Types of Business Loans Available
Even a successful business will need to borrow at some point. No matter how much you set aside from your monthly revenues, it is unlikely to be enough to cover the costs of purchasing a delivery vehicle, investing in new uniforms or linens, or opening another location. Investing capital wisely into business ventures produces growth.
Smart borrowers know that taking out a loan can yield results for their company. If you have only borrowed in your private life, say a mortgage or car loan, the interest rates on business loans could look much higher in comparison. When applying for a business loan, you should worry less about the interest rate and more about the expected rate of return on your investment.
If you expect that adding a new location will produce a 30% return, and the loan costs 22%, you are still making money, and taking out the loan is a good idea. When it is time to borrow, here are some loan options that you should consider.
1. Bad Credit Business Loans
It is notoriously difficult to qualify for a small business loan through a traditional lender. They will not lend to businesses with less than two years of operations. They require that borrowers show steady cash flows and growth, and the individual borrowing must have an excellent credit score. Statistically, they only approve 56% of loan applications, so alternative lenders have stepped in to fill the market need.
Alternative lenders offer products called bad credit business loans to borrowers who cannot qualify with banks. Their approval rate is a much higher 75%, so you are far more likely to get the capital you need. Banks deny loans for many reasons, including how long you have been in business or monthly revenues that they consider too low. Your credit score could be just one reason they deny your loan application.
Bad credit business loans have higher interest rates, between 12% to 45%, because of the higher risk when lending to a business with less proven ability to repay loans or generate capital. Shield Funding only requires a minimum credit score of 500, and you can borrow for a term of 2 to 18 months.
The average small business loan given by banks is $493,000, which provides you with an idea of what they consider small. This could be far more than a new business needs to borrow, and since an alternative lender’s bad credit business loans start at $5,000 and go up from there, they could be a better funding source.
2. Equipment Financing
Commercial ovens and refrigerators are just a few pieces of large equipment that you will need to run a catering company. Scaling up slowly, and starting with only one or two items, will make it easier to afford them, but be aware that equipment financing loans exist to help outfit your kitchen.
Equipment financing loans purchase equipment that then serves as the loan’s collateral. If you have a lower credit score, the lender may ask you to put a down payment on your new oven, but a mediocre score will not disqualify you from funding. The interest rates on equipment financing loans will also likely be lower than for an unsecured loan.
With an unsecured loan, the lender has no recourse and nothing to seize if you stop paying. If you default on an equipment financing loan, the lender will take and resell the equipment to recoup their losses. Because this lowers their risk, they charge less for the loan, but carefully consider how losing a key piece of equipment could impact your business before applying.
If you do apply for an equipment financing loan, you will have to provide information about the equipment’s age, condition, and value. For extremely high-value items, the lender could require an independent appraisal. Waiting on an appraisal could delay the time until they fund the loan. Typical loan terms on equipment financing loans are from three to five years.
3. Short Term Business Loans
Short term business loans work best to address short term cash flow problems. If your alcohol vendor requires upfront payment, but a customer’s deposit does not cover their invoice, a short term loan will pay the vendor and keep your business running smoothly.
Short term loans must be repaid within six to 24 months, so while ideal for covering a gap in cash flow, they are not intended to finance a long-term plan. Many small business owners use business credit cards to cover cash flow gaps, but the interest rate on a short term loan could be lower, and you may need to take out capital above your credit limit. With Shield Funding, short term loans can be borrowed from $15,000 to $1 million, and their rates are between 9% to 45%. You must have a minimum credit score of 650 to qualify.
4. Unsecured Business Loans
Lenders often require that borrowers pledge collateral to secure their loan. Collateral can be assets such as an oven, a business savings account, or investment and retirement accounts. While this reduces their risk, it increases your risk.
Any asset that you pledge could be forfeit if you default on your loan. If a lender seizes an essential piece of equipment, it could be difficult to impossible to stay in business. If you do not want to take this risk, apply for an unsecured business loan.
Loans that shift more risk to the lender will cost you more. Interest rates for an unsecured loan typically fall between 9% to 45%, depending on your credit score. At Shield Funding, your score must be at or above 500 to qualify for an unsecured loan. You also must have been operating for a minimum of one year and have monthly revenues should meet or exceed $10,000.
