The food service sector is a dynamic and sometimes volatile business sector. Restaurants are on the front lines of the service sector and are more susceptible to consumer trends and demands than other industries. To be successful in the food service industry, it is essential to respond quickly to the market shifts and invest in the growth of the business. Therefore, restaurant owners rely on the availability of quick access to working capital. But what is the best avenue for access to capital within the restaurant industry? While there are many options, the best choice really depends on your business, your goals, and your history. To make this decision, there are three factors to consider:
1. Return/ Cost of Capital
2. Qualification/Speed of Approval
Return/ Cost of Capital
It is important to look at the cost of the capital, which can be tricky since each type of capital program calculates the cost differently. Remember that you are comparing apples to oranges with many of these programs.
Bank loans generally have set monthly payments. The benefit here is that you know how much you will be paying each payment and when. The challenge is regardless of how well your business is operating, you must pay the scheduled payment on time each month.
Merchant cash advance programs are not as hard to secure, and depending on the structure of the program the payments are tied to future revenue. Therefore, any ebb and flow of the business is accounted for in the repayment. Whether your business is good or bad, you are only obligated to pay a share of the sales.
Qualification/Speed of Approval
Most access-to-capital processes will require bank statements and merchant account history. This business history documentation is needed to show or be able to calculate your cash flow, receivables, and payables. In addition, some forms of capital will require credit ratings, collateral, tax records, and much more documentation. The amount of required documentation is generally indicative of the speed of approval and receipt of your needed funds.
With merchant cash advance programs you are not borrowing cash and they are not loans. You are selling your future receivables, so therefore they do not require the same extensive documentation as a loan. For bank loans on the other hand, you are borrowing cash and there are strict usury laws that must be followed, limiting how much lenders can charge. In general, bank loans are harder to secure and depending on the interest rate, terms, payment schedules, and other factors can be more affordable in the long term for your business.
The timing, amount, and risk tolerance are factors you need to consider when looking at the availability of cash. Many loans take time and offer a greater amount of cash over merchant cash advance programs, but also come with more risk. It is important to know your business goals, understand your revenue and cash flow, weigh your risk tolerance, and assess your true needs in terms of capital quantity.
In general, merchant cash advance products have a lower bar of entry, quick turnaround, an easy application process, and repayment is based on revenue, so when your business is not producing the repayment decreases.
Which avenue you take for access to capital depends on your business goals and most importantly on how quickly you need the capital, how burdensome the payment will be on your business cash flow, and your risk tolerance versus the availability of capital.
Just like your business, each situation is unique, and each option has a value. Deciding on the one that is best for your restaurant is up to you!
Want to know more about Merchant Cash Advance options from Rewards Network? Read on: