Remodelings, additions and expansions are common occurrences for restaurants and could ultimately determine if a restaurant survives or shuts its doors. Financing any of these upgrades is often troublesome even for a long standing restaurant business. Thriving establishments with no prior issues borrowing money are frequently turned down for restaurant loans due to the high failure rate within the restaurant industry. Restaurant owners, therefore, must often turn to alternatives to traditional funding and bank loans.
One type of alternative lending that has historically funded restaurants is a merchant cash advance (otherwise known as future revenue based financing). This alternative financing product focuses on the restaurant’s daily cash flow and deposits so that the lender can advance cash up front against the future revenue of the restaurant. Personal credit and other bank-like underwriting factors are not heavily considered in the approval process. Funding can arrive in as little as five days and most of the time it is a non-recourse loan, which does not require the business owner to make a personal guarantee . This is usually a good option for working capital needs as the funds are paid back within a 4 to 12 month time frame.
The Small Business Administration (SBA) offers two specific SBA loans to help entrepreneurs obtain capital. The SBA 7(a) loan program helps start-up or existing small for-profit organizations obtain flexible financing for use in working capital, leasehold improvements, machinery and equipment, or inventory for the start-up or expansion of a small business. The SBA 504 loan program funds the purchase, construction or renovation of the facility in connection with expanding. This loan product would typically be used if the restaurant wanted to purchase real estate.
Restaurant financing is also available to restaurants and franchises looking to restructure or consolidate debt. Lenders will analyze the current restaurant operation and financials to determine if the debt restructure will provide significant benefit to the business and if the business can pay back the loan with cash flows from operations.
Crowdfunding is a newer method for a business to obtain funding. However, instead of money coming from a bank or financial institution, many smaller investors come together to invest or donate to a business. Crowdfunding sites enable a business to post a profile of their company and their financing needs and enables the pooling of smaller contributions from a multitude of investors. One of the most significant benefits of crowdfunding is that it allows a restaurant to gather investments without giving up equity stake in their business. In some cases there are sites/apps that permit soliciting capital in exchange for products or services.
In addition to the variety of loan products and funding types, there are thousands of lenders who provide franchise and restaurant financing. Knowing where to look and how to qualify are key factors for applicants looking to position themselves for obtaining financing with good rates and terms.
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