Any restaurant entrepreneur understands the importance of cash flow in food service. Between fluctuations in inventory pricing and the seasonality of consumer demand, every restaurant needs to carefully consider how they invest in their growth to avoid a situation where they don’t have the capital to operate at their highest capacity.
It’s a delicate balancing act, even for well-established restaurants, and the challenge has only become more difficult in 2023, with supply chain issues and inflation weighing down the economic outlook. Business loans can provide some much-needed liquidity for restaurants dealing with a challenge or facing a growth opportunity, but why should you consider one for YOUR business?
Everyone has unique circumstances. Still, there are a few benefits of business loans that everyone can take advantage of. Continue reading for everything you need to know about restaurant business loans and the reasons every restaurant owner should consider them.
What Are Restaurant Business Loans, and How Do They Work?
Restaurant financing describes the multitude of loan options available to entrepreneurs in the food service industry. They’re beneficial for traditional restaurants as well as food trucks.
If you choose a more structured loan option, like a term loan or revenue-based financing, you receive a lump sum payment that you manage over a set period of time. You’ll make payments on a schedule agreed upon with your lender, and your payments will work towards the principal and interest attached to the loan.
More flexible options, like a business line of credit, provide access to capital on an ongoing basis, where you can draw funds as needed from a total credit limit. They work much like business credit cards, but lines of credit offer the ability to draw physical cash and tend to have higher credit limits.
Despite the different formats, all types of restaurant financing provide an influx of capital for expenses, opportunities, and challenges. You can use the funds for almost any business purpose, including
- Equipment purchases
- Inventory expenses
- New hires
- Opening a new location
- Renovating your current location
- Managing cash flow
- Revenue-driving opportunities
Restaurant business loans are an advantageous way to fund your growth, whether you’ve operated your business for 1 year or 20. But, before you take out a business loan, ensure that the repayment schedule fits your business and won’t become a challenge at any point in the process.
Top 5 Reasons to Consider a Business Loan
Streamlined Cash Flow
First and foremost, business loans provide an opportunity to streamline your restaurant’s cash flow. For example: Let’s say your business is considering a $100,000 equipment purchase. If you were to make the purchase out of your cash flow, you might not have the necessary liquidity to cover expenses in other areas of your business. This can cause you to operate at less than your highest capacity.
Business loans are a way around this. Instead of jeopardizing your finances, you can secure the funds you need to accomplish your goals and manage the repayment over time.
Increased Purchasing Power
Expensive price tags can deter entrepreneurs from purchasing assets and pursuing growth opportunities. The funds from a business loan, however, complement your income and allow you to afford more expensive opportunities.
Some businesses choose to secure business loans to increase their inventory orders and lock in bulk discounts, while others use their funds for asset purchases that were previously outside their financial capabilities. You can also use a business loan to fund a renovation of your restaurant, the opening of a new location, or a purchase of a new business altogether – the choice is yours to make.
Tax & Credit Score Benefits
Tax deductions, like Section 179 for financed equipment, can help you save money come everyone’s favorite time of year – tax season. Certain situations also allow you to write off the interest you’ve paid towards your loan but make sure to speak with your financial advisor about your ability to qualify before making any final decisions.
Additionally, timely and consistent payments can strengthen your credit score and make it easier to qualify for additional financing down the road. And, with your higher FICO score, your business could also be eligible for better rates and terms, making it much easier to grow, scale, and drive success in all areas of your operation.
Entrepreneurs typically have growth plans, but most are set on the horizon behind a laundry list of things that need to happen before they can start. With a business loan, you can start to implement your plans immediately – rather than wait – and outpace your competition with the utmost efficiency.
Think about it: How many plans do you have that you haven’t started yet?
With your increased purchasing power, your business can afford a higher caliber of growth. You can purchase expensive equipment, take on additional team members to support a project, or fund the opening of your new location, all without putting your business in financial jeopardy.
Restaurants usually can’t forecast six months into the future because their overhead and profitability fluctuate heavily on a weekly basis. This often forces entrepreneurs to forgo their growth plans, but a business loan provides some stability to cut through the uncertainty.
Under a fixed rate, your payment stays static from month to month. You can plan for the future with increased certainty, knowing that your payments will never change, and start to strategize for future growth.
