How to Secure a Business Loan for a Restaurant

How to Secure a Business Loan for a Restaurant

Buying a restaurant requires a different loan structure than most other business acquisitions. The asset being purchased includes goodwill, fit-out, and often inventory or plant, which means lenders assess the deal based on a combination of the business's trading history and your capacity to service debt from forecast cashflow.

The most common structure is a secured business loan where the lender takes security over the business assets, and often over commercial or residential property as well. If the restaurant operates from leased premises, you won't have property as part of the deal, which means the lender will lean more heavily on your business financial statements, deposit size, and trading performance of the existing operation.

What Lenders Look for in a Restaurant Purchase

Lenders want to see consistent revenue, positive cash flow, and a demonstrated ability to service the proposed loan repayments. A restaurant with strong weekend trade, repeat customers, and solid profit margins will be viewed more favourably than one showing irregular income or seasonal dependency.

Consider a buyer looking to purchase an established cafe in Balmain. The business has been operating for eight years, turns over around $950,000 annually, and shows net profit of approximately $180,000 after all wages and expenses. The asking price is $420,000 plus stock at valuation. The buyer has $120,000 in cash and wants to borrow $300,000. The lender will assess the debt service coverage ratio, which compares the business's operating income to the proposed loan repayments. In this scenario, monthly repayments on a $300,000 loan over seven years sit around $4,500, depending on the interest rate. The business generates roughly $15,000 per month in net profit, which gives a coverage ratio well above the typical minimum of 1.25. That makes the deal viable from a servicing perspective.

Secured vs Unsecured Lending for Hospitality

A secured business loan typically offers a lower interest rate because the lender has recourse to specific assets if repayments aren't met. For a restaurant purchase, security might include the business assets themselves or property you already own. Unsecured business finance is available but usually comes with higher rates and smaller loan amounts, making it less common for acquisitions above $100,000.

If you're buying a restaurant that includes ownership of the commercial property, lenders will structure the deal as commercial lending with the property as primary security. This often results in better loan terms and a longer repayment period. If the restaurant operates under a lease, the loan is secured against business assets and potentially your home, depending on the amount being borrowed and your financial position.

How Loan Structure Affects Repayment Flexibility

Most restaurant purchases are funded through a business term loan with either a fixed interest rate or variable interest rate. A fixed rate gives certainty over repayments, which can be helpful in the first year or two when you're settling into the operation. A variable rate offers more flexibility, including redraw facilities that let you access extra repayments if cash flow allows.

Flexible repayment options matter in hospitality because revenue can fluctuate. A loan structure that allows you to make additional repayments during stronger months, then draw on that buffer during quieter periods, can smooth out cash flow pressure. Some lenders also offer interest-only periods for the first 12 months, which reduces the initial repayment burden while you transition into ownership.

Deposit Requirements and Genuine Savings

Most lenders expect a deposit of at least 20% to 30% of the purchase price for a restaurant acquisition. That deposit can come from cash savings, equity in another property, or even funds from selling another business. The stronger your deposit, the more flexible loan terms you'll be offered.

Genuine savings are less of a concern for business lending than they are for home loans, but lenders still want to see that your deposit hasn't been borrowed from elsewhere. If you're using equity from your home to fund the deposit, that's acceptable, but the lender will assess your overall debt position to ensure you can service both the new business loan and your existing mortgage.

What Documents You'll Need to Support the Application

Lenders will ask for the seller's business financial statements, usually covering the past two to three years. They'll also want tax returns, a profit and loss statement, and a balance sheet. If the restaurant has seasonal fluctuations, be prepared to explain how those patterns affect cash flow and why the business remains viable year-round.

You'll also need to provide your own financials, including personal tax returns, a statement of assets and liabilities, and details of any existing business interests. If you're currently employed and plan to transition into running the restaurant full-time, the lender will want to understand how that change affects your income.

A cashflow forecast is often required, especially if you're planning changes to the menu, hours, or service model. The forecast should show projected income, operating expenses, and loan repayments over at least the first 12 months. Lenders use this to assess whether the business can sustain itself under your ownership.

How Your Business Credit Score Affects Approval

Your business credit score plays a role in both approval and the interest rate you're offered. If you've operated other businesses, any late payments, defaults, or court judgments will appear on your commercial credit file and may limit your options. If you're a first-time business owner, lenders will assess your personal credit history instead.

A strong credit profile can open access to business loan options from banks and lenders across Australia, while a weaker profile might require you to provide additional security or accept a higher rate. Some non-bank lenders specialise in approvals for buyers with less conventional credit histories, though loan amounts and terms may be more conservative.

When to Use Equipment Finance Separately

If the restaurant purchase includes significant kitchen equipment or fit-out, you may be able to structure part of the deal as equipment financing rather than rolling everything into a single business term loan. This can be useful if the equipment has a clear resale value and you want to keep the loan amount for goodwill and working capital lower.

Separating the equipment component also allows you to match the loan term to the useful life of the assets. A commercial oven or coolroom might justify a five-year term, while goodwill and business assets might be financed over seven years. This approach can improve your debt service coverage ratio by spreading repayments more appropriately.

How Long Approval Takes and What Slows It Down

Approval times vary depending on the lender and the complexity of the deal. If the restaurant has clear financials, you have a solid deposit, and the business structure is straightforward, you might see conditional approval within a week. More complex scenarios, such as a turnaround opportunity or a business with inconsistent trading, can take several weeks as the lender conducts deeper due diligence.

The most common delays come from incomplete financial records, unclear lease terms, or questions about how the business will perform under new ownership. Having a detailed business plan that addresses these points upfront can shorten the timeline and give the lender confidence in the viability of the purchase.

Once the loan is approved and contracts are signed, settlement usually follows within 30 to 60 days. That gives you time to finalise lease negotiations, arrange insurance, and prepare for handover. Some lenders offer a progressive drawdown if you're planning renovations or fit-out work after settlement, which means you only draw on the loan as costs are incurred rather than taking the full amount upfront.

Call one of our team or book an appointment at a time that works for you to discuss how we can structure a business loan that fits the specifics of the restaurant you're looking to purchase.

Frequently Asked Questions