Opening a restaurant can be a rewarding experience. Securing funding is another story, as you may have to jump through several hoops to get the financing you need to get up and running.
But by understanding the various financing options available for your restaurant, you can take the guesswork out of finding the right opportunity for your venture. Read on to discover a popular form of funding to move your vision forward. You’ll also discover smart ways to use the funds and what you’ll need to apply and boost your approval odds.
Common Reasons Why Restaurant Owners Apply for Business Financing
Here are common reasons why restaurateurs seek funding opportunities.
Opening a New Restaurant
Starting a new restaurant business is an exciting but expensive venture. Securing financing at this stage can help you cover the costs of securing a location, purchasing equipment, securing inventory and hiring staff. This can be especially important if you are starting from scratch and don’t have an established customer base or revenue stream.
Obtaining financing at this stage can also help you establish a solid foundation. Plus, you can avoid the pitfalls of undercapitalization, which can lead to cash flow problems or, even worse, failure.
Renovating the Restaurant Space
Upgrading your restaurant’s facilities, such as the kitchen or dining area, can improve customer satisfaction and add value to your business. Renovations can also help you keep up with changing trends in the industry and stay competitive in an oversaturated market.
However, renovations can be expensive, and you may not have the cash on hand to cover the costs. Business financing can provide you with the necessary capital to make these improvements. Whether you need to update your equipment, expand your seating area, or create a new ambiance, financing can help you achieve your goals.
Purchasing an Existing Restaurant
If you are looking to expand your restaurant portfolio, purchasing an existing restaurant can be a viable option. Acquiring a business that is already established can save time and resources compared to starting a new one. However, purchasing an existing restaurant can still be expensive, and you may not have the cash on hand to cover the costs.
Business financing can also be used to acquire existing restaurants, giving you the opportunity to take over a successful operation and continue its growth. Financing can help you cover the costs of the purchase, along with any necessary renovations or upgrades to the existing space.
Rebranding the Restaurant
Sometimes, rebranding your restaurant is necessary for renewed success or to accommodate changing customer preferences. Rebranding might include changing the menu, redesigning the interior or updating your marketing strategy. Either way, making these much-needed changes can help your restaurant stay relevant.
Rebranding isn’t always a cheap endeavor, though, and business financing can help minimize out-of-pocket costs. Plus, your restaurant can adapt to the times and maintain both its popularity and profitability.
Funding Operations and Marketing
Running a successful restaurant requires ongoing investment in operations and marketing efforts. Whether you need to hire additional staff, purchase inventory or invest in advertising campaigns, business financing can provide the necessary funds to keep your restaurant competitive and thriving. Financing can also help cover the costs of day-to-day operations, such as rent, utilities, and payroll, as well as larger investments, such as expanding your menu or adding a new location.
Furthermore, the right marketing is essential to attract new customers and build brand awareness. Business funding can help cover the costs of advertising campaigns, social media marketing and other promotional efforts.
How to Secure Restaurant Business Financing
Below is a breakdown of the steps you should take to secure business financing.
Determine How Much You Need
Before you can apply for financing, you need to determine how much funding you need for your restaurant. This can be a challenging task, though, as you need to consider a wide range of expenses. These include purchasing equipment, leasing or buying real estate, hiring staff and covering operating costs.
To come up with a realistic figure, develop a budget and list all expected costs that include unforeseen expenses. It’s important to be as detailed as possible when creating your budget, accounting for everything from rent and utilities to marketing and advertising expenses. You should also consider the potential risks and challenges associated with your business, such as competition, seasonality and economic conditions.
Once you have a clear understanding of your funding needs, you can start exploring financing options that align with your budget and business goals. By taking the time to develop a realistic funding goal, you can increase your chances of getting the financing you need to grow and succeed in the restaurant industry.
Analyze Your Credit Score and Other Qualifications
Lenders will analyze your credit score, business experience, and financial stability to determine if you’re a suitable candidate for their loan products. Therefore, it’s essential to review your credit score, improve it if necessary, and ensure you meet other essential qualifications before applying.
You can check your credit score for free online. It’s equally important to review your credit report and file disputes promptly if you spot any errors or discrepancies. If your score is lower than you’d like, you can take steps to improve it, such as paying down revolving debt, bringing past-due open accounts current and refraining from applying for new credit.
It’s also likely that you’ll need to provide financial statements, tax returns and other documentation to prove your financial stability and business experience. It’s important to have these documents ready before applying for financing. You should also research the lender’s specific qualifications and requirements to ensure you meet their criteria.
Prepare Your Business Plan
Some lenders also request business plans if you wish to be considered for restaurant funding. It should outline your restaurant’s concept, target market, marketing strategy, financial projections and other essential elements.
This plan helps lenders understand your business’s potential and your ability to repay the loans. Therefore, it’s essential to make sure your business plan is well-structured, accurate, and persuasive in conveying your vision for your restaurant.
