alternative financing

Alternative financing: Know your options when it’s time to borrow

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By Jeff Mitelman

Growing a restaurant business at a stable pace throughout the year can be challenging, even for the most experienced restaurant owner. The seasonality and competitive nature of the industry, changing consumer eating trends, and the ramp up costs for expansion all require savvy planning – and often an infusion of capital to put the plans in place.

Many restaurateurs find it challenging to secure this financing from traditional banks as small business loans typically require a personal guarantor or personal collateral in the form of a home or other assets, along with a long history of high personal credit scores.

Successfully managing your business can be capital-intensive upfront. You might need to beef up staffing, invest in better quality equipment, add a new deck or bar area to cater to more customers, or (heaven forbid) deal with an emergency like Shelley Simon, the owner of Station 4 in northwestern Ontario.

Last year, when the roof caved in at Station 4, Shelley had no other choice but to move into a new building. She needed to move fast, but knew that a traditional bank– even the one where she kept her accounts – would not give her the funding she needed.

“I think it is very hard to get a loan for a small restaurant from traditional banks because the ratio of restaurants closing all the time is not up to their standards,” Shelley said.

So when Shelley needed the additional funds quickly to deal with this emergency, she turned to alternative financing. By going this route, Shelley not only got the funds she needed to handle this unexpected emergency, but was also able to afford the upfront labour costs of extending the hours of operation at her third restaurant in Thunder Bay, The Scandinavian Home.

So what is alternative financing?

Alternative financing refers to financial channels and instruments that have emerged outside the traditional finance system, or are offered in collaboration with banks.

Unlike traditional banks, alternative financing providers – particularly those that specialize in serving Canada’s small to mid-size business market – make lending decisions based on a more holistic picture of how a restaurateur manages their business rather than on personal financial and credit information of the restaurant owner.

The best alternative financing sources use proprietary data and algorithms to make lending decisions based on how well a business is run and its resulting cash flow. This unconventional, technology-driven approach can mean restaurant owners, like Shelley, have a much greater chance of securing financing fast, when they need it.

Alternative financing options to grow your restaurant business

As with traditional business loans, it is important to understand what your options are for alternative financing now, so you are prepared when and if the time comes to borrow.

There are several types of funding that a restaurateur can take advantage of – each with its own unique set of benefits and drawbacks. Here are a few of the alternative financing options for you to consider that can help you grow your restaurant business, or when you face an unanticipated expense:

Alternative loans: Like traditional lenders, alternative lenders offer lines of credit and short- and long-term loans. While traditional lenders prefer to lend to those with a good credit score and/or many profitable years in business, alternative loans are an option even if you personally have average or bad credit because alternative lenders look at much more than your credit score.

Alternative lenders consider the overall success of your restaurant, business plan, and business health well-being. If you have been in business for a while and if you generate enough revenue, you could qualify for term loans based solely on your time in business and monthly sales.

The interest rates associated with these types of loans are higher than a loan you might obtain from a traditional lender, but they are quite competitive when compared to business credit cards that are often used by business owners as an alternative to a traditional bank loan.

Merchant cash advance: This is an alternative financing option to consider if your customers pay you with credit or debit cards. Unlike traditional financing, there is no fixed time period during which you must repay a merchant cash advance in full. When you accept this type of alternative financing, you agree to allow the lender to withhold a small percentage of your daily sales until you have repaid the financing in full.

You can get a merchant cash advance in as little as one to five business days, and your credit is often not even a consideration. Lenders look at things like the amount of time your restaurant has been operational as well as your monthly revenue generated through debit and credit to determine whether you qualify.

While some merchant cash advances come with high annual percentage rates (APRs), others have one-time fees built right into the total amount of the loan to help you better manage your finances.

Working capital loans:  Unlike term loans or even merchant cash advances that are sometimes used to pay for long-term assets, working capital loans are designed for more immediate needs like accounts payable, squaring up wages, or even pulling a restaurant through a seasonal lull.

Oftentimes, alternative lenders will look at your time in business, your average annual and/or monthly sales, and even your immediate business forecast to determine your ability to repay the funds.

The process by which you repay a working capital loan depends solely upon the lender and the terms you choose. Most of the time, you will repay the loan based on a percentage of your daily sales.

Evaluating your options

When weighing out your options for alternative financing, be sure the lender provides fast turnaround of approvals, has a credible history, understands your unique needs and the market you are in, and can deliver capital when you need it most. And most important of all, ensure they demonstrate an appreciation for the value and hard work restaurateurs bring to the table.

Also, make sure the lender delivers a product that is tailored to your needs. Keep in mind that flexible payment solutions can align with the cash flow of your restaurant and help you better plan financing based on your terms.

Finally, remember the financing is for your restaurant. Make sure the lender has not restricted its use, so that you can use the money as needed.


About the Author:

Over the last 20 years, Jeff Mitelman has built his career by challenging the status quo in financial services. First in ATMs and then in card payments, the impact of his work can be seen through many of the changes in how these products are consumed today. At Thinking Capital, Jeff and the team are focused on redefining how small businesses borrow. Driven by a vision that lending should be smarter not harder, he continues to drive new products, and has cultivated many of Thinking Capital’s partnerships including CIBC, Staples and Moneris. Since 2006, Thinking Capital has helped more than 10,000 small- to medium-sized Canadian businesses reach their full potential.

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