If you're looking to open your own restaurant, cafe, or similar hospitality establishment, a commercial mortgage could be the right choice for you, although other funding options are available. In this article we look at the various forms of finance that could be suitable for a restaurant purchase, how lenders assess this type of application, and why using a broker with experience is this niche can be so helpful.
What type of finance is available to buy a restaurant?
There are a number of finance options available to you if you're looking to buy a restaurant, and the most suitable one will depend on both your circumstances, and the type of restaurant or similar hospitality establishment you intend to purchase and how you intend to use it.
Below we look at the different funding options and which scenario of restaurant purchase they are most suited for:
Commercial mortgages
Commercial mortgages vary base on how you intend to use the property:
- If you're buying or remortgaging an establishment from which to run your own restaurant or cafe, a commercial owner-occupier mortgage is often the best option
- If you're buying or remortgaging a hospitality establishment such as a cafe, with a flat above, you'll need a semi-commercial mortgage, which covers both the residential and commercial aspects of the building
- If you're buying hospitality property as an investment to rent out to a separate restauranteur, you'll need a commercial investment mortgage
Bridging loans
Bridging loans are a kind of flexible, short term finance that can be organised very swiftly, so can be helpful if you're purchasing a restaurant at an auction, for example. They can also be used to buy an uninhabitable property, which could be a useful if you're buying a restaurant that needs considerable refurbishment to bring it up to standard, or a propety for which you are changing the use to a hospitality business.
The rates tend to be higher than on commercial mortgages, but usually you will remortgage onto a standard commercial mortgage once possible.
Development Finance
If you're looking to finance a restaurant development project, whether that's building from scratch or complete refurbishment of an existing property, a development finance could be a viable option to consider.
This is another form of short term finance, but with development finance, the funding is released in phases to align with the project. This can make it more cost effective for longer development projects than a bridging loan, as you only pay interest on the amount of funds released to date. Typically you would refinance onto the right type of commercial mortgage for your needs, once the works are complete.
What criteria apply to a restaurant mortgage?
When it comes to financing a restaurant, prospective lenders will be particularly interested in your qualifications and/or experience in running a similar establishment. Regardless of the type of finance you opt for, prospective lenders will be interested in similar factors, such as:
- Experience: Your experience in running and/or owning a restaurant or similar hospitality establishment - Providing CVs highlighting the hospitality experience of all key stakeholders is likely to be required
- Business plan: A robust plan based on experience or substantial research, outlining your strategy, competition, and growth plans
- Loan affordability: Usually you'll need to provide the last 3 years of full financial accounts and at least 12-months cash flow forecast
- Location: The property location and how suited/lucrative the type of establishment you wish to open is in that area, whether that's a fine dining restaraunt or a takeaway
- LTV: The loan to value ratio of the loan will typically need to be 80% or lower for this type of purchase
- Credit score: Both your personal credit rating and that of your business may be reviewed
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Lease Details: If you are buying a leasehold, the remaining term usually needs to be significantly longer than the mortgage term
For leasehold restaurants, lenders will scrutinize your EBITDA (profitability) far more harshly because the business's cash flow is the only thing that will pay back the loan, whereas, with a freehold, the building provides a safety net.
How much deposit will you?
You can expect to contribute a larger deposit for a commercial mortgage than for a residential mortgage. How much you need for the specific type of business you intend to operate typically depends on your experience, and the lender's individual appetite for that type of establishment. For example, some lenders won't offer pub mortgages, but are happy to offer office mortgages.
Restaurants can be seen as more risky than some other businesses, so a deposit of between 30-45% is typicaly. However, if you can demonstrate a high level of experience and capability, you're likely to have access to lower deposit requirements and potentially, more favourable the rates than if you're new to the industry.
If you are unable to contribute a cash deposit, you may be able to secure a commerical mortgage against another property that you own, if you have sufficient equity. A broker can help you to select the right type of lender for your particular endeavour.
How to get a commercial mortgage for a restaurant purchase
Mortgages for restaurants, cafes and particularly take away establishments can be difficult to arrange, as each lender has their own preferences in terms of what sort of business they will accept. There are plethora of factors for them to consider, including prior experience, and the suitability of your chosen business to the intended area.