Growth Tips for a Catering Company
When planning your company’s future, plan on growth. Think about the type of catering company you want to run – whether it is big events, corporate catering, or smaller luncheons – and map out a growth plan. These tips could help you reach your goals.
State of the Industry
The success of the catering industry depends, in part, upon the nation’s economy. When the economy is going well, people are more likely to splash out on a big wedding or a corporate event. As the economy has been strong in the past few years, total sales for social caterers topped $8.6 billon in 2018, and mobile caterers made $967 million.
Local companies still dominate the catering industry, which is considered highly fragmented. There are over 12,000 catering companies in the United States, and the top 50 companies only produce 15% of the industry’s revenue. A fragmented industry with few large players means that it is easier for smaller companies to get off the ground.
Corporate catering has been on the rise in recent years, and corporate events now generate $3 billion of the industry’s total sales. Caterers have seen competition from fast-casual restaurants for drop-off catering as more and more companies order in lunch from a local restaurant. If you are a restaurant owner thinking of opening a catering decision, you could capture some of this market by offering delivery.
Growth prospects look good, with the global catering market expected to have a compound annual growth rate of 4% until 2021.
Costs to Running a Catering Business
There are costs to running any business, but in surveys, many caterers report that keeping their margins under control has a significant impact on their long-term success. When writing your business plan, carefully consider how these costs will impact your business. This quick overview will give you an idea of what to expect, though much will depend upon the size and type of catering company you want to start or grow.
Conservative estimates put the cost of starting a catering business between $10,000 to $44,000. These assume that you immediately rent a space for your business and food preparation, some caterers get their start preparing food in their home kitchen. If you want to get your feet wet by catering small events with baked goods, pastries, and appetizers, this will work, but to grow, you will eventually need a larger space.
The cost to rent an office space, which also has room for food preparation, could be between $3,000 to $6,000 a month. You will need equipment such as ovens, cooking trays and racks, and refrigerators. If you plan on also providing china, silverware, and glassware, you might have to build storage shelves for them. Some items, such as burners and warming pans, can be rented on an as-needed basis.
Plan on investing in ingredients, herbs, and spices before you have made any money. Part of your marketing plan could be to offer taste samples to potential clients. However, you should avoid investing significantly in meats or produce until you have booked any jobs and received a partial upfront payment. Controlling food waste costs is a skill that you will need to develop early for your business to succeed.
Business licenses and permits, including a license to sell alcohol if you plan on including it in your services, can run several thousand dollars. State licensure requirements could consist of taking food safety courses, undergoing a health inspection, or paying for your employees to take courses. You will also need insurance, both to cover your business from the liability of a lawsuit but also injury protection for kitchen staff or other forms of liability insurance.
Most catering companies employ a mix of part-time and full-time employees. While you may want a full-time chef, you can often hire serving staff as needed. Payroll costs can eat into your margins, and you will need to monitor how many servers you need per event carefully.
Then, you must get all the prepared food to the event location. In the beginning, you can rent delivery vehicles such as trucks and vans, but part of a professional appearance is consistent branding and presentation. At some point, you may want to invest in delivery vehicles painted with your logo, which will also serve to advertise your business.
Word-of-mouth can significantly help build your business, but you will need to advertise and market your new catering company. Devote a portion of your start-up costs to your marketing plan and utilize free options such as social media whenever possible.
Start-up costs can be small if you start small, but to build a viable business, you will also need to plan for growth.
Prioritize Satisfied Customers
While satisfying customers should always be your goal, when launching a new business, you want to make it a priority. Those first reviews on yelp or google could significantly impact your business, and their word-of-mouth and referrals will be an invaluable asset.
It may sound counter-intuitive, but to keep your customers satisfied, you may have to turn down jobs. If someone approaches you to bid on a large, 500-guest wedding, and you have only catered small affairs with less than 15 people, you should pass and not take the gig. Only take on jobs that you know you can handle and fulfill the client’s requests, particularly when you are new and building your reputation.
Scaling up slowly allows you to learn the ins and outs of the business, find and hire qualified and good employees, and continually satisfy your customers.
Cater to your Strengths
Why did you start a catering business in the first place? Did friends keep asking you to bake cupcakes for their bridal showers? Or did you discover that you had a knack for putting together the perfect table setting? Whatever your reasons, build your business around your strengths.
