Financial Challenges Before Every Restaurant Owner
Working capital is essential for sustaining the restaurant business. General decreases in income and seasonal downturns can hurt the restaurant business. Meanwhile, inventory must be purchased, the staff must be paid, and the insurance and operational costs must be taken care of. Building Block Capital provides working capital in the form of advanced restaurant finance, restaurant business loans, lines of credit, and other types of financing that can help you handle cash deficit.
Traditionally, restaurant loans were treated as a high default risk by lenders. Many lenders associated a high level of risk with restaurant loans but with the restaurant business evolving, lenders have learned ways to mitigate the risks associated with lending to restaurant owners. One of the major factors that lead to the failure of the restaurant business is the shortage of cash flow caused by various factors.
The restaurant business is often characterized by uneven patterns disrupting the cash flow and causing financial difficulties to the owners finally leading to the failure of the business. However, proper fiscal management and financing can help avoid many financial stresses.
Also, a restaurant owner often finds the tax regulatory requirements overwhelming. Even if a restaurant serves awesome food and has good business, the slightest of mismanagement is enough to jeopardize the future of the entire business. Identifying the resources that you really need including adequate financing and professional services can help stabilize the business and ensure its healthy survival over the coming years.
Choosing the Right Restaurant Financing Option
You will have questions about the ideal restaurant loan and where do you get one. The right financing for your restaurant business may include many specialized loans and not just one.
When you analyze the financing environment over the past decade, you will notice that loans have become more specialized. The specialization offers an advantage to restaurant owners seeking financing as the narrow focus of the loan proceeds lets the borrowers and lenders decide loan amounts precisely, thereby avoiding unnecessary borrowing costs. For example, while you are purchasing restaurant equipment, finding sources of equipment financing is better than looking for a business term loan, business line of credit, or a business credit card.
Why take multiple loans for a restaurant? In the example, a restaurant owner is more likely to pay less interest with equipment financing than the rate for a cash advance or a loan.
However, there will be some circumstances when a business owner needs a cash advance for getting supplies, like perishables for example. Here you can expect a quick turn-over that enables you to repay the loan in a timely manner. Common examples of this would include big dining holidays like Valentine’s Day, New Year’s Eve, Mother’s Day, or when the busy season is near. In these circumstances, you will have a busy schedule as a restaurant owner and will mostly have to hire additional staff and place an order for multiples of your regular supplies. A merchant cash advance can be very useful in these cases. It is paid back through a part of the credit card sales and proves more suitable for stabilizing cash flow.
Consider another situation where you get the opportunity to buy premium spirits and wines at price rates that seem very favorable and sell them at high margins. This is without a doubt a good investment. You might have heard the phrase “you don’t make money selling, you make it buying”? Although the phrase is an idiomatic expression, there is some truth in it. Purchasing power is a relevant factor in selling business. However, it is possible that you take some time to sell the premium spirits and wine, and hence you would require a longer repayment horizon that helps bring a balance between the sales and loan repayments.
If you can buy a bottle of wine at $20 and sell it at $60, you get a 200% profit in the deal. If the interest on the money you borrowed for purchasing the wine is 15%, then your final profit will be reduced by 10% only, and your earning per bottle will be $37. In cases like this, you can use a business credit card or a business line of credit to buy the supplies because they have longer repayment horizons.
Let us look at the different types of financing that can be used as a restaurant loan.
Most business owners regard an SBA loan as the most desirable long-term loan due to its longer repayment horizon and low-interest rates.
What Is Meant By An SBA Loan?
The US SBA (Small Business Administration) is a federal agency that offers loan guarantee programs and other related services for supporting the growth and sustainability of small businesses across the United States. The agency was founded on July 30, 1953, and has delivered more than 20 million loans, counseling sessions, guarantees, contracts, and financial assistance in other forms in the US. Merchants are provided SBA loans through multiple institutions.
SBA Loan Guarantee Program
Because SBA guarantees a significant portion of the loan, lenders feel more confident about providing loans to small businesses that are often considered as high credit risks. Most often, these businesses will not have the financial stability to be eligible for loans from traditional banks and they rely on the SBA guarantee.
Common Features of the SBA Loan Guarantee Program
Longer-term financing and lower down payments are some of the features of SBA loan programs. They can be useful to businesses that have just started operations, those planning to expand, or those that want to manage their cash flow more effectively. SBA loans let small businesses focus less on debt payment and more on their operational expenses.
What Are The Uses Of An SBA Loan?
SBA offers loans for various purposes including business startup acquisitions, owner-occupied real estate, inventory, working capital, franchise financing, and even renovations and improvements.