There are many other reasons for restaurants to leverage business loans to fund their growth, but the above list is a few of the most prominent. Basically, if your business is growing and you need capital to support your plans as you implement them, or you’re looking for a way to streamline your cash flow, business loans can offer the funding necessary to accomplish your goals.
Types of Business Loans for Restaurants
One option might work better for you than it does for another business, but understanding your options gives you the information you need to make the right decision.
Term loans are the traditional type of business loan. They’re given in a one-time, lump-sum payment, and you manage the funds/your repayment over the duration of your term. Most lenders will require a business plan of how you intend to use the funds in your business before approving your file, so make sure to have this ready before you start the process. Not only will the preparation save you time, but it also gives you an opportunity to plan out your financing strategically.
This type of loan is best for situations where you know exactly how much a project will cost. If you’re looking for something more flexible, consider a business line of credit.
Business Line of Credit
Lines of credit offer access to capital on an as-needed basis. Once you’ve established one with a lender, you can draw capital from your total limit and use the funds as you see fit. You only pay interest on the amount you take – not your total credit line – and you won’t have to worry about a lender dictating how you invest your capital.
Business lines of credit are perfect for restaurant businesses. If you run into cash flow problems, you can leverage your line of credit and bridge the gap without having to drain your emergency fund.
Equipment is necessary to stay competitive in the restaurant industry, but the price tag often stands between entrepreneurs and their full potential. With equipment financing, you can secure the assets you need to run your restaurant with the utmost efficiency and pay on a manageable schedule.
You can finance virtually any piece of equipment, from oven units and industrial refrigerators to CRM and bookkeeping software, and start using it immediately. For growing entrepreneurs, it’s an advantageous way to ensure your business is keeping up with, if not surpassing, the competition.
If you’re looking for financing outside of the list above, there are many other alternative solutions available to restaurant businesses, like revenue-based financing, asset-based lending, SBA loans, accounts receivable factoring, and many more. Anyone looking to explore these options should reach out to National Business Capital and their 75+ lender marketplace.
How to Find the Best Option for Your Restaurant
You can’t just choose any financing product to grow your restaurant; You’ll need to pick the one that best fits your business and where it’s headed. Here are a few steps every entrepreneur should take before signing on the dotted line.
- Determine Your Business Needs – You shouldn’t borrow more than you need, and borrowing too little can force you to take out additional financing. Make sure to be realistic about your opportunity or challenge to ensure the amount you’re seeking fits your goals. You should also consider whether your growth plans require flexible access to capital, like from a line of credit, or a more structured solution, like a term loan.
- Research Bank and Non-Bank Lenders – Banks are most people’s first stop, but their strict eligibility requirements and lengthy underwriting processes can deter many entrepreneurs. Non-bank lenders, on the other hand, are more inclusive and offer faster funding times. Interest rates are generally higher at non-bank lenders, so make sure to research and apply with a few of each category to understand the options available to you.
- Consider Eligibility Requirements – Before you apply with that lender, research their eligibility criteria and ensure your business qualifies. Every lender has different qualifications, and by taking this step, you can save yourself from waiting for a denied application.
- Review Your Contract and Costs – Once you’ve received a few offers, you need to carefully review the contracts and ensure that the terms fit your business and growth plan. Take the time to forecast how the interest rate will factor into your repayment by running the numbers and putting yourself into the shoes of future-you. Would the interest payments overwhelm your financial capability and make repayment a challenge? If so, it’s best to turn down that option and search for an alternative that allows you to grow without restraint.
Streamline Your Search for Restaurant Financing With National Business Capital
Applying with lenders one by one is a time-consuming process. You’ll have to fill out applications for each lender, wait for the decision on each, and determine whether each offer fits your business, which isn’t always straightforward. With National Business Capital, you can bypass both of these challenges and move from application to funding as fast as possible.
Our Business Finance Advisors leverage a 75+ lender marketplace to bring the country’s top lenders into one single platform. You apply once, receive multiple offers, and sift through them along with expert advice on which one best fits your business. We focus on your business’s potential rather than your credit score and can secure approvals algorithm-based services can’t through our decades of lender relationships and experienced team.
A trusted guide to today and tomorrow, National Business Capital ensures every next step is the right step for your business. Complete our digital application to see the options we have available for you.