Six different loan options to consider before building, expanding or refurbishing your restaurant business
With an ever growing appetite for good food, it’s no wonder why the food industry remains to be one of the largest in the world. Food stalls, trucks and carts have become ubiquitous, popping up in gas stations, public parking areas, malls, and highway exits. In 2017 alone, the international restaurant industry topped $3 trillion, which just shows how owning one can be a profitable endeavor.
The bigger the restaurant’s potential earnings though, the more capital is usually necessary. Hard work and creativity are crucial to starting and maintaining your own restaurant business, but startup money is necessary to get your business up and running. Depending on the type, size and location of your restaurant, you could be spending anywhere from a few thousand dollars to a few million dollars, therefore knowing where to start your search for capital is essential. Fortunately, there are a variety of financing options available to help restaurant owners like you grow your business quickly. Here are six loan options your restaurant can consider when looking to expand or open.
Rent and renovations are probably that most expensive part of owning a restaurant, but to open your restaurant, you’ll also need to significantly invest in equipment and supplies. Ovens, cooktops, coffee machines, dishwashers, and kitchen appliances can be costly, let alone the walk-in freezer and fridge. In addition to these, you have to buy furniture, silverware, serving materials, and much more. According to this survey, restaurant owners spend $30,000 to $115,655 on kitchen equipment costs. Equipment loans allow you to finance all your equipment needs. However, the equipment itself will serve as the collateral for this type of loan.
Working Capital Loan
Determining the capital needed to operate your restaurant is among the first important steps you should make. This includes everything you have to purchase or invest in to launch your business, from the building to your equipment, furniture and furnishing, rent, payroll, initial supplies, etc. A working capital loan is taken by business owners to finance their daily operation and is especially helpful for new restaurants that do not have stable or predictable revenue. Working capital loans give restaurant owners fluidity to manage their daily expenses while generating profit. It can be secured or unsecured (no collateral required) but the latter is usually given to business owners with high credit ratings. This type of financing does not involve equity transaction, which means you have the full control of your business.
Restaurant inventory refers the goods you have on hand. An inventory loan is used for restaurants that have to pay suppliers before they sell their inventory to turn a profit. Inventory loans are useful during peak seasons (such as holidays) when you have to increase your inventory to meet the high demand for your products. Like equipment loans, inventory loans make use of the inventory itself as the collateral.
Lines of Credit
A line of credit (LOC), which is usually provided by a bank or an established financial institution, gives a business owner access to a limited amount of funds that he can borrow, much like a credit card. Having LOC gives restaurant owners like you the flexibility to manage your operational expenses. For instance, when you have to purchase a new equipment unexpectedly, pay a supplier immediately, or increase your inventory to address an order.
Alternative Financing Option
Since it’s become more difficult for small businesses to get loans from banks, alternative lenders, such as Open Cash Advance have become popular option in recent years. If your restaurant business needs money quickly, alternative financing can be an option as they provide access to a network of payday lenders who adhere to top industry standards and practices. Applying for these loans are quick and easy, but keep in mind that the cost of the convenience and speed are very high interest rates and fees, substantially greater than other forms of credit (meaning that you will have to pay back up to double what you originally borrowed). Therefore, make sure that you can get the funds to repay alternative finance loans quickly.
Applying for a Business Loan: Important Things to Consider
Not all these loan options might be suitable for your business. It is important to determine where the funds have to go in order to determine the best type of loan available for your restaurant. Planning ahead is crucial too as some financing options take time (6 months or more with traditional banks and lenders). You should also be prepared with documents and other paperwork that may be required during the application process. Take note that an established business has more chances of getting their loan approved than start-ups. But that doesn’t mean you should lose hope. SBA loans, for instance, are geared towards small companies and often have lower interest rates. Nonetheless, you have to be prepared for the rigorous qualifying conditions. Furthermore, keeping your personal and business credit scores high is very much important to increase your chances of getting a loan. Same with personal loans, lenders look at your credit history to determine your eligibility for loan and ability to pay it off.
Owning a restaurant can be a profitable business. But it usually takes a significant amount of capital. Fortunately, there are various financing options available to help you grow your business. Always take time to choose the best option for your restaurant, understand the pros and cons, and ensure efficient management of funds to maximize the benefits of your business loan.
Lidia Staron is a part of Content and Marketing team at Open Cash Advance. She contributes articles about the role of finance in the strategic-planning and decision-making process.