There is one key driver in the restaurant business – cash flow. If the cash is not flowing, the restaurant is not growing. And from time-to-time, you need an injection of money into the restaurant for anything from a refit, to expansion, restructuring or simply cash flow. Here is a list of the types of finance available to restaurants:
- Tax / VAT Funding
- Business Development Loans
- Cash-flow / Cash-release Facility
- Refurbishment Loans
- Asset Finance / Re-Finance (Leasing)
- Vehicle Funding
- Merchant Cash Advance
- Invoice Financing (Factoring)
- Personal Loans
- Secured Loans (2nd charge)
Almost all lending is unsecured (ie not secured against property) but does require personal guarantees. I will cover these at the end.
Tax / VAT Funding
This is a short-term loan (for example 3 months). The funder pays HMRC for you and you then pay them back each month for the next 3 months with interest.
This type of lending can be used to balance out a big tax bill that you just paid (the lender pays you on proof of the bill and you repay them). You don’t have to use the facility every quarter, just when you need to. It is often used after a busy season when you transition to a quieter season and would benefit from retaining more liquidity in your business account.
Business Development Loans
These are for larger projects like new site purchases, business expansion, etc. You would need to present a good case for them with financial support (a good history) in order to secure the larger loans and you may need to shop around because some lenders don’t like lending to restaurants. Depending on the mood in the market, some lenders – like banks – often stop lending to hospitality for periods of time. It’s just that they are risk-averse and hospitality is considered a higher risk opportunity.
Cash-flow / Cash-release Facility
This is a general term for a loan to help you get along day-to-day. Typically it can be repaid over 2 years, though longer terms are possible depending on what you are looking for. Most cash flow facilities are considered a ‘bridge’ to get you from here to there if there is a downturn which you can reasonably foresee turning back upwards.
Some cash flow loans are called “cash release.” This latter type of funding means you are pre-approved for a fixed ceiling of lending but do not need to borrow all of it. You take what you need, when you need it and pay accordingly. You are usually expected to have a ‘cooling-off’ period after taking (drawing down) some of the money and may need to wait a period of months before you can access additional funds, even if you still have credit on the account.
Specifically for the refurbishment of existing sites. However, these may also come under business development loans depending on the lender. Essentially it is a larger sum of money for a larger project.
Asset Finance / Re-Finance (Leasing)
More commonly called leasing. Here, the lender buys the equipment from the supplier and leases it to you over a period of time (typically 3-5 years). At the end of the period, you pay a ‘transfer of title’ fee (more an admin fee) which confirms that you are now the legal owner of the equipment and not the lender.
You can also use this to re-finance equipment you have already purchased. You enter into what’s called a ‘sale and lease back (SALB)’ agreement where you sell your nearly-new equipment to the lender and they then lease it to you for a period of time as above. You invoice the lender and will need to show the lender proof of purchase.
Most equipment can be covered these days, including fit-out costs (where these used to be solely the province of loans which were hard to get when you are a new business). Leases are lower risk for lenders because they own the equipment, so – if things go wrong – they can sell the equipment to recoup some of their losses.
A Word from the Wise
There are two things to be aware of with leases:
Fixed vs Minimum Term Leases
Some leases are for a fixed term, but others are open-ended (called ‘minimum term’ leases). Lenders like to offer the latter as it’s better for them. A minimum term lease runs forever unless you write to them to say you would like it to cease at the minimum term period and transfer the title of the goods. The idea behind them is that the lender continues to offer you a line of credit so you can ‘top-up’ the lease by adding new equipment to it without needing to enter into new agreements. If you forget, you’re just paying for nothing.
Every lease comes with a requirement for you to take insurance out for the goods on behalf of the lender. Although they own the goods, they won’t insure them. The catch here is that a default insurance policy is provided with the lease which kicks in automatically if you don’t cancel it. This adds extra cost on to the repayments, but you don’t actually need it. Your existing restaurant insurance policy will cover the items, but your insurance company will need to contact the lender’s default insurer and stop the default insurance on your behalf and list the specific items on your own policy under an ‘interested parties’ section.
This is specifically for cars, vans, trucks, motorbikes, etc. It can be a lease or a loan and can also be called ‘hire purchase.’
Merchant Cash Advance
This is a short-term loan which is repaid based on credit card sales. It is often offered by your merchant acquirer (the people who provide your credit card terminals). Repayment rates are typically approx 10% of card sales each month (calculated daily) and there is a flat ‘arrangment’ fee added to the cost of of the lending. Even if you repay early this flat fee has to be paid – it’s not interest in the typical sense. There are different rates and percentage options, so you can shop around if you need this form of cash flow funding.
This is also called factoring and is used if you sell a lot of higher value items. A number of our wine suppliers have used this. The factoring company takes on the risk of not getting paid and charges the supplier – you – a fee for ensuring they get paid by the customer. You get paid by the factoring company on time so you don’t have to worry about your cash flow. As a restaurant, you would not need to use this sort of service unless you are doing lots and lots of catering events.
Not all personal loans can be used for business, though some can.
Secured loans are usually for larger sums over longer repayment periods, but they require assets like a mortgage or other property to secure. They are not available against commercial leases. If the lending is approved, the lender places a second charge (or debenture) against your property in the case of default. This means that if you cannot repay the loan, they take the property and sell it to get their money back. Lenders talk about ‘loan-to-value’ here and base lending on the value of the property.
In today’s market, almost all forms of lending require a personal guarantee from the company directors. This means that if the company cannot pay, the lender can seek compensation from the director personally. Limited companies used to provide a safety net, but with higher than average failure rates – especially in restaurants and hospitality – lenders now seek additional security against the lending.