April 30, 2019 | Last Updated on: June 16, 2023
It can sometimes be overwhelming to look at the variety of lending options at your disposal when you need restaurant business financing. But there’s a reason for that variety. Each type of financing you could acquire for your business is different. The sizes, rate calculations, and different purposes for each product mean that no two loans are exactly the same – nor should they be treated the same. So when you’re deciding on whether you need a restaurant business loan, the best way to begin the search might not be exploring the lending marketplace at all. Maybe the most helpful way to search is to think about your possible needs instead.
Restaurants require a ton of inventory in order to function. You’ll need pantry items, cooking supplies, seasonal ingredients and of course your big ticket menu items. That’s not even covering all the linens, dishes, silverware, drinkware and more every restaurant needs. Those expenses can add up quickly. And if your restaurant tends to operate seasonally, inventory issues can be an even bigger issue. How can you make sure you’ve got the ingredients and other items you’ll need for the busy season while you’re in the slow season? Can you afford to stock up? There a few funding options for this situation. A business line of credit is one option. In a business line of credit, a borrower only pays interest on the money they spend out of a certain credit limit, similar to a credit card. Lines of credit are great for inventory issues because you can hold that line of credit open until you need it. That means during the busy season, you can stock up on the things you’ll need instead of buying those things during the slow season, which can hamper your cash flow. Another option is a merchant cash advance. A merchant cash advance is not a loan. In a cash advance, you can quickly acquire funding in exchange for a daily rate or percentage of credit and debit card transactions and other business receipts. The speed with which you can acquire a cash advance makes them great for when an inventory shortage happens unexpectedly or if you’re presented with a great deal to stock up. Seasonal problems don’t have to hurt you either since you’ll be able to pay back these advances with a part of your daily or weekly sales, ensuring that you can always cover your payments.
At some point, you may find yourself in a position where you’ll need to hire more staff for your restaurant. This will often mean more managers or kitchen staff, since front-of-house employees like waitstaff and bar staff are paid mainly through tips. There are a few options to help fund new hires. One is a simple term loan. A term loan is exactly what you’d think it is: the borrower is given a particular amount of money at a particular interest rate and a given time to repay. Ideally, you won’t need to finance new hires. But again, restaurants can be highly season-dependent. You don’t want to wait to hire new kitchen staff until the busy season has already started. Inexperienced staff during a busy season can lead to disaster: long waits, inferior food quality, and mistakes on orders that will frustrate your customers. By financing your hires during the slow season, you can be assured that your new staff will be up to par when the busy season starts – and you’ll be able to pay those loans off quickly with the increased revenue you’ll be bringing in.
Maybe your cafe’s expensive espresso maker is broken beyond repair. Maybe you need to upgrade or expand the kitchen. Maybe you’re looking to replace the tables and chairs throughout your restaurant. Regardless, there will most likely be a situation in the life of your restaurant that requires buying new equipment or upgrading what you already have. For those situations, you may want to consider an equipment loan. Equipment loans are given specifically to lease or buy new equipment like the examples listed above. What’s great about equipment loans is that they typically use the new equipment as collateral. So if a borrower can’t make payments, the lender will be able to repossess the equipment, minimizing possible loss. That minimized loss means that equipment loans typically come with lower interest rates. If you’re in need of equipment but also have poor credit, merchant cash advances are another option, particularly if the piece of equipment is needed immediately.
If you’re just getting started with your restaurant, you may want to explore options with loans guaranteed by the United States Small Business Administration (SBA). In short, SBA loans are given by traditional or online lenders and are guaranteed by the government. If a borrower isn’t able to repay the loan, the SBA pays back a guaranteed percentage, minimizing risk to the lender. That minimized risk means lower interest rates. But these loans can take time and lots of paperwork and qualifications. Still, those factors can make these loans perfect for a restaurant startup. You want to be sure you’re not rushing into a restaurant venture. You’ll want to take the time to put together a thorough business plan and make sure your personal credit is in great shape before you start. And because you’re doing deep research, you’ll know exactly how to get an SBA loan. Look at the preparation for that application process as an important part of the startup process in and of itself.
Stuff happens. It’s a part of any business, and doubly so for an industry as unpredictable as the restaurant industry. Inevitably, you’ll experience some kind of emergency – whether it’s a fryer on the fritz or an unexpected rise in rents – at some point. The whole point of an emergency is that you don’t see it coming. It could be a kitchen fire, a plumbing issue, or a piece of equipment breaking at the worst possible moment. Regardless, there are a few ways to use restaurant business loans to mitigate the issue. One option is a business line of credit. Similarly to not knowing when you’ll need to acquire more inventory, you’ll never know when an emergency can arise. A business line of credit can offer you the ability to make a large purchase at a moment’s notice without having to pay interest on money you haven’t spent. Having that line of credit available means you’re always ready to make a big purchase. You could also use a cash advance to be ready when an emergency strikes. Because of their speed to approval, cash advances can allow you to make things happen quickly. And if the emergency affects sales for a period afterward (as in a fire), cash advances can be paid with a percentage of card transactions, so you won’t be stuck making large payments when your revenues are down.
Restaurants are exciting and unpredictable. So make sure that when you’re looking for funding, you’re aware of what it takes to run a restaurant, possible issues that can pop up in the future, and common reasons restaurant owners seek out loans. Proper restaurant business financing acquisition can keep your restaurant operating at peak levels all year round with minimal headache for you as the owner.
