Jacques Famy Jr cofounded Advancepoint Capital, a small-business loan agency. He has over 20 year’s retail lending experience.
Restaurants often have working capital needs such as purchasing equipment, supplies or daily operational expenses and purchases that can impact the cash flow of the business. Often times restaurant owners aren’t sure which is the best business funding product to solve a working capital issue.
Let’s go over the most common business funding options when a restaurant needs working capital.
1. Small-Business Loans
A small-business loan is a term loan that offers a lump sum of money upfront to a restaurant with a fixed term, fixed rate of interest over a set number of months. Payment cans be monthly, bimonthly or weekly, depending on the lender. Terms range from a few months up to 10 years. Small-business loans can be either secured or unsecured depending on the lender and your qualifications.
Qualifications
• Creditworthiness: Must demonstrate good to excellent credit history with no major blemishes on credit.
• Application: One-page application covering both business and business owner’s personal information.
• Documentation: Bank statements and other financial statements will be required.
Why choose a small-business term loan?
• Set payment structure: Your payments and terms do not fluctuate, which offers consistency and reliability in repayment.
• Application process: Most small-business loan applications offer a simple, fast, streamlined application with a one-page application and limited documentation required, with an answer in a day or two.
• Tax advantages: Interest on a business term loan is tax deductible.
Drawbacks
• Flexibility: A term business loan does not have flexibility like a business line of credit.
• Requesting Additional Money: Fixed terms don’t allow you to draw additional money unless you refinance.
2. Business Line Of Credit
A business line of credit is a revolving credit facility that allows a restaurant to draw funds and pay down funds on demand up to a preapproved credit limit. Payments are monthly and amortized either on a 12, 18, 24 or 36-month basis. Simple interest is charged only on the outstanding balance with no pre-payment penalties.
Qualifications
• Creditworthiness: Must have excellent credit with FICO scores above 680 to qualify.
• Application: One-page application disclosing both business and business owner personal information.
• Documentation: Bank statements and most recent tax returns as well as other financial statements may be required, like profit and loss and balance sheet.
Why choose a small-business line of credit?
• Flexibility: With a line of credit, you can draw funds on demand without prior approval up to a limit throughout the active period before renewal is required.
• Payment Flexibility: Your payments fluctuate based on your current balance.
• Application Process: Streamlined business line of credit application with offers in days, not weeks.
• Tax Advantages: Interest on a business line of credit is tax deductible.
Drawbacks
• Credit limits are less than business term loans.
• Renewals to keep credit line open can be quarterly, semiannual or annual.
3. Small-Business Administration (SBA Loans)
The Small-Business Administration (SBA), a federal agency established to assist small-business owners, backs business loans for approved SBA lenders. The most popular SBA loan is the SBA 7(a) loan which is a great solution for working capital for a restaurant. Rates and terms are very attractive because the SBA provides a guarantee to the approved lender issuing the SBA loan.
Qualifications
• Creditworthiness: Credit must be strong with established credit history. There is no FICO requirement, but your credit must be very good to qualify.
• Application: Lengthy application (11 pages) with numerous questions to answer and document.
• Documentation: The loan submission checklist is lengthy, with a variety of documents required including, but not limited to, bank statements, tax returns, business and personal financial statements, income and balance statements as well as other documentation.
Why choose an SBA loan?
• Terms: SBA loans can be approved from five to 10 years and up to 25 years with real estate. An SBA Express may also be a revolving line of credit.
• Rates: Typically some of the lowest in industry Prime + 2.25 up to 4.25% on loans. Prime + 4.5 to 6.5% on SBA Express.
• Tax Advantages: Interest on a business term loan is tax deductible.
Drawbacks
• Lengthy and difficult application process with lower approval rates than other business finance products.
• Prepayment penalties for loans greater than 15 years.
4. Merchant Cash Advance
A merchant cash advance is a future receivables purchase and sales agreement, also called revenue-based financing. The merchant cash advance provider purchases future sales at a discount for a lump sum advance to the seller (restaurant) now. Repayment is made by the merchant cash advance provider taking a fixed percentage split of future sales of the restaurant until the discounted price is paid off. Keep in mind this is not a loan but an advance.
Qualifications
• Creditworthiness: All credit is considered from excellent credit to bad credit.
• Application: One-page application covering both business and business owner’s personal information.
• Documentation: Bank statements and merchant processing statements (if applicable).
Why choose a small-business term loan?
• Flexibly Repayment: Payment is attached to a fixed percentage of future sales, so the payments fluctuate up or down depending on future sales revenue.
• Approval Rate: Approvals are based on revenue and not profit and loss as well as lower credit standards, unlike traditional financing making it easier for restaurants to get approved.
• Application Process: Same-day approvals and business funding are available with a merchant cash advance.
Drawbacks
• Higher costs than traditional financing. Factor rates from 1.13% up to 1.45% of funded amount.
• The estimated time to repay the way a merchant cash advance is structured can be between three to 18 months.
The Bottom Line
Choosing the best working capital solution will be predicated, for the most part, on the qualifications of the restaurant and business owner. Make sure you shop around and compare products, features, rates, terms and conditions before choosing which business funding option is best for your business needs. Always do a cost vs. benefit analysis before accepting any offer.
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