With over one million restaurants in the United States, it’s not surprising that restaurateurs operate in a dog-eat-dog industry. Running a successful restaurant is a tough job, but fortunately, having access to a restaurant loan for small businesses can take your business to the next level.
Studies show that 20% of restaurants fail within their first year of operations. This demonstrates that restaurant business owners clearly need all the help they can get in order to succeed. There are a number of different ways you can affectively use a restaurant business loan. Everything from equipment purchases and working capital to renovations and branch expansions are common uses.
However, before you apply for a loan, it’s important you be familiar with the different types of restaurant business loans, which will allow you to identify which financing option is most suitable for your business.
1. SBA Loans
The Small Business Administration (SBA) is aware that small business owners, especially restaurateurs, have a hard time qualifying for bank-rate financing. To address this problem, the SBA created various loan products to support and protect small businesses.
The SBA works with banks and other lenders to help small businesses secure funding while minimizing the lenders’ risks by covering up to 85% of the loan. This lowers the risk for lenders, so they’re more likely to approve your loan application.
Many business owners apply for SBA loans because they’re one of the absolute best loan programs available. SBA loans have lower interest rates, longer repayment terms, and higher loan limits than other types of loans. However, there’s a catch; it can be hard to qualify for an SBA loan.
The underwriting process takes months and you need to have a strong credit rating as well as an established financial history, among others. Bottom line is, be sure you have a good chance of qualifying before you apply for SBA loans.
2. Equipment Loans
You can’t run a successful restaurant without high-quality equipment. An average restaurant needs ovens, stovetops, commercial refrigerators, freezers and deep fryers. However, it can be expensive to purchase everything upfront. Once your restaurant is up and running, your equipment may need repairs or upgrades, so it’s also very important to have access to equipment financing to pay for equipment repairs and purchases.
Equipment financing provides you with the funding you need to purchase or lease much-needed equipment. Once you know which type of equipment you want to purchase, you need to determine how much you’re willing to spend on each piece of equipment.
Some lending companies are willing to fund 100% of the value of your equipment, but this may result in higher interest rates to offset the added risk.
3. Business Lines of Credit
A business line of credit is one of the must-have financing options among entrepreneurs because of its flexibility. Once approved, lenders assign you a predetermined credit limit which you can withdraw from as needed. Unlike other types of loans, you only need to pay interest on the amount you’ve withdrawn, not the entire credit limit. Once you repay what you’ve withdrawn, your credit limit will go back up again without having to reapply.
This type of financing option works well for seasonal restaurants that need funding during slower seasons. It’s also great if you need emergency money for unforeseen expenses seeing your line of credit sits in your bank account until the time you need to withdraw from it.
4. Inventory Financing
Even though restaurants don’t sell products, they still need to stock up on ingredients. If you need working capital to buy inventory for your restaurant, you might want to apply for inventory financing. This type of financing can take on many forms, from a short-term to a long-term loan, as well as a business line of credit. However, this loan is for the specific purpose of acquiring inventory.
With inventory financing, the inventory you’re looking to purchase serves as collateral for the funds. Be sure that your business is profitable and you submit your payments on time, and in turn you will guarantee you have no problems with lenders wanting to repossess your inventory.
5. Invoice Financing
Most companies often deal with slow payments and restaurants are no exception. Every sale counts, but if it takes weeks or months to get paid, it could become a cash flow issue for your business.
Restaurants operate in a capital-intensive industry, so it’s extremely important to receive payments on time. To bridge cash flow gaps, make a point of looking into invoice financing.
Invoice financing lets you sell outstanding invoices in exchange for upfront funds. Some lenders can fund up to 100% of the total invoice value, but most will fund between 85% to 90%.
Your customers will pay their invoices directly to the financing company rather than to you, and once a payment is received, they send you the remaining percentage, minus a small transaction fee.
Want to Know More About Restaurant Loans for Small Businesses?
Restaurants need quick access to working capital to survive what is in essence a cutthroat industry. It’s important to know what your financing options are, so you can determine which one works best for your company.