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Navigating the restaurant industry: What is the right financing solution?

The restaurant industry is a tough nut to crack. Is a merchant cash advance right for your restaurant?

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July 31, 2023 | Jay Avigdor, Founder & CEO — Velocity Capital Group

The restaurant industry is currently experiencing a significant transformation due to the current financial landscape and changing consumer preferences and expectations. As a result, restaurant owners and operators are finding themselves continuously striving to obtain sufficient funding to maintain their businesses and stimulate growth.

The restaurant industry is facing several challenges in today's economy. For one, interest rates are rising far beyond where they have been in recent years, causing financial struggles nationwide, meaning consumers are attempting to save money by eating out less and looking for cheaper dining options.

Restaurant owners and operators are realizing that they may have to change their business strategy in order to stay afloat by finding ways to attract new clientele, obtain additional financing and improve their profit margins. This is where a merchant cash advance may come in.

What is a merchant cash advance?

A merchant cash advance (MCA) is a financial arrangement where a business receives a lump sum of cash upfront in exchange for a portion of its future sales or revenue. Unlike traditional loans, MCA providers assess the business's creditworthiness based on its sales history and overall financial health rather than relying heavily on credit scores or collateral. The repayment structure typically involves deducting a fixed percentage from the business's daily credit card transactions or overall revenue until the advance, along with all fees and costs, is fully repaid.

Alternative financing solutions for MCAs include bank loans, small business loans, investors or equity partners, or loans from family and friends. Often, these methods involve a long and arduous application process that includes a great deal of documentation — and there is no guarantee of success.

Additionally, when taking on loans, people often don't realize the full scope of the debt they are taking on. Loans often take years to repay and sometimes force the borrower to take on extra outside work to keep up with the payment schedule.

Eligibility requirements for obtaining an MCA

Though the process of receiving an MCA is less involved than a traditional loan, there are still necessary requirements. To apply for an MCA, you must be able to provide the proper identification, including information about the business and its owner(s) and recent bank statements.

Though the eligibility for an MCA can vary among providers, the following will typically be reviewed:

• Amount of time the business has operated.
• Credit sales or revenue over the last three to six months.
• Cash flow.
• Preexisting debt.
• Credit score.

Advantages and disadvantages of an MCA

Small businesses, such as restaurants, are attracted to MCAs because of the comparative ease of obtaining them. If all the eligibility requirements fall into place, capital from an MCA can be received on the same day as the application.

As mentioned above, an MCA can be granted based on much less document evaluation than a typical loan. Though a credit score is still reviewed during the process, it is not the factor that the approval hinges on, allowing businesses with lower credit scores to secure financing. In the current interest rate environment, MCAs are particularly favorable, as the interest rates are not much different than today's real estate-backed financing rates.

However, it is important to take note that MCAs have their disadvantages as well. An MCA can seem attractive due to its accessibility and expediency, but that does not mean that it is inexpensive. In fact, the annual percentage rate and repayment plan costs are usually quite high. Furthermore, many businesses get lured in by the ease of the process and ignore financing options that may be more beneficial to them simply because they take longer.

Advice about MCAs

MCAs are not a one-size-fits-all approach and should only be considered on a case-by-case basis. Thus, restaurant owners and operators should consider all factors before deciding to apply for an MCA.

An opportune time to use an MCA is when your business needs quick access to capital because of a presented opportunity, such as new equipment or discounted stock. Once the MCA has been obtained, the business must focus on using the capital for revenue generation so that the debt can be repaid in a timely manner.

A restaurant should not apply for an MCA in order to get them through a slow period. If the business does not generate enough cash or is operating under tight margins, it will be challenging for it to keep up with the repayment schedule of the MCA, which can trap the restaurant in a cycle of debt that will be hard to emerge from.

If you already have an MCA, it is crucial to ensure that your balance is sufficient to make the payments required for it. Additionally, it is important to prioritize building a relationship with the funder. Make sure you have a reliable point of contact and maintain frequent communication with them — if they don't trust you, this can hurt you in the long term.

The restaurant industry presents unique financial challenges that require careful consideration and strategic decision-making. Use these expert insights into MCAs to help guide you as you seek the most fitting financing solution for your business.

By understanding the nuances and implications of MCAS, restauranteurs can navigate the complex financial landscape more effectively and make informed decisions that drive sustainability and success.

Jay Avigdor seamlessly balances his roles as a devoted family man and the Founder & CEO of Velocity Capital Group,demonstrating a unique equilibrium between his personal and professional life. Over his distinguished 13-year career, he has developed an extensive network of over 40,000 relationships with clients and brokers, contributing to an impressive $850 million in sales. Avigdor's innovative technological approach is setting new trends