In case you are within the restaurant organization, you definitely will not need to have me to tell you how challenging it may be financially.
Although you are constructing up the reputation of the establishment, funds is often tight and one poor evening can mean an unprofitable week. As for cash flow ? nicely, the money undoubtedly flows, does not it You just wish that much more of it was flowing in than out. And what about those slow periods What do you do if they final longer than you anticipated How do you get the funds you will need to acquire your restaurant business more than that hump.
OK, I am painting a negative image right here, but funding may be an issue for even the most successful restaurant, especially if you wish to expand speedily. The query remains: what?s the very best approach to get financing for the restaurant
LOANS
A loan may be an obvious way to raise finance for your restaurant company, but have a look at it from the point of view in the lender.
The 2004 Restaurant Business Operations Report published by Deloitte & Touche LLP indicates that average pre-tax profit margins range from 4-7%. This means that, from the lender?s point of view, even a profitable restaurant is a big risk. The bigger the risk, the bigger the interest payments ? that is, in case you even get approved for a loan at all. High interest rates, of course, can bring their own problems, particularly for a very low margin business such as the restaurant trade.
Lenders will, admittedly, look far more favorably on you if you also own your premises. However, you need to be aware that funding your enterprise using real estate as collateral means that it could be the potential resale value of the property that lenders are looking at. The purpose with the property itself could actually reduce its resale value as there would be a smaller pool of potential purchasers. Thus, many lenders set very high minimum loan amounts, which may not be suitable for the particular circumstances.
Should you do decide to go the loan route, then speaking to a specialist lender with expertise in the restaurant sector is essential.
ACCOUNTS RECEIVABLE FACTORING
Factoring is a form of commercial finance where a business can accelerate its cashflow by selling its accounts receivable at a discount. This means that the organization does not have to wait for outstanding invoices to be paid in order to receive the cash necessary to finance the organization moving forward.
For many service based businesses, accounts receivable factoring is an extremely good way of quickly accessing cash. However, restaurants rarely have much company of this kind.
What they do have, however, is a high volume of credit card transactions. By leveraging these, budding restauranters can ? literally ? fund their restaurants with other people?s credit cards.
CREDIT CARD CARD FACTORING
Essentially, restaurants can sell their future credit card transactions and receive an advance on that income ? usually up to around $120,000. The money could be used for any purpose ? from expanding premises to buying new equipment or whatever you want. This isn?t a loan, so there is no personal guarantee needed. It?s simply an advance against future credit card settlements.
The company purchasing takes a small, fixed percentage of future credit card transactions until the advance is repaid.
The advance money can frequently be made available within 14 days, so ? for the restaurant enterprise that is in need to have of a quick injection of funds ? this is a good option. Of course, there are restrictions on who can apply. Generally speaking, a restaurant would have to be running for over 1 year, take more than $5,000 per month in Visa/Mastercard transactions and have much more than 1 year left on their lease to qualify.
For the restaurant that has been in existence a lot more than one year, this represents the top method of further growing your enterprise at minimum professional or personal risk.
COMPANIES PROVIDING RESTAURANT FINANCING
There are a number of companies out there offering financing of this kind to restaurants. The main points to watch out for when selecting such a company are as follows :
i) Application Fee ? Companies charging an application fee really should be avoided. To be honest, there isn?t much paperwork involved in this process, so an application fee is unnecessary.
ii) Closing Costs ? Again, companies charging ?closing costs? are best avoided. There are enough companies out there competing for the enterprise.
For the young or established restaurant organization, credit card factoring may be the most effective way of obtaining the funds you?ll need to expand your company. So, fund your restaurant using somebody else?s credit card !
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