It is a type of small business loan that is primarily used for purchasing equipment like machinery, computers, vehicles, and almost all business equipment. The new equipment can be used as collateral for the loan, thereby preserving more hands-on-cash.
What Qualifications Are Required To Finance Equipment?
The qualifications required for equipment financing are like that of other small business loans. Lenders will study the business owner’s credit score, repayment history, the period he/she is in business, and the company cash flow to grant loans.
One of the major advantages of equipment financing is its feature that lets you use the equipment that you finance as collateral. Thus, you do not need to use other collateral or free cash flow for purchasing needed equipment.
So, when should you use equipment financing? Use it to fund the purchase of restaurant equipment and machinery.
Merchant Cash Advance
Merchant cash advances prove useful for various business owners that have a steady debit/credit card business. Restaurants and retail stores are the common business types that use a merchant cash advance.
How Do You Qualify For A Merchant Cash Advance?
The cost of a merchant cash advance is generally more than other types of business financing and thus is meant to be used only in times of urgent cash need. The business owner should have the confidence that they can repay the loan in a short period.
Liberal standards set by lenders for qualifying is one of the major benefits of merchant cash advances. This indicates a possibility for qualifying even when you have a credit rating less than good, little to no collateral, and/or limited operating history.
When should you depend on merchant cash advances? Ensure that you use this type of funding sparingly when you have a reasonable expectation that doing so leads to an increase in your business volume quickly.
Business Line Of Credit
A business line of credit is more of a cross between a business credit card and a business loan. Like a business loan, an unsecured line of credit is used as a source of business financing for taking care of general business expenses. However, there is no lump-sum disbursement in the case of a business line of credit, with the business owner borrowing exactly what they need and paying interest for the same.
There are some similarities between a credit card and a business line of credit. In the case of both, the available capital to draw upon and the payments are revolving and are also subject to annual review. Only from the point when money is withdrawn does the interest starts to accrue and it applies only to the borrowed amounts. The funder usually sets a limit on the amount that the business can borrow.
When should you use a business line of credit? This type of financing is to be used for larger expenditures or purchases and the monthly repayment amounts to be reduced, the repayment time must be increased.
Business Credit Card
A business credit card is a revolving credit, indicating that your borrowing limit is constant and is reduced by the purchase amount. Once it is paid, you can get the same amount within the credit limit.
Being able to make payments for all business purchases and meet the related expenses with a single credit card allows for better bookkeeping of the company. The credit card users can know their expenses by simply referring to their credit card statements on a monthly, quarterly, or yearly basis, thereby offering ease of managing a business checking account.
Credit card rates are often higher than other forms of borrowing, but it is mostly better than a merchant cash advance. The borrowing and spending limits are usually lower, but you can build a strong credit profile if you succeed in maintaining a solid payment history with a business credit card.
Lastly, business credit cards often offer cash backs, discounts, and/or other rewards. These extras tend to add up when purchasing everyday supplies.
You can use your credit card to purchase supplies and other usual purchases. A business credit card can help with cash flow if paid-off immediately and you get thousands in cash-back if your spending levels are high.
Purchasing or licensing a restaurant franchise is an effective way to enter the restaurant business.
Franchise business loans often come with more impressive terms than most other start-up business loans. The reason is that the lenders analyze the business model, financial stability, and past success of the franchise parent company while the loan application is under review. Banks and alternative lenders think franchises are an attractive investment.
According to the SBA report of 2011, $1.5 billion in SBA 7(a) loans for franchises were approved. It was approximately $826 million in the previous fiscal year. The 7(a) loan-guarantee programs of the SBA are quite popular, and it is, in fact, the most popular loan program of the SBA.
Although a franchise owner enjoys more relative ease of access to capital, many elements must be considered before you decide to purchase a franchise. The way each franchise is operated may be different and each will have its own set of start-up and operational costs.
Business Acquisition Loan
A business acquisition loan lets you:
Open a new franchise location or acquire one
Business acquisition loans offer several options that will be discussed here. The industry that the business you are planning to acquire influences the cost of borrowing and the amount of funding. Your personal credit history and the balance sheet of the target company are also crucial elements.
Getting a loan for buying a business may get complicated at times and might take longer than other kinds of business loans. This guide offers an overview of the types of financing that business owners depend on for acquiring new businesses.
When you are looking for financing for your restaurant, weigh all the available options, and analyze their feasibility before choosing one.
Promote Your Business Growth with Restaurant Loans And Financing
A hybrid financing approach is best in the case of restaurant financing. Maintaining your positive cash flow is the key to your business’s success once you have it running. You can handle most of that work by effectively managing expenses and selecting the right financing for each situation.
Many additional financing programs serve specialty groups that provide low-cost financing.