What is the Best Type of Loan to Get for a Restaurant
June 20, 2015
The restaurant business remains one of the most popular opportunities that any entrepreneur can enter. This is because there is always a market for good food. Fads and fashions will come and go, but the need to eat won’t. Restaurants will remain a stable industry.
Despite this opportunity, not everyone can be a restaurateur given the high capital required to start the business. Aside from the initial costs, such as site renovations, decorating costs, fixtures and supplies, the day-to-day operational costs of the business can be substantial. Most businesses still fail because they run out of funds long before the restaurant becomes viable. After all, any good businessman would know that an entrepreneur has to have enough cash for six months of operations with the assumption of zero sales for the given period.
Fortunately, there are ways to fund the business through equity (selling ownership of the business) and debt financing. The former requires a good business plan to sell the idea. The latter requires the aspiring restaurant owner to know and understand the different channels to source funds from, keeping the restaurant afloat long enough for the market to respond.
Why might a restaurant need a business loan?
A restaurant business might need to take out a loan for many reasons. Foremost is the initial costs. Various pieces of equipment needed for the operation such as ovens, grills, POS systems and cash registers have to be purchased. Similar to that is the deposit for lease contracts or the purchase of a building itself for the future restaurant’s site.
Once the restaurant becomes operational, there are daily expenses that need to be paid whether or not the restaurant gets its customers, such as employee salaries, the cost of utilities, and the cost of the food to be served daily.
What types of business loans are available for restaurants owners?
A restaurant owner has to have a clear understanding of these expenditures because the kind of loan to be taken depends largely on what the loan is for and how long the company has been operating.
Generally, there are two types of loans depending on the providers. The first type is the traditional loan, which is provided by credit companies and banks. This includes term loans, lines of credit, equipment credit, and credit card loans.
The other type is the alternative loan, which is provided by financing companies and cash advance businesses. This includes the merchant cash advance and the unsecured business loan.
Pros and Cons of Business Loan Types
Innovative financing methods such as the merchant cash advance and unsecured business loans are better alternatives. Merchant cash advance is a credit facility where loan payments are deducted daily as a percentage of daily credit card sales. An unsecured business loan is similar to the merchant cash advance except that it deducts from the business’ bank account daily. Both options offer a faster way of getting a working capital to fund immediate needs such as employee salaries, utilities and payment for stocks, inventory, and food items.
The upside to this is that it does not burden a merchant to produce a fixed amount of cash every month, as opposed to term loans with fixed interest and part of the principal amount. Instead, deductions are made only as a percentage of the actual sales, which lessens the risk of depleting the cash on hand of the business. This facility goes hand in hand with your business cash-flow. Approval normally takes only a few days and is almost always guaranteed, making it a reliable source of cash.
How do I select a loan provider that understands the needs of hospitality?
Given the variety of loans available, it is important that the business owner considers the reputation of the institution to partner with. It has to be one with a good number of years in the industry with enough experience to know just what the debtors need. It has to be a company that understands the challenges that business owners face and responds by giving them the more flexible and efficient ways to repay the funds received.
It has to be a company that balances its interests with those of the business owners and communicates them effectively, with different communication channels that cater to questions and inquiries. A company that allows business owners to learn as much as they need or want to is exceptional because it lowers the risk for both sides.
How should I use my loan wisely?
It is important that loans are used for expenditures that have been carefully considered and added to the financial plan. Loans are obligations that have to be paid quickly, and this is only possible if the owner has already accounted for the expense long before the loan is taken out.
The key is always planning. A financial and operational plan that lays out the cash requirements for several years gives the owner leeway to execute the plan and keep a good credit history and credit relationship with its lenders. This means that the business owner must carefully map out its big purchases such as additional equipment and plans of branching out. As with anything, success and security both begin with foresight.
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