freehold going concern arrangements.
Although there’s a greater reward attached to leasehold businesses, there’s also a greater risk involved so it comes down to your ability to put in the hard work.
If you’re looking at a challenge, then a buying a leasehold may be a better option for you. If you want a “set and forget” commercial property, you might be better off buying the business as a freehold going concern and earn rental income.
Decide if you want to buy the restaurant, along with the name, logo and menu or just the space and the equipment.
If you’re buying a busy restaurant and don’t plan to make any big changes, at least in the beginning, then your best bet is to keep the current restaurant name .
Restaurants are a risky venture no matter what – even established restaurants with a good track record are never a sure thing.
If you manage to make a decent enough profit from the leasehold, you can later use the investment to build up your property portfolio which may include freehold commercial properties.
Is a short term lease better?
Generally speaking, you should try to avoid locking in for a long term lease when you start the business, that is, no more than 1 to 2 years.
Let’s just say you sign up for a 5 year lease term. If your business fails within that time, you’ll still be liable to pay the rent and you could be sued by the landlord if you cannot make your rent.
It’s essential you speak to a hospitality accountant or financial adviser about which lease term will fit better with your long term financial goals.
If the building or space is only available with a long term lease (more than a year or two) really consider whether you have the ability to run a successful venture.
Longer leases do provide stability so it allows you to firmly establish your business in town and protects you from having to move in case the landlord decides to sell the premises.
Why is the restaurant being sold?
One of the first things you’ll need to do when you find a potential business is to find out why the vendor is selling the restaurant in the first place.
Is the restaurant not doing too well financially and the owners want out?
To find out, ask for three years business bank statements for the business and go over them with your accountant. Make sure they’re bank statements not profit and loss statements – these aren’t as reliable.
What’s the reputation of the business now?
A business broker can help you answer these questions but you’re usually better off getting to restaurant yourself to meet the owners and get a feel for the establishment.
- What does the place feel like?
Really think like a customer and consider things like service, ambiance, furniture and comfort and, of course, the food. What does this place have that other restaurants don’t?
- How long have management been in place?
A great management team is key to running a successful establishment because they understand the business at a patron level.
- Who are the current suppliers?
You may have to renew these contracts when you take over the leasehold. Then again, you may be better off switching suppliers for those located a little closer, a better option logistically, or for suppliers that are cheaper.
- Is the restaurant situated in a popular holiday destination?
How are the current owners generating business during off peak periods?
- What are the vacancy rates on tables?
Is it the type of establishment where people are in and out within the hour or do customers hang around for more than just the food?
- What about existing staff?
If staff are remaining with you, check the terms and conditions of their employment and their areas of responsibility.
- Are there plans to develop?
Check your local council for future development projects such as a new road or buildings being erected – will it be good for business or put you out of business?
- Are Occupational, Health and Safety (OH&S)inspections being passed?
Does the business have regular hygiene and safety regulations? Are they always met? You don’t want to buy a restaurant with a bad reputation.
- What’s the financial situation of the business?
Ask to see business records. Are there outstanding debts? What’s revenue like? If the owners seem reluctant in letting you look at the business accounts, you should question whether this is the type of person you want to buy from.
- Is the vendor planning to open a rival business?
You should consider arranging with your solicitor to have a non-compete clause in the Contract of Sale or Heads of Agreement to prevent them from opening a competing business for a given period of time.
If a restaurant isn’t doing that great, it doesn’t necessarily mean that you should steer clear. If you have the right industry experience and business and management skills, you may be able to turn the place around.
Then again, the vendors may simply be selling because they want to retire or are tired of being their own boss.
Have you done your own due diligence?
Apart from due diligence on the business itself, your business plan and forecasts should consider predicted:
- Food and beverage sales.
- Labor costs.
- Food costs.
- Menu and pricing.
- Marketing plan.
- Training and retention programs.
What should be in the lease arrangement?
Leasehold restaurants are normally sold as ‘plus stock’ but you should get in touch with a qualified solicitor so they can help you negotiate this with the vendor.
Stock items include certain appliances, machinery and even some long life food products.
Is the equipment fit for purpose and under warranty?
Similarly, the establishment may require certain fixtures and fittings to be installed before you can start operating.
Are you or the vendor liable for installing these fittings?
These details should be clearly outlined in the lease agreement before signing. Again, you can negotiate this with the help of a business broker and solicitor.
Should I buy a freehold going concern restaurant instead?
Although leasehold business purchasers enjoy a much higher return on their investment, the worst case scenario, the business failing, usually means the loss of any money you outlaid for the business.
Deciding on which ownership to choose comes down to your circumstances and your lifestyle.
The great thing about a freehold arrangement is that the land itself retains value even if the business sinks.
Please get in touch with us on 1300 889 743 or fill in our free assessment form so we can properly assess your situation and discuss freehold and leasehold options with you.
Tips on the buying process
Get the building properly inspected. You may be able to negotiate the cost of repairs into the purchase price or request that certain building and OH&S inspections are undertaken and passed before the sale goes ahead.
A simple letter of offer or Heads of Agreement that spells out your expectations and intentions is a helpful document to have prior to the Contract of Sale. Along with your deposit, it acts as a stencil of the contract to come.
For example, if a certain amount of inventory isn’t made available or certain maintenance or repair issues aren’t resolved, then the purchase shouldn’t go ahead.
Without a Contract of Sale, isn’t this a risky way to go about buying a restaurant?
Not really. A commercial buyers agent or business broker can help you to draft up the heads of agreement and by having a formal agreement between you and the vendor, the agent can take that property off the market.
It gives you breathing space to undertake your due diligence.
If certain conditions aren’t met, such as the landlord not extending the lease because it’s a little too short for you to qualify for finance, then you can pull out of the deal and the deposit is totally refundable.
Is it worth renovating?
You can definitely find freehold going concern businesses at a great price but they may need some work. If you see the potential in the restaurant, then undertaking renovation work may be worth it despite the time it takes away from you earning revenue.
No matter whether you do most of the work yourself or not, you’ll need to apply for a development application with your local council.
You could submit the application yourself or hire a professional to organise and handle this for you. Depending on the nature of the property and its location, it may cost you upwards of $20,000 but these professionals have the relevant contacts to get your application over the line meaning you can open your doors for trade a lot sooner.
Keep in mind that fit-outs, such as plumbing and electricity, can be quite expensive so ensure you have a sufficient fit-out budget.
What permits do I need?
The food industry is strictly regulated and subject to inspections. Failure to meet regulations and you could be subject to fines or get shut down by authorities.
Once you’ve undertaken the necessary due diligence on the owners, inspections on the property and you’re moving towards coming to a sale agreement, apply for the appropriate permits right away.
It can sometimes take weeks to receive these licences and permits so contact the local council for information on registration requirements and charges, what food business class (1, 2, 3 or 4) the business falls under, and whether you’re required to have a food safety program.
In Victoria, for instance, class 1 and 2 food premises must have a food safety program. This applies to pretty much all restaurants, cafes, take-away stores, pubs, delicatessens, most manufacturers and other food business types.
Class 1 and class 2 food premises are required under the Victorian Food Act to keep a copy of their food safety program onsite at the premises and must also have a food safety supervisor.
A food safety supervisor needs to have the expertise and authority to ensure that all food handling staff have sufficient skills and knowledge to provide safe food, including being able to understand and follow the food safety program.
Usually, class 3 or 4 restaurants aren’t required to have a food safety program or food safety adviser because they don’t deal in the sale and preparation of food associated with food poisoning.
These food permit requirements vary from state to state so please check with the local council.
Of course, apart from food permits, establishments that sell alcohol will be required to hold an appropriate liquor licence with staff members required to undertake an RSA course.
There are also other permits required depending on the cafe’s offering, such as outdoor seating/patio seating permits, which will vary depending on location and the type of business it is, whether it’s a restaurant, cafe or function centre.
Is it worth getting key man risk insurance?
Like all businesses, you’ll have that one member of your team that is pretty much irreplaceable. They often go above and beyond what is set out in their job description and can easily run their part of the business, or the entire show altogether.
No matter whether you bought the leasehold or the freehold going concern, your business would be lost without this person so replacing them can be expensive.
In relation to restaurants, your “key man” is usually your head chef. If they’re good, they would have come with dishes that are now a signature for your business.
Have these recipes been written down and can they be replicated?
Will you be able to recruit and train someone to replace your head chef should they decide to leave? How much will that cost?
Depending on how important the staff member is in keeping your business profitable, you may consider getting key man risk insurance.
What you can do in the meantime though is to put in systems and procedures in place that help to replicate what this staff member undertakes on a daily basis to ensure you can continue to run an optimum business.
Does it matter where the restaurant is located?
Restaurants located near a highway and freeway exits generate a lot of business but not necessarily repeat customers. You’ll have to make sure that there is adequate parking to accommodate patrons.
Cafes located in downtown districts and in developed strips like shopping centres tend to sell for more because they generate a lot of foot traffic but, again, not necessarily repeat business, particularly if you’re having to compete with other restaurants close by.
Even if you have great food and service, restaurants out of the way or located in a bad part of town will usually result in customers opting for another location.
Then again, if you’re located in an area that’s made up largely of your target demographic, and you’re providing them with what they want, you’ll have a much better chance of these retaining this business.
How long does settlement take?
Like other commercial properties, settlement on a restaurant usually takes around 6 to 8 weeks.
Bear in mind that you will have to apply for food and liquor permits, which can take as long as 8 weeks to process and approve.
Consider joining a professional association
Restaurant and Catering Australia can help you establish key performance indicators for your restaurant that help you map out cost and revenues benchmarks related, but not limited, to:
- Staff and employment: Wages and retention.
- Kitchen management: Cost of food per head.
- Front of house and restaurant management: Number of customers, table vacancy rates and customer satisfaction.
- Bar and cellar: Sales per head, stock value and stock turnover.
Need a restaurant business loan?
If you were to go to a lender directly, you’d usually have to dress to impress and be prepared to answer tough questions about your plans to buy a restaurant.
By using one of our specialist lenders you can avoid the hassle altogether because we know how to present a strong case to the right lender.
Call us on 1300 889 743 or complete our free assessment form today.