It can be tempting to chase after the latest fad, whether it is a chocolate fountain or a candy table, but if you cannot do it well, doing it poorly will harm your business. Build your services and food offerings around your strengths. If a client insists upon something that you have doubts about your ability to provide, look into finding a partner, and outsourcing.
Offer Discounts, Coupons, and Referral Bonuses
Reputation, and word of mouth can help your business do well. Referrals from past customers can bring in new events without you spending any money on marketing to reach those clients. Offering bonuses to customers who refer new clients incentivizes them to mention your name. It is recommended to wait until the new client actually books and pays for an event to pay out the incentive, however.
Building a successful catering business rests upon repeat work. You want to turn one family wedding into catering the sister’s wedding, their cousin’s wedding, a son’s Bar Mitzvah, and every family event. To do so, you can offer discounts or coupons off the next event that they book. Throw in something for free, such as an extra canapé, as long as you can maintain your profit margin. Showing your appreciation for customer business keeps them recommending and using your services.
Follow up and Conduct Customer Surveys
After unpacking the boxes from your van, washing the dishes, and cashing the final check, do one last thing for your client. Follow up with them. Pick up the phone, or send an email, and ask for their feedback on your catering services and the event. Some of their comments may not be applicable, for example if they criticize the tablecloths, and you did not provide them, but their feedback can help you improve.
Instead of becoming offended by negative feedback, look at it as an opportunity to improve your business. It could tell you if a server needs more training, or if the dishwasher left spots on the wine glasses. Do not write off unsatisfied customers as lost cause, either. Think about offering a discount, or another form of apology, if something really went wrong.
If you have an email list, periodically send out customer surveys. Ask if they have any upcoming events that may need catering, solicit comments about past events, and offer an incentive such as a small discount for completing the survey. Customer surveys identify not just areas of improvement, but also where you could add products or services and capture more business.
Hire a Sales Team
Either hire a salesperson or plan on devoting time daily to sales activity to boost your business. You will need someone available to follow-up quickly on inquiries from potential clients. They can place cold calls to local businesses and larger corporations to inquire about company picnics, holiday parties, and drop-off catering.
Once initial contact has been made, a strong salesperson can help write a big for a job but also upsell food and services. Having a salesperson or setting aside time for you to sell your business will force you to refine your branding and value proposition.
After booking an event, do not forget to send handwritten “thank you” notes. Any salesperson should be adept at forming and building strong relationships that will bring in new business.
Focus on a Niche
Depending on the amount of competition in your town or city, you may want to focus on a niche to capture business. Try to identify gaps in the marketplace. Maybe all the caterers in your city have a minimum spend of $15,000 per event, and smaller church luncheons, corporate meetings, and such have been neglected.
Identify areas where you can set yourself apart from other caterers, and invest in branding and marketing that emphasizes your niche.
Host Tasting Events
Ultimately, it is all about the food. A beautiful presentation ceases to matter if a guest bites into an hors d’oeuvre and spits it back out. If you are new or trying to bring on new business, think about hosting a tasting event.
Purchase a mailing list of local brides who have visited a bridal shop and send out postcards inviting them to come and try your food. If you do not have the space in your location, talk to a local event space about partnering to host it so they can advertise to the potential customers, too. Sign up for a booth at a local wedding show and hand out free samples. Drop-off free sandwiches at a local office, along with an order form and flyer advertising your company.
Use the creativity that you put on the plate when designing new recipes into ideas for how you can find and meet your target customers and put your food in their hands.
Invest in Software
The right catering software can automate many business functions and create efficiencies to help your business grow. Software that has lead forms will help you keep track of potential leads and how and when you have contacted them. With it, you could accept credit card payments online and avoid hearing the dreaded – the check is in the mail.
Catering software that contains an inventory management function could cut down on spoilage while simultaneously ensuring that you have enough food on hand for upcoming events. It could also track wineglasses, china, and other breakable items, to identify when you need to replenish stock.
The Final Word on Entering the Catering Business
Owning a catering business can be fulfilling and profitable. If you love food and enjoy being part of people’s special days, you may find it to be the perfect industry. Before launching a new business, write a thorough business plan, and do all your research. And find the right lender to support your growth, whether it is now or in the future.