Start by researching your target market and competition, and clearly define your restaurant’s unique selling proposition (USP). Your business plan should also include a marketing strategy that outlines how you plan to attract and retain customers, as well as a financial plan that includes revenue projections, cash flow analysis, and break-even analysis.
It’s important to be as detailed as possible in your business plan, including any potential risks and challenges associated with your business. Furthermore, your business plan should be visually appealing and easy to understand. Consider using graphs, charts, and other visual aids to help illustrate your points.
Choose the Right Type of Financing
There are various financing options available for restaurant owners, including merchant cash advances, bank loans, SBA loans, equipment financing and equity financing. Each option has its pros and cons, so it’s essential to research and evaluate them carefully. Also, consider factors like interest rates, loan terms, speed of funding and collateral requirements.
Bank loans are a common financing option, but they can be challenging to obtain, especially for small businesses. SBA loans are guaranteed by the Small Business Administration and can be a good option for restaurant owners who meet specific qualifications. Equipment financing can help cover the costs of purchasing or leasing equipment, but it may require collateral and higher interest rates. Equity financing involves selling a portion of your business to investors, which can provide the necessary capital for growth but may come with a loss of control.
What is the Best Type of Restaurant Business Financing?
A merchant cash advance can be a great option for restaurant financing.
Merchant Cash Advance
It provides quick access to cash, which can be crucial for your restaurant’s growth or to cover unexpected expenses. You’ll receive a lump sum of money, and in return, you agree to pay back a percentage of your future credit card sales.
How Merchant Cash Advances Can Grow Your Restaurant Business
A merchant cash advance can help you cover various expenses and grow your restaurant business in several ways:
- Expand or remodel your restaurant: With a merchant cash advance, you can make necessary upgrades, expand your seating capacity or add a new bar area. This can help you attract more customers and improve the overall experience for your guests.
- Purchase equipment: Use the funds to buy new appliances or upgrade your kitchen equipment. This can help you improve the efficiency of your operations and provide better quality food and service to your customers.
- Improve cash flow: A merchant cash advance can help you manage uneven cash flow, pay off debts, or cover payroll during slow periods. This can help you avoid cash flow problems that can negatively impact your business and your ability to grow.
- Marketing and advertising: Boost your restaurant’s visibility with targeted marketing campaigns and attract more customers. Use the funds to create promotional materials, run social media ads, or sponsor local events. This can help you build your brand and attract new customers to your restaurant.
The Pros and Cons of a Merchant Cash Advance
Pros:
- Quick access to funds: A merchant cash advance can provide you with funds within a few days, which can be helpful if you need to cover unexpected expenses or take advantage of a time-sensitive opportunity.
- No need for collateral: Unlike traditional loans, a merchant cash advance doesn’t require collateral, which means you don’t have to put your business assets at risk.
- Flexible repayment: Repayment of a merchant cash advance is based on a percentage of your credit card sales, which means that your payments change depending on your revenue. This can be beneficial if you experience seasonal fluctuations in your business.
- High approval rates: Merchant cash advances have high approval rates, even for business owners with low credit scores. This can make it easier for businesses that may not qualify for traditional loans to access the funds they need.
Cons:
- Higher interest rates: Merchant cash advances are typically more expensive than traditional loans, with annual percentage rates (APRs) that can go up to 200 percent depending on the lender, the size of the cash advance, fees, and the repayment period. This means that you’ll end up paying more in interest over time.
- Access to daily credit card transactions: Merchant cash advance providers will have access to your daily credit card transactions, which can be a concern for some business owners who value their privacy.
- Cash flow challenges: Since repayment of a merchant cash advance is based on a percentage of your credit card sales, it can lead to cash flow challenges during slow periods. If your sales are down, you’ll still be required to make payments, which can be difficult if you’re already struggling to make ends meet.
How to Qualify for a Merchant Cash Advance
To qualify for a merchant cash advance, your restaurant must:
- Have a steady stream of credit card sales: Since payment amounts for merchant cash advances are based on a percentage of your credit card sales, providers will want to see that you have a steady stream of credit card transactions. This will help them determine how much you can borrow and how quickly you can repay the advance.
- Be in business for at least six months: Most merchant cash advance providers require that your restaurant has been in business for at least six months before you can qualify for a cash advance. This helps them evaluate the stability of your business and your ability to generate revenue.
- Possess a minimum credit score of around 500: While merchant cash advances have high approval rates, merchant cash advance providers will still look at your credit score to determine your eligibility. A minimum credit score of around 500 is typically required, but some lenders may require a higher score.
- Be up-to-date with rent and taxes: Merchant cash advance providers will want to see that your restaurant is up-to-date with lease and tax payments. This helps them evaluate your financial stability and your ability to manage your finances responsibly.
To find the best merchant cash advance provider for your restaurant, carefully compare interest rates, repayment terms, and other associated fees. Also, consider how the repayment plan may affect your cash flow to ensure your restaurant business can handle the payments in both busy and slow periods.
