There’s a lot of speculation about what 2017 is ultimately going to bring to the table for the restaurant industry. Some CEOs of larger restaurant chains were broadly optimistic about opportunity for the industry given the choice of Andy Puzder, CEO of CKE Restaurants (the organization that owns Carl’s Jr. and Hardee’s), for United States Secretary of Labor. Now that Puzder has withdrawn from consideration, the outlook is once again hazy.
Other analysts are concerned about stalled growth as Americans have an increasing propensity for eating at home and the decreased traffic for all segments of the industry except for quick service. In fact, a number of prominent casual restaurant chains are experiencing sales slumps continuing into the new year, with expectations that independent restaurants will not fare any better.
So the question is: how can restaurants weather a year of the unexpected, particularly if traffic turns south? What follows are six common ways an established restaurant can obtain funds to help cushion the blow of a potentially down year.
1. Traditional Bank Loan
Loans acquired directly from a local or national bank are typically the business owner’s first line of inquiry when sussing out financial options. Interest rates tend to be fairly low, assuming your assets meet the lender’s requirements.
First-time business owners, particularly restaurants, can find the application process frustrating, however, as banks can often take a conservative outlook regarding risk in their investments. Historically, many franchise restaurant brands have reported higher-than-average default rates on loans. As such, obtaining a bank loan can be a challenging route for food-related businesses that don’t have a long credit history. And even for the most qualified, the application process can take up to 30-60 days to complete.
2. Small Business Administration (SBA) Loan
The United States government guarantees competitive loans through its Small Business Administration for profit-based businesses that qualify as “small” under its guidelines. These loans are generally long-term, up to a maximum of 10 years for working capital loans and 25 years for real estate loans, and feature interest rates in the range of 6-8%. The SBA itself does not issue the loan. It is merely the intermediary that helps acquire and then guarantees a portion of the value of the loan for the bank issuing it.
A common expectation is that a start-up or young business would be able to put up 10% of its own cash upfront to qualify (much lower than most banks require), as that enables the SBA to comfortably guarantee most of the value of a bank’s loan. Micro-loans are also available for shorter terms and smaller amounts of money, and may be used for working capital.
3. Money from Family and Friends
Who better to support your vision than the people who know you best? That said, like any other business deal involving a loan of money, make sure there’s a contract involved, ideally one prepared by a licensed attorney. That will help ensure that the terms of the loan are clear, lawful, agreed upon in advance by all of the parties, and not subject to change.
Borrowers who lean on family and friends ultimately have a choice to make. Are you assuming a debt that you can pay back in full or are you sharing a piece of ownership that may or may not come with operational responsibilities and control? This distinction may drive how the contract is structured and how much money your family or friends are willing to provide, and for how long.
4. Private Investors
Opening up your business to private investment is another option for generating a sum of cash upfront for the year, but it comes with long term consequences. Unlike a loan, this is a commitment that doesn’t go away at the end of a proscribed term. These investors are buying into your business for the long haul, and while many may strictly want to fund and reap the benefits on the back end, there can be investors who will want to exert a stronger stake in the business. How your attorney structures the investment will determine a lot about how your business functions in the future.
That said, there’s a huge network of private investors always looking to support small businesses. The trick is simply finding the right match and scenario you are comfortable with as a business owner.
An external investment strategy that has become much more popular, especially among internet entrepreneurs of late, is crowdfunding. While crowdfunding may take different forms, a popular version consists of accepting small amounts of money (at differing levels) in exchange for perks or rewards, without any expectation of repayment. Individual contributions may not account for much on their own, but a successful crowdfunding can raise a fairly large amount of money.
Crowdfunding is usually best suited for special projects or additions, however, and the rewards one would promise and fulfill in exchange for contributions are usually tied to the funding of that particular goal. For instance, a restaurateur could crowdfund a pizza oven, with perks and rewards involving coupons for free small pizzas or gift certificates for dinner. Just remember: whatever you promise, you must fulfill, so be careful that your expenses don’t exceed your donations.
Ultimately, crowdfunding is usually self-managed through a site such as kickstarter.com, so the amount of work to raise sufficient funding — including advertising for driving people to your funding site — may be more effort than it’s worth.
6. Merchant Cash Advance
Neither a loan, nor a consumer cash advance like you may have seen on TV, a merchant cash advance is another popular method for restaurateurs to finance their ongoing business operations, particularly in tumultuous times. As a purchase of future credit card sales (also known as “receivables”), there is no “repayment” — only the fulfillment of a promise, the delivery of the future receivables as they are generated by the business, in exchange for upfront cash.
Unlike a loan that has a monthly repayment schedule with set amounts — no matter the economic condition of your business — receivables purchased through a merchant cash advance are paid as a set percentage of your credit card sales, as those sales are generated by your customers.
For example, if your business’s credit card sales were less this month than they were last month, the amount of receivables paid to us this month would also be less. Payment of the purchased receivables is tied to the real time performance, the actual ebb and flow, of your business. Because a merchant cash advance is not a loan, there are no minimums or balloon payments involved.
And a financing company like Rewards Network doesn’t just stop with providing the cash advance. We offer marketing services with every funding offer, at no additional cost to you, to help drive more customers through your doors. We understand that upfront cash is great in the short term, but a steady stream of 4-6% monthly top line revenue is what will help restaurants over the long term.
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