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Types of Restaurant Loans and Bar Loans

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Types of Restaurant Loans and Bar Loans

To choose between any two or more lenders, carefully consider the requisite terms and interest rates of each lender to pick out the most suitable lender.

Types of loans available to restaurants and bar businesses

SBFP loans are an arrangement designed to ensure financial institutions share the risk of a loan with a government-backed entity. The government will guarantee a portion of the loan advanced by the financial institution in case of defaulted loan repayment. The advantages of the SBFP loans are:

1. Canadian Small Business Financing Program Loans


Down payments may be extremely large


Loans may take longer to be processed compared to commercial loans

However, other factors may work against this type of loan.

Longer loan terms of up to 10 years


Generous principal amounts/borrowing limits


Low-interest rates due to government backing

2. Merchant Cash Advance

The only drawback with MCAs is that they can be expensive with APRs reaching 200%.


The cash advance will be made on accelerated timelines


Repayment amounts are variable dependent on sales activity to avoid potential cash flow challenges


Credit scores and collateral are not a requirement

Some of the benefits of MCA are:

This is a cash advance made against a restaurant’s future card sales.
After the principal amount has been advanced, a percentage of debit and credit card receipts are remitted to the lender until the entire amount is recovered.

3. Term Loan

A term loan is advanced by the lender based on the credit score, credit history and financial strength of the borrower.

And just like a conventional type of loan, the borrower will pay back the fixed amount and interest every month as per the agreement.

Some of the main advantages of a term loan are:

Fixed repayment amounts make it easy to budget and forecast


Interest is tax-deductible as well as no dilution of control


Easily refinanced and rolled over if requisite terms are honored

A notable disadvantage is that a business is under a legal obligation to repay on time with legal repercussions, asset seizing, and bankruptcy in case of failure to repay.

4. Revolving Line of Credit

The revolving line of credit represents a commitment by the bank to provide funds at any given point in time within the term of the loan. The business will choose to take up any level up to the maximum. Interest for the facility is calculated as a weighted average of principal outstanding. The unused principal amount is levied a small fee that represents the lender’s opportunity cost for reserving the capital for the business.

The advantages of a revolving line of credit are:

Eases the impact of seasonality and cyclicality


Aids a business to align borrowing with operating needs and financial strength


Versatility ensures the loan can be committed to different expenses of the restaurant.

The business should exercise caution to ensure it only takes out the needed amount rather than maxing out the limits of the loan.

5. Equipment Loans

Equipment loans are advanced so that a business can purchase a fixed asset to be used in the restaurant or bar. The asset will then serve as collateral for the loan.

Some advantages of equipment loans are:

No liens on personal assets


Lower interest rates as asset acts as collateral


Easy budgeting and improved cash flow

The only downside of the loan is that it can only be used to purchase the identified equipment and not for any other purpose.