Launching a new restaurant concept is a high-risk, high-reward endeavor. New studies have shown that the failure rate for new restaurants is about 17% in the first year, which is less-alarming than the often-quoted but inaccurate 90%. Still, in getting your restaurant off the ground, you may have made some mistakes which negatively impacted your credit. Now that your restaurant is on track you need access to capital, but your credit score is standing in your way.
A restaurant owner with poor personal credit will not be able to borrow from a traditional lender. Banks view the restaurant industry with caution to begin with given its high failure rate. And many traditional lenders will not lend to a business that has not been operating for over two years. You will have to look to alternative lenders to meet your capital needs.
When deciding where to go for funding, first you should consider why you need the business loan. Your purpose will dictate the type of small business loan which is best for your restaurant, and guide your decision when choosing a lender.
It’s an obvious but true statement; to make money as a restaurateur you must have food to serve your customers. If your servers are constantly telling customers that you have run out of the meatloaf special, they will start going elsewhere. Beer and wine have the best profit margin in the business, so you want to keep the bar fully stocked, but if you have bad credit, your distributor is unlikely to offer you credit.
Restaurant owners often need access to capital to keep their business running, but the capital demands can come at inconvenient times; a liquor distributor who wants to be paid before the weekend, when cash is low for example. A business line of credit is the best solution for these situations.
Once you apply and are approved for a line of credit, the line of credit remains open either indefinitely or for a longer period of term. You can draw on the line of credit to pay everyday expenses, and many lenders issue checks or debit cards for this purpose. When cash comes in, you can then pay down the line of credit and have access to more to borrow for next time.
Unlike a business loan, you do not have to reapply for the capital every time it is paid off. If you do not draw on the line of credit, while some lenders charge a minimal fee to keep it open, you will not have a payment or interest due. If you have bad credit, it will not prevent you from opening a business line of credit. Alternative lenders feature very flexible credit and it is not uncommon to provide bad credit business loans to business owners with credit scores as low as 500 and one of the main reasons is because these lenders consider business revenues when making a lending decision.
It is the end of the week, and your servers want to be tipped out, but your credit card receivables have not settled. You frequently find that payroll does not align with your cash flow. The best type of small business loans in these situations are working capital loans.
Working capital loans are used to cover the day-to-day business expenses in running a restaurant. They are not meant for large capital purchases such as a new oven or delivery van for your catering business. A working capital loan has a shorter term than a small business loan and will be for a smaller amount. Loan terms range from three to eighteen months.
The storefront next door just became available, and you are thinking about adding a to-go counter and coffee bar. Or, you were just approved for your liquor license and need to purchase inventory, build out space and add seating. If your restaurant is ready to expand, the best type of small business loan for you is a short term business loan.
Typically, an expansion happens over a period of time and takes longer than a month. A general rule of thumb in lending is that the period of time over which you repay your capital borrowing should align with the benefits received. While you could use a line-of-credit for an expansion, it would likely have a much higher interest rate than a short-term business loan, and the payments would not be fixed. This would make it difficult for you to budget the payments over the project’s lifetime.
A short term business loan can be taken out for the term that you expect the project to last. Many alternative lenders like Shield Funding provides short-term business loans for up to three years, for business owners with credit scores as low as 500 if their restaurant’s cash flow supports their ability to repay the loan.
Because it is a business loan, rather than a line of credit, money will be disbursed in one lump sum. You could even use some of that capital to make payments while you wait for the project to ramp up and start producing revenue. Interest will be lower than on many other business loans for bad credit available, and will not fluctuate over the loan’s lifetime.
Whether it is due to an expansion, or one of your commercial ovens just broke, restaurant owners often need to replace or purchase new equipment. Broken stoves slow down your line, a non-working refrigerator could lead to spoiled produce. The equipment that keeps your restaurant running is crucial for your success.
If you do need to purchase new equipment, equipment financing will be your best option for a loan. The equipment that you are buying with the loan’s funds also serves as collateral for the loan. Because the lender has collateral, they will charge a lower interest rate. That collateral reduces their risk. Therefore, if you have bad credit, it is easier to be approved for an equipment financing loan.
An equipment financing loan’s term should match the expected life and use that you expect to get out of the equipment. If you are unsure of how long this will be, consult common depreciation tables in your industry.
Building an outdoor patio, adding on additional dining space, or even opening a new location are all construction projects which require significant time and resources. Because the project is new or ongoing, there is no collateral to pledge to secure the loan. Your best type of business loan in these situations is an unsecured business loan.
An unsecured business loan will have a higher interest rate than one which is secured by collateral, but you will be able to budget for a flat monthly payment amount. You may, however, have to sign a personal guarantee and pledge your personal assets for the loan. Individuals with poor credit scores are not disqualified from taking out an unsecured business loan, but your other financials should be strong. This includes cash flow, time in business, and your personal assets.
Proper inventory management reduces waste, a key area of loss for most restaurants, and yet still maintains enough on-hand to keep customers happy. A successful restaurateur pays attention to and tracks their inventory and knows to place an order when essential items are running low. But, unfortunately, the need to place an order does not always align with cash flow.
A merchant cash advance is one of the most popular cash management loans in the restaurant business. Because a restaurant, particularly a higher-end restaurant, rings up so many credit card sales that merchant cash advances work well with their business model.
With a merchant cash advance, a lender advances you funds on the basis of future credit card settlements. They do not charge interest or require a flat repayment; instead, they recoup their money and make their profit by taking a percentage of every credit card transaction going forward. This continues until the advance has been paid off in full.
Because repayment aligns with cash flow you do not have to worry about budgeting for a monthly loan payment. Also, since the loan is based solely on cash flow and credit card receipts, your bad credit will not be a problem.
After determining the best type of bad credit small business loan for your restaurant, you will have to choose a lender. While you may be tempted to borrow from any lender who will grant you a loan, a poor choice in lender can damage your business.
Unscrupulous lenders could steer you into expensive products that do not truly meet your needs. Interest rates and terms vary between lenders, and if you do not take the time to shop around you could wind up paying more for your loan.
Their “from scratch” pizza sauce really comes from a can. That restaurant lies about wait times. Word gets out in any business, whether it is the restaurant industry or lending. A lender’s reputation often says a lot about them.
Have borrowers left reviews praising them on impartial websites? What has been the borrowing experience of other restaurants in your town? Ask around and, if you have a mentor, ask them for advice. Experienced veterans in the industry are guaranteed to have opinions on lenders who specialize in lending to restaurant owners.
Another way to gauge reputation is to look at how long the lender has been in business. An unscrupulous lender who takes advantage of their borrowers will not last long. Shield Funding has been in business for over a decade.
Despite all your budgeting and cash flow projections, you may find yourself in a situation where you need access to funds immediately. Traditional lenders such as banks can take months to approve a small business loan. They require extensive documentation, including taxes, financial and bank statements, and do not move quickly. If you have bad credit, a traditional lender will not even look at your business, no matter how successful you are.
Alternative lenders have a broader perspective and fewer requirements. They understand that your bad credit could be a reflection of past mistakes or life circumstances that were out of your control. Shield Funding requires monthly cash flow above $8,000 to be approved for a loan, and a few other, small items. Loan decisions can be turned around in 24 hours to a few days.
That flexibility can mean the difference between a case of spoiled food and selling through your produce inventory.
Alternative lenders exist to fill the gap between traditional lenders and business which need capital to grow and succeed. Shield Funding has been successfully operating in this space for over ten years. Talk to a lending specialist about how we can help you meet your business goals today.
