Choosing the right type of business loan often comes down to your industry. The financial needs and cash flow patterns of certain businesses make them better suited for certain types of business loans. One example is restaurants, which are known for tumultuous revenue and unforeseen expenses looming around every corner. These are the kind of dilemmas that are most effectively solved by a business line of credit. It’s safe to say that countless failed restaurants would likely still be alive and well today had they sought out a business line of credit in their early stages. Thanks to this extremely advantageous source of extra cash, smaller and/or younger restaurants can recover from initial obstacles in shorter time frames and minimize damage in the process.
The rationale for a business line of credit comes from at least two factors: The costs of getting your feet off the ground in the restaurant industry and the most plausible curve balls for the average establishment in today’s climate.
1. Initial Costs Aren’t Getting Any Lower
Unlike other options like a business term loan or merchant cash advance, a business line of credit is designed to be obtained before you actually need the money. Once you are approved, you can use the borrowed funds whenever you like, and you’ll only pay interest when you borrow from your credit line. So, when the time comes to borrow, you won’t have to take the time to apply for a business loan, which might be difficult since you are likely low on cash or experiencing a decline in revenue. Many businesses apply for a business line of credit as early as possible in anticipation of changes in demand or unforeseen expenses. As if these two reasons weren’t enough, restaurants are low on cash from the get-go due to their notorious startup costs.
In the restaurant industry, it is not uncommon to have to spend over $100,000 within your first six months of business. After this period, the business enters a state of vulnerability. Any more significant expenses could be fatal. Luckily, companies like United Capital Source are able to approve business lines of credit (along with numerous other business financing programs) for businesses that are just six months old. It’s probably a good idea to at least start looking into a business line of credit as soon as your restaurant becomes eligible.
2. New Local Regulations
One example of an early, unexpected obstacle for restaurants is new local regulations. During a state-mandated health inspection, you might be instructed to purchase a certain type of appliance or use a certain type of material for your tables, countertops, or bar. If both requirements run on the expensive side, this single inspection could easily cost nearly $10,000. That might not sound like much money, and any smart restaurateur will have this kind of cash set aside for these exact situations. But then you realize the effect the unforeseen expenses will have on your cash flow and projected schedule.
Your restaurant cannot stay open when you are installing a new appliance or a new type of material. This will likely be followed by a final inspection, which keeps your restaurant closed for even longer. When all this is going on, you are paying rent, labor costs, and other bills with no revenue coming in. This is when the need for a business line of credit arises. By protecting what’s left of your cash reserves, you can get back to funding your business. You have a much greater chance of offsetting the lost revenue when you can continue marketing your business while keeping enough people on staff to ensure fabulous service.
3. Equipment Must Be Up To Date
Since restaurants cannot function without up-to-date equipment, many restaurateurs might pursue equipment financing when something needs to be replaced. But equipment financing is usually only recommended for large, expensive pieces of machinery. The terms tend to run on the longer side, and you’d have to make fixed payments every month. So, for equipment that’s less costly, it makes more sense to use a business line of credit. Odds are, you need the new equipment immediately. Your business line of credit is already in place, so you can make the purchase later that day, as opposed to later this week. And when something else breaks just a month or two later, you don’t have to take the time to gather paperwork for another application.
As you can see, this is an industry where staying competitive means accumulating as much cash as possible as early as possible. Companies like United Capital Source are aware of this new standard. This is why we frequently work with younger businesses with little credit history and/or little working capital. You don’t need perfect credit and heavy capitalization to be approved for a restaurant business loan anymore. Keeping a restaurant alive costs more money these days, but there are also more ways to access that extra money, and some are available for anyone who can prove they know how to manage cash flow.