That's why it can be particularly helpful to speak to a broker with experience of arranging both commercial and semi-commercial mortgages in the hospitality industry. At Money Helpdesk we have plenty of experts in this field who can help you to maximise your chance of a successful application, as well as finding you the most suitable commercial mortgage for your business.
You can book a free, no-obligation chat with a restaurant and hospitality mortgage specialist below:
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Restaurant mortgage calculator
You can use our calculator below to get an ideal of how much your restuarant mortgage will cost each month and overall.
To reflect a typical commercial mortgage, we have set this tool to calculate results for an interest-only loan with a rate of 6% over 25 years, but these values can be changed manually.
Which mortgage lenders are available?
Mortgages for restaurants and hospitality businesses are offered by both the commercial arms of high street banks and specialist commercial mortgage providers. Typically high street lenders have stricter criteria, and specialist lenders can be a bit more flexible.
Below is a list of some lenders that currently offer this type of loan, however, to get a full overview of the finance options available to you it's best to speak to a broker that specialises in this lending niche:
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HSBC: A major lender for established restaurants and hotels. They typically prefer businesses with a strong trading history and may require a business bank account
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Lloyds Bank: Known for providing sector-specific expertise, particularly for larger hospitality acquisitions and refinancing
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Santander: Often supports SMEs in the hospitality sector with flexible repayment structures
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OakNorth Bank: A specialist in hospitality bridging finance, including complex deals such as multi-site restaurant groups on bespoke terms
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Aldermore Bank: Often considers semi-commercial properties such as a restaurant with a flat above and is more flexible with prior trading history than high street banks
- Allica Bank: Allica accept Freehold and may consider longer leasehold purchases up to around 65%LTV. They typically require 2 years of accounts
Buying a leasehold restaurant vs. a freehold restaurant
Restaurant and hospitality businesses are commonly sold as a leashold business opportunity, so it's important to understand the distinction between buying a leashold and freehold property, and how this could impact the type of finance that's best suited to your needs.
- With a freehold restaurant you own the entire physical property including the kitchen, the dining floor, and the land. As this is a physical asset, it offers strong security for your business. Usually the most competitive commercial mortgages with longer repayment windows and a higher LTV are possible with this type of purchase
- In a Leasehold setup, you are essentially purchasing the restaurant’s reputation and customer base, the commercial kitchen fit-out, and the remaining years on the rental contract. You do not own the building and lenders class this as a 'wasting asset' because its value drops to zero the moment the lease expires. Financing a leasehold is significantly more difficult and may require a business Loan rather than a mortgage
The Lease Tail rule
In the restaurant and hospitality world, the 'Lease Tail' is the most common reason finance is rejected. If you want a 10-year loan to buy a bistro, most UK lenders will insist that the lease has at least 15 to 20 years remaining. If the lease is too short, the bank fears that by the time you've paid off half the loan, the landlord could refuse to renew the lease, leaving you with a debt and no premises to trade from.
Why choose Money Helpdesk for your restaurant mortgage?
At Money Helpdesk, we have specialist commercial investment advisers with experience in arranging both commercial and semi-commercial mortgages for the hospitality industry. No matter what type of restaurant or eating establishment you need finance for, we can help you search the market for the best fit, and most competitive rates available to you.
Our initial consultation is always free and there’s never any obligation, but our brokers are rated 5-stars on Google, Trustpilot and other leading review sites, so why not
Get started here to discuss your restaurant finance needs today
FAQs
While it is certainly more challenging to get a restaurant mortgage with bad credit, it's certainly possible. It will largely depend on how the lender assesses credit issues. Some will consider the age and severity of the credit issue when making their decision. Each application is assessed on a case by case basis, and even if you have been turned away by one lender, it doesn't necessarily mean you will be rejected again.
If you have a bad credit history, it can be particularly helpful to use a mortgage broker as they will be able to enhance your application and advise on lenders who are more agreeable to credit issues.