Restaurant Loans

Financial Challenges Every Restaurant Owner will Face

Every restaurant needs working capital. Seasonal downturns and general decreases in disposable income can impact restaurant owners significantly. Meanwhile, staff must be paid, inventory must be purchased, and operational costs and insurance costs can mount. Biz2Credit can help provide working capital in the form of restaurant business loans, lines of credit, advance restaurant finance, and other forms of financing that can ease any cash crunch.

The bottom line with restaurant loans is that they traditionally represented a high default risk for lenders. Many creditors looked at restaurants as too risky to lend to. As the restaurant financing business has evolved (with the help of financial technology), lenders have learned how to mitigate the risks associated with lending to restaurants. One of the top reasons restaurants fail is due to cash flow shortages.

As mentioned above, restaurants often experience uneven cyclical business patterns that can disrupt cash flow and cause financial hardships that often lead to failure. However, with proper financing and fiscal management, many of the hardships and "uneven" financial stresses can be avoided.

In addition, tax and regulatory requirements can be overwhelming for a restaurant owner. Once again, even if a restaurant serves great food and has a robust business, even the slightest bit of mismanagement can jeopardize the entire health and future of the operation. Understanding what resources you need, including professional services and the proper financing can mean the difference in a long-standing, successful business and another first-year failure.

Choosing the Right Restaurant Financing

So the obvious question is, "what is the right restaurant loan, and where do I apply?" The answer may surprise you. The answer could be that the right financing for your location includes several specialized loans instead of a single, general purpose loan.

Loans have become more and more specialized in the past decade. This is a benefit to restaurant-owners looking for loans because the narrow focus of the loan proceeds allows lenders and borrowers to be more precise about loan amounts, reducing unnecessary borrowing and borrowing costs. For example, when purchasing restaurant equipment, equipment financing is likely more financially suitable than a business term loan, a business credit card or a business line of credit.

Why piece together multiple loans for a restaurant? In the example above, a restaurant owner is likely to pay much less interest with equipment financing (and pledge the equipment as collateral) than the rate for a loan or cash advance. This is perhaps the most dramatic example.

However, there are times when a business owner may need a cash advance, such as buying perishable inventory like supplies, where you know it will turn-over quickly and you can repay the loan in a timely manner. Examples of this would be popular dining holidays such as Valentine's Day, Mother's Day or New Year's Eve. Or when your busy season approaches. As a restaurant owner, you are bound to be very busy and will likely need to order multiples of your regular supplies or add additional staff. In this case, using a merchant cash advance which is often paid back through a portion of credit card sales may be more appropriate and help stabilize your cash flow.

In another example, say you get an offer to buy premium wines or spirits at very favorable prices and could sell them at high margins; that would be a good investment, right? This happens all the time. Have you ever heard the expression "you don't make money selling, you make it buying?" This has to do with purchasing power. However, it may take some time to sell expensive bottles of wine or premium liquors so you want a longer repayment horizon that will allow for the sales to keep pace with the payments.

If you could buy a bottle of wine at $20 and sell it at $60 that's a 200% profit or $40. If you are paying 15% in interest on the money you borrowed to purchase the wine that reduces your profit by only 10% you end up making $37 per bottle. In this case, you would want to use a business line of credit or a business credit card to make the purchase since they have longer repayment horizons, thus preserving your cash flow.

Let's explore the various types of financing that may be used as a restaurant loan or source of restaurant financing.

SBA Loans

An SBA loan is the most desirable long-term loan for many business owners because of the low interest rates and the longer repayment terms.

Equipment Financing

Equipment financing is a type of small business loan used primarily to purchase business equipment like computers, machinery, vehicles or most any business equipment. Business owners may use the new equipment as collateral for the loan, making equipment financing a smart way to preserve on-hand cash.

Merchant Cash Advance

Merchant cash advances are suitable for a wide range of business owners who have a steady credit card/debit card business. Retail stores and restaurants are some of the most common types of businesses that use a merchant cash advance.

Business Line of Credit

A business line of credit can be seen as a cross between a business loan and a business credit card. Like a business loan, an unsecured line of credit provides business financing that can be used for general business expenses. However, with a line of credit, there is no lump-sum disbursement; a business owner borrows only what is needed and only pays interest on the amounts borrowed.

Like a credit card, the amount of capital available to draw down and the payments are revolving and is usually subject to annual review. Interest begins to accrue only when money is drawn (or borrowed) and interest only applies to those amounts. The funder will set a limit on the amount the business may borrow.

When to use a business line of credit? Use this type of financing for larger purchases or expenditures that may take time to repay in order to reduce monthly repayment amounts over a longer period.

Business Credit Cards

Most people are familiar with a business credit card. It is revolving credit which means that your borrowing limit remains constant and is reduced by purchase amounts. Once paid, the credit is automatically available to the level of the original amount.

Franchise Loans

Purchasing or licensing a restaurant franchise is a very popular and stable way to get into the restaurant business.

Franchise business loans typically come with more attractive terms than you are likely to find for any other type of start-up business loan. This is because lenders consider the financial stability, business model, and previous success of the franchise parent company when reviewing a loan application. Banks and alternative lenders are finding franchises to be an increasingly attractive investment.

In 2011, the SBA reported approval of $1.5 billion in 7(a) loans for franchises, up from approximately $826 million the previous fiscal year. The 7(a) loan-guarantee program is the SBA's most popular loan program.

Despite the relatively easier access to capital that a franchise owner enjoys, there are many different elements to think about before purchasing a franchise. Each franchise is operated differently and will come with its own set of operating and start-up costs.

Business Acquisition Loan

A business acquisition loan allows you to:

• Purchase an existing business that has already been established
• Acquire or open a new franchise location
• Buy-out a partner in a business you presently own

Business acquisition loans include several options which we will explore here. The amount of funding and the cost of borrowing (interest rate/APR) will depend on the industry sector of the business you are trying to acquire, the balance sheet of the target company and your personal credit history.

Getting a loan to buy a business can get complicated and usually will take longer than other types of business loans. This guide is designed to provide an overview of the types of financing business owners use to acquire new businesses.

Carefully consider the options and the examples given above when choosing financing for your new or existing restaurant. Links in the sections about loan types provide access to deeper coverage of the types of restaurant loans that might be suitable for your circumstances.

Use Restaurant Loans and Financing to Grow Your Business

To conclude, when it comes to restaurant financing, it is almost always best to consider a hybrid financing approach. Remember, the key to success once you have your business running is to maintain your positive cash flow. Much of that work can be done by managing expenses and choosing the right financing for the right situation.

Finally, there are many additional programs for financing that cater to certain specialty groups that may deliver low-cost financing and in some cases, grants to business owners as well as existing businesses.