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What are your Financing Options?
Restaurants face many different needs and reasons for borrowing money, so there are many different types of loans that can work in the industry.
The following list isn’t a complete list of restaurant financing options. For that, you’ll want to consult as many financial institutions as feasible. Online lenders may be a good option for restaurant owners who need funding but are unable to seek out traditional bank loans due to issues with credit, while restaurants with great credit and/or significant assets might be best served to go with a traditional bank.
The best funding option for one restaurant won’t be the same for others, as factors like your monthly revenue, credit history, asset availability, time in business, and personal credit can all affect the options your restaurant might be offered. There are, in fact, many different factors that lenders take into account when making a decision on loaning money to a restaurant.3
Credit Scores – Is there a minimum amount of credit required by your lender? Check your credit score to make sure you are eligible.
Annual Revenue – Lenders don’t often care about your personal credit score. They just want to see if you have enough income and cash flow to repay the loan. This is particularly applicable in revenue-based financing, like a merchant cash advance (more on these later).
Pre-existing Relationships – If you’ve already got a credit card and a business checking account with a bank, they’re likely to be more amenable to lending you money in an equipment loan.
Time in Business – Lenders are more likely to lend to companies that can sustain themselves beyond a certain point in their business. Remember, a business that’s no longer operating can’t make monthly payments. When a restaurant has a consistent amount of time in business, it shows lenders that it’s likely to be around for a while.
Collateral– Your lender may be more likely to approve a small-business loan if there is a lot of collateral, like real estate, inventory, or vehicles in your company’s name.
Small Business Loans
There are many types of loans out there for restaurants, whether you’re a new restaurant with bad credit or a long-running bar looking for a kitchen equipment upgrade. The type of loan and lender depends on your particular qualities as a borrower.
Term loans are lump sum financing that must be paid back within a certain timeframe (also known as their term). In many ways, these are the loans you think of when you think of loans. The lender decides to lend you money at a particular interest rate depending on your credit, the size of the loan, and how long it’ll take to repay.
These loans are flexible but can be expensive if you’re unable or unwilling to put up significant assets as collateral. Some term loans are short-term loans, which must be repaid within 18 months or so. Short-term loans often come with smaller loan amounts and high interest compared to long-term loans, which can take years or even decades to repay.
Let’s suppose you need customer seating for your restaurant. Or equipment like a range top or oven. These items can cost tens of thousands if they’re bought outright, which is why restaurant equipment financing is such a good choice.
Instead of paying cash for the equipment in question, small business owners using equipment loans make a down payment and then offer up the new equipment as collateral to the lender. Using the new equipment as collateral protects the lender from losing too much money, while the borrower gets exactly the equipment the restaurant needs. Equipment loans often have lower interest rates than other loan options because they’re seen as relatively safe for lenders.
Business Line of Credit
Lines of credit are a powerful form of financing in the restaurant industry.
Many restaurateurs view lines of credit as readily available cash when it’s needed. Instead of receiving the loan amount up front, as you would in a term loan, a business line of credit allows borrowers to withdraw as much as needed up to an agreed-upon limit, and the borrower need only pay interest on what’s borrowed.
What’s great about lines of credit is that they’re available whenever you need them. If a vital piece of kitchen equipment breaks and must be replaced, a line of credit means you’ll never have to panic as you start loan applications for vital equipment. They’re also available with most lenders, from alternative lenders online to the most powerful traditional banks in the world.
Business Credit Cards
Restaurant owners are familiar with business credit cards as they’re one of the most popular ways to finance purchases. Because of that simplicity and ease, business credit cards can be lifelines for restaurant owners.
Search for credit cards that offer cash back, rewards points, or credit toward merchandise or services. Some credit cards also offer frequent flyer points and airline points. If you’ve got consistent purchases that fall under one of these categories, a business credit card can save you a ton of money.
A word of warning on credit cards and lines of credit
The utilization rate for lines of credits and credit cards is one of the biggest factors used to calculate your business’s credit score. Use these tools very carefully, as the wrong credit choices can lead to significant financial complications.
Many U.S. lenders offer SBA loans, which are slow-moving, low-cost loans guaranteed by the government. The U.S. Small Business Administration allows lenders the opportunity to offer borrowers very low interest rates, large loan amounts, and no origination fees. It also gives the lender the ability to negotiate favorable repayment terms. The term length can reach up to 30 years. That’s because the government’s guarantee works much like the equipment being used as collateral in an equipment loan: the lender has very little risk of losing a ton of money, so they’re able to offer great terms.
However, because defaults are repaid by taxpayer dollars, it’s flat-out difficult to get an SBA loan. You must submit a business plan and meet minimum annual revenue requirements during the arduous application process. Credit reports are also required. It can take weeks to complete the application and receive funding.
Merchant Cash Advance
Because of the high cost of borrowing, a merchant cash advance (or “MCA”) should only be used in extreme cases. In an MCA, the funding provider isn’t lending you money and the money is not a loan. Instead, they’re buying a portion of the business’s future debit and credit card sales.
MCAs make money through factor rates, which are multiplied by the size of the advance to find the total amount that the receiving company must repay. If you borrow $5,000 in an MCA at a factor rate of 1.2, you will repay $6,000, no ifs, ands, or buts.
Payment for an MCA happens with each credit and debit card sale, so they by definition constrict cash flow. However, receiving an MCA is based largely on your restaurant’s debit or credit card sales. You won’t need to have a credit check, so even if your credit score is low, you may still qualify. MCAs also don’t require much paperwork, making them one of the fastest methods to obtain financing. Many companies receiving MCAs get the money in as little as a single business day.
Combinations of the Above
Because of the multitude of needs that your business may face, there are also likely many loan products that’ll work best for your restaurant. Instead of seeking out one single funding solution, consider a mix. You may want to take out a term loan to help with working capital and an equipment loan to replace all of the furniture in the building. You might take out an SBA loan to use for a rebranding project, and a business credit card to buy your delivery vehicle’s gas (to earn miles).
Why should restaurant owners apply for business financing?
Now that you’ve got an idea of what types of funding are out there, ask yourself what your restaurant needs to be the best restaurant it can be. Are there any projects that might help take your eatery to the next level?
Buy an existing restaurant
Renovations or decorations
Expansion within the existing space (think a patio or second floor)
Buying, upgrading, or repairing equipment
Opening an additional location
Rebranding or marketing