It makes no difference how long you've been in business or how successful you are when you apply for a bank loan. Banks target certain industries that they do not want relationships with and the foodservice industry is often one of them.
Regardless of the banking world's perception, the nation's restaurants will bring in $511 billion this year, according to The National Restaurant Association's 2006 Industry Forecast.
But while the overall industry outlook numbers are encouraging, under-capitalization remains one of the top reasons restaurants fail. Cash is critical to overcome some of the common money challenges that banks often aren't willing to help you with.
A few restaurant operations, such as Smith & Wollensky, Outback Steakhouse and Boston Market,-have shunned banks altogether, turning to Wall Street instead to meet their financing needs. In general, most restaurateurs don't have access to the stock market to fund company growth and expansion, so they must rely on other methods.
More restaurant owners are turning to funding solutions other than a bank. Banks have traditionally viewed restaurants as a cash business, which raises repayment concerns and often results in the denial of a loan request.
The reality is that 80 percent of restaurant checks are paid with credit cards, paving the way for new funding options. Today, there are numerous companies that specialize in providing working capital based on anticipated credit card sales. This is not a loan; it's a purchase of future credit card receivables.
Many of these alternative funding sources, which include commercial finance companies, factoring companies, pension funds, venture capital funds, insurance companies, even credit card companies, have become serious competitors for loans.
These alternative lenders can take more risk than banks, which are held to strict credit standards by federal and state regulators; finance companies are not.
There are often no fixed payments, no fixed-term time frame and no administration fees. Business longevity requirements vary. You're asked to provide proof of minimum credit cards sales over the previous few months, and usually get your cash in72 hours.
These companies will partner with a restaurant to determine an optimal payment plan based on a formula calculated on cash flow projections.
Repayment is automatically deducted from future credit card transactions and takes place over the agreed-upon period. Especially important for seasonal businesses, the repayment will vary if there are wide variations in sales.
With applications as basic as those for credit cards, many restaurants are taking advantage of the rapid service these companies offer.
Often these funding sources offer credit card transaction processing services as well, so they understand the financial's, including the structure of the balance sheet and efficient credit card processing.
Usually, there are minimal requirements for applying, and often a merchant will be required to switch its credit card processor to one affiliated with the company. Traditionally, the affiliate processor will meet or beat your current credit card processing fees. This does not usually require obtaining a new credit card terminal, simply reprogramming your current one, which takes about 10 minutes via phone.
Since a cash advance is a business purchase, not a loan, it is not reported to credit bureaus and there are no closing costs or applications fees. Plus, a poor credit rating, including delinquencies, will not influence a cash advance.
While the rate is often higher than traditional funding, the quick turnaround, minimal requirements and painless application process, coupled with the technology that makes both the advance and repayment seamless, borrowing capital this way can be a good business decision if you use the dollars wisely. —Sam Chanin
Sam Chanin is the CEO of 2nd Source Funding in New York City, which supplies working capital to businesses. Contact Sam directly at [email protected] or by phone at 877-700-7947, ext. 242.
BRIAN HAGIWARA / BRAND X PICTURES