Finance for Restaurants and Food Businesses

Why restaurant margins leave so little room for debt

Operators often combine food and labour into a single figure, sometimes called prime cost. If food is a third of the menu price and staff another third, roughly a third remains for rent, rates, energy, insurance, card fees, platform commissions, repairs and loan repayments. Net profit on each pound of sales is small, and in a difficult year it is nothing.

Food cost inflation hits this directly. When ingredient prices rise and menu prices cannot follow quickly, the margin absorbs the difference. Labour is the same: minimum wage and employer cost increases land on the day they take effect, while trade builds slowly. A restaurant that comfortably covered a loan repayment last year may be unable to this year without any fall in sales.

Delivery platforms add a layer. An app order carries a commission that is a significant share of the order value, with payment made weekly or later rather than at the till. An operator who prices the delivery menu the same as the dine-in menu can be losing money on every delivery while sales look healthy.

Supplier credit is the other pressure point. Wholesalers and fresh produce suppliers offer weekly or fortnightly accounts and will move to cash on delivery at the first sign of late payment, forcing the business to pay for stock before selling it just when cash is tightest.

Where restaurant debt usually comes from

• Fit-out loans. Converting a unit is expensive and the fit-out has little resale value, so these loans are usually unsecured with a personal guarantee from the owner.
• Kitchen equipment finance. Ovens, extraction, refrigeration and dishwashers are commonly leased or bought on hire purchase, often under several agreements with different end dates.
• Landlord deposits and rent. A deposit of several months' rent is locked away for the life of the lease, and the rent is fixed regardless of covers.
• Merchant cash advances. Because card takings are easy to collect, MCAs are heavily marketed to restaurants. They are quick to obtain and expensive to carry.
• Tax and VAT arrears. VAT or PAYE used to pay suppliers becomes a debt to HMRC with interest running. Time to Pay arrangements may be available via GOV.UK.

Finance options that fit the sector

Consolidating fit-out and equipment debt

A restaurant two years in may be servicing a fit-out loan, three equipment agreements, a credit card and an advance, each on different dates. Consolidating business debt into one monthly payment can reduce the combined outgoing, particularly where the fit-out loan was taken over a short term. A longer term increases the total repaid, hire purchase settlement figures may include interest that is not fully rebated, and cheap equipment agreements are often better left running.

Refinancing a merchant cash advance

An MCA repaid through a percentage of daily card takings can be refinanced into a term loan with a fixed monthly payment. This removes the daily deduction, lets the restaurant pay suppliers and staff from takings first, and puts an end date on the debt. The lender will assess affordability on normal trading and will almost certainly require a personal guarantee. Our page on merchant cash advance debt explains how to check the settlement figure first.

Cash flow finance

A short-term cash flow facility can bridge a known gap, such as a January trough after a strong December. It works when a clear event closes the gap. It does not fix a margin that is too thin, because it adds another repayment to a cost base that cannot carry the existing ones.

Equipment leasing versus owning

Leasing kitchen equipment spreads the cost, keeps cash in the business and can include maintenance, which matters for refrigeration and extraction. Owning avoids ongoing payments but ties up cash in assets that lose value quickly and are hard to sell if the restaurant closes. Leasing is often the more cautious choice for a new operation; buying can be cheaper over the equipment's life for an established one with reserves. Either way, list the agreements alongside loans when assessing total debt.

Risks specific to restaurant borrowing

• Daily collections before costs. Any product repaid from card takings at source takes its share before food, staff and rent. On a thin margin that can be the difference between paying suppliers and not.
• Stacking. Most advance agreements prohibit taking another while the first is running, so it can be a breach as well as a trap.
• Personal guarantees. Lender caution about food businesses makes a director's guarantee standard, and some owners also guarantee the lease. If the restaurant closes, the owner can be pursued for both. See our personal guarantees page.
• Short lifecycles and lender appetite. Because many restaurants close within a few years, providers price the sector as higher risk. A new restaurant should expect higher costs, lower amounts and stricter terms.
• Borrowing to cover a structural loss. If the margin is negative after commissions and labour, more borrowing delays and enlarges the problem. Repricing the menu or renegotiating platform terms may do more than any loan.

Questions to ask before borrowing

• What is my margin after food, labour and platform commission, and does it cover this repayment?
• Is the repayment collected daily from takings, or monthly after costs have been paid?
• What is the total cost over the whole term, including fees and the settlement of anything being replaced?
• What am I guaranteeing personally, including the lease, and what would I owe if the restaurant closed next year?

If supplier payments, VAT or instalments are already being missed, our page on business debt problems explains the warning signs and practical steps. Business Debtline offers free, impartial help, and where a business cannot pay its debts as they fall due a licensed insolvency practitioner may need to be consulted.

Frequently asked questions