Restaurant Equipment Financing

Restaurants commonly struggle in their search for restaurant equipment financing because of the industry’s fly-by-night reputation. The speed at which restaurants can open and shut their doors have many lenders worried about the risk of provide restaurant equipment financing, will the business close overnight and run off with the lender’s money?

While the instability of food services is not by any means a blanket statement for the industry, it does complicate the process of finding funding for restaurants who are legitimate and looking to grow. The inherited risk coupled with low credit scores from the high costs of starting up can make getting restaurant equipment financing a challenge, but there are options.

To start understanding this necessary funding process, one must look at the components that go into financing a restaurant business. Why do restaurants need funding? Why is getting restaurant equipment financing so hard? Where can I get restaurant loans? We’ll answer these questions and more below.

Why Restaurants Need Funding

Like any business, restaurants need funding to grow. The unique details about operating in the food service industry is that there is a high barrier to entry and many of the hefty upfront purchases can be draining on funds and consequently credit score. With low credit scores and a need for large purchases, such as ovens, refrigerators, delivery trucks, and other industrial kitchen appliances, restaurants need assistance getting funding to keep operations running smoothly.

Food and catering businesses can be extremely unpredictable. When dealing with perishable foods, a slump in traffic can cause a harder hit than expected. This can also make it hard to prepare for a seasonal rush when profit margins are already so thin.

Restaurant equipment financing is one of the main reasons restaurants need funding, but there are actually dozens of reasons loans and credit are sought for restaurants.
Common uses are:
– Restaurant equipment financing
The cost of equipment is the most common use of funding. When a freezer unexpectedly breaks down, you need a fix fast before the next shipment of food comes in. Suddenly putting this burden on your cash flow can strain operations for quite awhile. Whether you lease or purchase your restaurant equipment, financing can help make it easy.

– Inventory
Inventory for a restaurant encompasses many items. Primarily this is perishable food. Sometimes it’s non-perishable consumables like alcohol. Other inventory items are the chairs and tables for seating, silverware and dishware, uniforms, buzzers.

– Staff needs
Covering payroll gaps is a major use of funding. Credit card payments and vendor invoices can leave cash flow tied up while the money owed and debted catches up. Rather than strain on payday or take a hit yourself, many business owners get funding as a bridge until the payments are settled.
– Seasonal rushes
Hiring staff in preparation for a seasonal rush requires a lot of paid training and uniforms. In addition to staff, seasonal rushes need an increase in inventory, extra advertising, equipment repairs for maximum efficiency, and other upfront costs that will generate a profit later.

– Advertising
Marketing a restaurant businesses actually one of the easiest. With social media platforms allowing for the sharing of photos, a well done professionally photographed dish can generate organic impressions and draw customers from local and far away locations. If you don’t know much about social media, it pays to hire someone to do it for you.

– Debt consolidation
It’s no secret that opening up a restaurant requires a lot of upfront purchases. After getting restaurant equipment financing, business owners may find themselves with several loans from several providers making multiple payments a month. Funding from another source can consolidate all of those debts into one smaller, longer term payment.

– Unexpected repairs
Equipment breaks, sometimes with warning and sometimes not. A pizza shop can’t make pizza without an oven. An ice cream shop can’t serve ice cream if the broken freezer melted it all. When a major or minor break happens, immediate funding can keep business going.

– Technology integration
The digital revolution is in every part of our lives. Technology is infiltrating the restaurant industry with the importance of aligning with multiple apps such as GrubHub and Seamless for food delivery or OpenTable and Resy for reservation. Many apps build local communities and emphasize that the businesses have a competitive online presence.

– Opening new locations
Commercial construction for building new locations, building an addition, or when purchasing an already constructed space all requires a large amount of funds that will show a return once open and running. There’s no better way to know customers love your food than with a successful second location!

Why Getting Restaurant Equipment Financing Is Hard

There are specific challenges in the restaurant industry that make getting funding more difficult than other industries. One is the high cost of entry with equipment being niche and hefty for every food type. Another is the low credit scores and racked up debt these equipment investments cause. Dealing with perishable inventory also causes a challenge, as the unpredictable return can make cash flow unpredictable, as can weather, holidays and online reviews.

There are options for restaurant equipment financing despite these setbacks and hurdles. If a restaurant doesn’t qualify for a bank loan, financing can be found through another resource such as alternative funding, lines of credit, grants and credit cards. Some types of funding don’t place a heavy emphasis on credit score, have short term or long term options, or offer favorable rates for your qualifications. Minority and women business owners may have a harder time getting a loan with less collateral to offer, as statistics show this is a contributing factor, but just because you’ve been rejected for a bank loan does not mean you can’t get financing anywhere else!

Where to get Restaurant Equipment Financing

Thanks to the recent emergence of online funding, finding restaurant equipment financing is now easier than ever. Below are several of the more common options, however getting creative with how you find alternative financing is always an option as well.

– Bank or SBA loan
Loans can come from many providers such as a bank or the Small Business Administration. Loans have government restrictions and strict funding guidelines so they can be hard to qualify for, but the interest rates are lower than most other options and some cash flows prefer longer terms up to 10 years.

– Credit union
This option is great for a local business that would like to partner with their local bank. You need to be a member of the credit union to use their products, but once you do you can access their unique rates and terms that suit your cash flow needs, not to mention making deposits and changes can easily be done locally.

– Line of credit
Think of a line of credit like a credit card, except with bigger amounts. A business line of credit can provide revolving credit for your business to use. A funder gives you a set amount to spend and you only spend what you need, meaning you only pay interest on what you use, nothing more. This is great for businesses who have fluctuating cash flow needs and want more term flexibility than what a loan can offer.

– Merchant cash advance
Within the merchant cash advance sector of finance there are different types of funding such as debt consolidation, credit card splits or standard funding for the purchase of future receivables. Alternative funding has higher rates and shorter terms, but has more relaxed qualifications allowing for business owners rejected by banks to gain access to working capital.

– Grants
Grants do not require any money to be paid back and are awarded for use towards a specific project or as a reward for a niche achievement. While many companies would love this “free money, they are very competitive to apply to and typically are not large amounts.

– Business credit card
If a line of credit seems like too much for your small business, you can get a business credit card. This still provides working capital to help with growth or coasting over gaps. As long as you pay off what you spend, fees and interest will be minimal.

Going Cashless

The debate on whether or not to go cashless is currently hottest in the food industry. Many restaurants are completely cash free as it deters crime, eliminates the problem of having change, and makes balance sheets easier to read. For cashless businesses, there is a type of restaurant equipment financing called “credit card splits” which take a percentage of credit card splits to pay back the funding rather than a set amount. This allows for flexible payback that adjusts with business and revenue and is perfect for businesses with primarily credit card transactions.

Some restaurants are opposed to allowing credit cards and would rather be cash only, as the cost of every credit transaction bites into their profit, forcing business owners to either raise prices or take the hit. Credit cards make having the exact change for a purchase easier, but can impact building good credit and bank statements reflecting cash flow, both necessary when applying for funding.