Prepare for the Unexpected: Know your financing options

By Jeff Mitelman

Staying on top of your day-to-day finances is vital to managing the ups and downs of owning and running a restaurant. But what happens when you need timely access to money because you found the perfect spot for your next location, or you’re cash-strapped when your out-of-warranty hood goes down? Knowing your financing options now can help you prepare for the future, even when you can’t always plan for it.

There are many financing options available in Canada for restaurants, so it’s best to start by evaluating their pros and cons to find the best fit. To start things off, it’s important to understand that there are two types of funding providers: traditional lenders (i.e., banks) and private lenders. While both lenders assess your risk as a borrower, traditional lenders rely on your personal credit history to determine this risk. Unfortunately, this is oftentimes the reason why even a successful business can have its business loan application rejected.

On the other hand, private lenders use your business bank statements to create a more complete financial picture of your business that is used to assess your risk. They take a more holistic look at how your business is run versus relying only your personal credit or financial information. Given how important it is for any lender to examine the borrower’s risk, there are tools like BillMarket that can help you find out your restaurant’s credit score.

Traditional Bank Loan

You are asked for quite a few things up front when applying for a bank loan. Usually, you are asked to put up collateral, two to three years of tax assessments and proof of income. The bank gives you money based on the outcome of this assessment, and if your personal credit score is good, you’re in luck: you’re given the funds (and, of course, charged interest on them). It’s one of the cheapest ways to fund a business, but only if you have a good personal credit score — ideally over 700.

Pros

  • Well-known lender
  • Large amount of funding available
  • Less expensive
  • Long payment terms
  • No pre-payment penalties

 Cons

  • Need an excellent credit score
  • Application process is complicated
  • Receiving funds can take long
  • Qualifying is tough

Line of Credit

In Canada, this is by far the cheapest way to receive business funding for small business owners. The interest rates are usually the lowest and the repayment terms are flexible. Once you’ve qualified, the only restraint on your borrowing cash is your maximum limit.

Pros

  • Lower interest rates
  • Flexible repayment terms
  • Get qualified once for a set amount
  • Interest is only applied on the borrowed amount, not the entire amount

 Cons

  • Qualifying as a small business owner is tough; the process can take an upwards of 60 days
  • Upfront collateral is often required
  • Personal credit score makes a big impact
  • Strict qualification criteria

Private Lenders

Private financing companies exist to serve more specialized needs and use innovative ways to deliver financing to small business owners. For example, leading online lenders in Canada use proprietary technology to quickly make lending decisions based on how well a business is run and the resulting cash flows rather than simply reviewing the small business owner’s personal financial and credit information.

Private lenders also focus more on convenience, customer service, and product delivery. They are typically more expensive than banks, but are also less strict. Private lenders are able to provide timely funding to small business owners — sometimes in as little as 24 hours. (And let’s face it, if your hood did go down, you need that fixed ASAP.)

Pros

  • Not only based on personal credit score
  • Extremely short application
  • Can be completely online
  • Multiple borrowing options

 Cons

  • Higher interest rates than bank or consumer products
  • Pre-payment penalties
  • Lower funding amounts

Depending on your situation, the type of lending your restaurant requires may vary, but keep in mind that the origination criteria between traditional and private lenders differ vastly. For you, as a borrower, be sure to consider the pros and cons of all financing options to find your best fit.

Remember the financing your business is for your business. Make sure the lender has not restricted the use of your financing, so you can use the money however you like. After all, no-one knows your business better than you do.

 

About the Author

Jeff Mitelman is the CEO and Co-Founder of Thinking Capital, a leader in the Canadian Fintech industry. Over the last 20 years, Jeff has built his career by challenging the status quo in financial services. Today, Jeff and the Thinking Capital team are focused on redefining how small businesses borrow. You can reach Thinking Capital on Twitter, LinkedIn, Facebook and on its website.

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