Many people dream of owning a restaurant but the costs of opening and running a restaurant restricts them. Restaurant financing can help actualize your dream of owning a restaurant whether you are a local entrepreneur, a talented chef, or a foodie. Several restaurant financing sources exist, the most common being money from family or friends, traditional bank loans, funding from investors, Merchant Advances, or other sources. Wide Merchant Group is an online lender with more than a decade funding small-medium sized restaurants in the United States and Puerto Rico.
Why Restaurants Apply for Financing
There are several reasons why restaurants apply for financing. The leading reasons are:
Starting a New Restaurant
Before a restaurant opens its doors to the public, several startup costs are taken into account. Starting any business calls for a considerable amount of money, time, and energy. However, due to restaurants' unique nature, getting a restaurant off the ground requires extra money and effort. You will incur the cost of refurbishing the premises, updating your kitchen equipment, buying furniture, paying administrative fees, and purchasing staff uniforms. You could also incur the cost of sourcing all the necessary foods and beverages. You should not postpone your dream of opening a restaurant for the lack of startup capital.
Upgrading the Existing Restaurant
Perhaps you have operated your restaurant for a long time, and you feel that you need to give it a facelift. You will need some money for this. You may want to renovate the restaurant, change the interior design, or add more staff. Due to the high number of customers that visit a restaurant every day, the furniture and other accessories could wear out fast, calling for a replacement.
You might also feel like your restaurant is outdated, given that interior designs change rapidly, mainly in the metropolitan areas. Seeking restaurant financing will enable you to renovate your restaurant whenever you desire.
Purchasing New Restaurant
Merchant financing for restaurants will come in handy when you need to purchase new equipment for your restaurant. You should ensure that all your staff, including the chefs, baristas, and wait staff, have the appropriate equipment to work with. Restaurant financing will help you acquire all the equipment you need including premium ovens, coffeemakers, stoves, and grills, among others.
If you foresee gaps in productivity due to out-of-date equipment, seeking restaurant financing can help you acquire advanced machinery and equipment. Acquiring a modern POS device would help your restaurant business handle transactions more efficiently. A POS machine can help you create a loyalty reward program, which could attract more people to your restaurant. Increasing advanced restaurant equipment increases customer satisfaction and enhances the likelihood of repeat business.
Opening Another Location
You could explore restaurant financing when you want to open another restaurant location. You might want to expand your restaurant from a single location to a citywide, regional, or chain restaurant. While opening new restaurants or expanding the existing one, you will incur costs like renovation costs, the cost of hiring commercial spaces or constructing a new building.
The cost of renting a high-traffic storefront might be higher than your budget would allow. With restaurant financing, you can access money and start moving in the right way. Part of your expansion may include add-ons like outdoor patios or remodeling. To fund these projects, you have to meet the costs of labor and materials. You should also have money to cover any downtime that might occur during the construction process.
When seeking a business financing for restaurants, some owners turn to the U.S Small Business Administration, referred to as the SBA-504 loan program. However, this program comes with strict restrictions regarding who qualifies for a loan and how the funds should be used. Many restaurant owners prefer seeking an alternative lender to access capital without numerous terms and conditions.
Seeking Expert Advice
Every single day, restaurant owners have to make numerous decisions. A restaurant owner may need to seek expert advice to help them manage the hustle and bustle of running a busy restaurant. You may seek financing to consult experts, usually other restaurant owners, chefs, or sourcing managers. These experts will advise you on how to position your restaurant in a saturated market. Seeking expert advice will help you to improve the overall running of your restaurant.
In any location, you will find many restaurants offering similar cuisines. It can be hard for a restaurant to stand out in such settings and create differentiation from other restaurants. This is where a restaurant's brand comes in. Seeking a restaurant loan can help rebrand your restaurant. You may opt to create a standout brand or rebrand the existing restaurant for the emerging dietary and culinary tastes.
Diversifying the Restaurant Products
You may use a restaurant financing to diversify your restaurant operations. For instance, you can introduce catering and packaged goods to complement the in-house dining. Providing takeout and catering services will take your restaurant to the next level. Many restaurants are popular for their steak and ribs, while others are popular for mouthwatering pasta that is impossible to make at home.
Customers will be happy to embrace your takeout services. However, even if catering and takeout services expand your restaurant's revenue stream, they come with additional costs. You may have to seek financing to meet the additional costs of product development, logistics, and packaging.
Day-to-Day Operational Expenses
Restaurant financing is not all about growing or expanding your restaurant. You may seek funding to support the day-to-day restaurant operation. In the restaurant business, revenue is not only seasonal but also unpredictable. You might need funding to maintain your restaurant operations during the low peak seasons. Seeking a loan will help you maintain a positive cash flow.
Types of Restaurant Financing
After understanding why you may require restaurant financing, you need to understand some of the financing options available to restaurant owners. Some of the financing options that you can consider are:
Merchant Cash Advances (MCA)
Commonly abbreviated as MCA, a merchant cash advance or merchant advance is not a loan but a way for restaurants to receive funds based on the restaurant’s projected future receivables. The MCA company will agree to buy a fixed percentage of a Restaurant’s future sales. This model of financing is versatile and can vary from lender to lender. Some forms of MCAs credit card based where a fixed percentage of the restaurant’s credit card sales are collected as a form of repayment. There are also, MCAs that are based on a business’ total bank deposits, and which payment is collected via ACH on a recurring basis. The advantage of these types of merchant financing is that they are ideal to restaurant owners with no collateral, low to poor credit score, and merchants who need funds fast.
- Faster finance application process
- You are free to use the funds for any purpose
- No need for collateral in most cases
- Flexible repayment plans
- Often approved with low and/or poor credit history
Some of the downsides of alternative lenders include:
- Higher interest rates
- Often daily or weekly payments
SBA (Small Business Administration) Loans
Small businesses, including restaurants, can access SBA loans if they can't access financing from other sources. However, SBA doesn't fund loans directly. It involves guaranteeing the bank that it will repay a percentage of the loan if a business or restaurant defaults. You may use an SBA loan to buy new machinery, refinance an existing loan, acquire an existing business, or purchase furniture and machinery. Some of the leading benefits of an SBA Loan are:
- The government guarantees it for amounts up to 5 million
- Long term financing of up 25 years available
- You won't incur certain standard loan fees
The disadvantages of SBA loans include:
- Tight eligibility criteria
- You must have owner equity to invest
- This form of financing is only suitable for profitable businesses
Conventional Bank Loans
Loans from conventional banks are the most common sources of restaurant financing. Banks have been lending small and medium-sized businesses for many years. Banks have a rigorous, established, and proven leading system. Some of the benefits of acquiring a restaurant loan from a bank include:
- Good reputation and proven operations
- You can tailor the loan to your operational needs
- You can pay back the loan over a longer-term
Some of the downsides of a bank loan include:
- Lengthy approval times
- Large amount of paperwork
- A complicated application process
- Collateral requirement
Family and Friends
Family and friends may also be a viable source of business financing. Some restaurant owners choose to ask their parents, siblings, spouses, or friends for financing. However, before seeking financing from your family and friends, you should remember that it is not advisable to mix your professional and personal relationships. Securing a restaurant loan from your family or friends may offer the following benefits:
- No need for collateral
- Some may not need to be repaid
- No lengthy approvals and intense paperwork
However, borrowing money from friends and relatives also has some disadvantages:
- It might affect your relationships
- The loans may have ambiguous or unreasonable terms and conditions
- It may lead to legal disputes
Crowdfunding involves using small amounts of capital, usually from many people, to fund a new business venture. However, this funding option is not common in service businesses and particularly restaurants. Before you consider crowdfunding, you must understand its benefits and advantages. The benefits of crowdfunding are:
- It comes in handy in testing new ideas fast
- It may double up as marketing and PR
- It often attracts other forms of investment
The disadvantages of crowdfunding are:
- It's not ideal for long term needs
- It is not a suitable financing option for restaurants
- The process is highly public
Line of Credit (LOC)
Restaurants may seek lines of credit through their banks. Currently, alternative lenders are offering LOC as well. This form of funding can allow you to access additional funds whenever you need them. Some of the leading benefits of LOC are:
- Can help you manage cash flow
- You will only pay interest after using the funds
- It may be secured or unsecured
The downside of LOC includes:
- It doesn't offer a long term solution to your financing needs
- You need to be careful about the fees involved
- You can't access certain amounts because the borrowing amount is capped
Equipment financing may come in handy if you need money to buy new equipment for your restaurant. Equipment financing would be ideal for buying items like premium ovens, POS technology, stoves, or coffee makers. The advantages of equipment financing include:
- The equipment serves as loan collateral
- After clearing the loan, you will own the equipment
- You will access the funds quickly
The downside of equipment financing is:
- It is less flexible than leasing
- The equipment may become redundant
- The equipment may depreciate
Commercial Real Estate Loan (CRE)
A restaurant owner may consider a commercial real estate loan to improve gardens, parking lots, and buildings. Lenders, especially those who operate under the SBA scheme, may allow you to include the legal, architectural, construction, and appraisal fees within the loan. Before you decide to obtain a CRE loan, you should seek the counsel of your accountant or your financial advisor.
Purchase Order Financing
A purchase order (PO) would be appropriate if your restaurant doesn't have enough cash flow to complete a catering order, for instance. In many business settings, including restaurants, orders are received and completed long before their payments. The key benefits of purchase orders are:
- Quick to access
- Enhances positive cash flow
- They don't require a personal guarantee
The cons of purchase orders are:
- Service businesses have limited eligibility
- Higher fees thank bank and SBA loans
- Your clients may lose confidence in you if they learn you rely on PO financing
Finding a Business Financing Provider Near Me
There are several reasons why your restaurant may need financing. Many types of options are available for restaurant owners. Each financing option has its benefits and downsides. You should take time to understand all aspects of a financing option before you choose it. For the affordable restaurant financing in Los Angeles, CA, contact Wide Merchant Group. Call us at 800-630-4214 and speak to one of our experts.