Restaurant funding: matching the money to how a restaurant takes cash

Restaurants are funded on their card takings more than on anything else, because that is the one number a funder can see every single day. That makes a merchant cash advance the easiest money to get and often the most expensive. The right answer depends on what the money is for: a broken walk-in, a slow January, or a second site.

The cash-flow shape of a restaurant

A restaurant has an unusual rhythm. Money comes in daily, mostly by card, and settles into the bank within a day or two. Money goes out weekly (food and drink suppliers), every two weeks (payroll) and monthly (rent, insurance, loan payments). The gap between a good week and a bad one is wide: weather, a road closure, a holiday weekend or a bad review can move covers sharply.

On top of that sit the lumps nobody budgets well:

• Equipment failure. A dead compressor or range is not a choice. It is an emergency with a price tag, and it usually lands in a busy week.
• Seasonal dips. Many restaurants have a slow stretch after the holidays and a strong patio season, but the pattern depends on your location. Your own bank statements are the only reliable guide.
• Refits and expansion. A new dining room, a second location, a delivery kitchen. These are big, planned and long-lived.

Each of those calls for a different product. Using one product for all three is where owners get hurt.

Which funding fits, and which doesn't

A merchant cash advance is a purchase of future card sales: you get a lump sum now and the funder takes a holdback (a fixed share of each day's card takings) until a set amount is repaid. On a true holdback, a quiet Tuesday means a smaller payment. That flexibility is the reason it suits restaurants. It is also why it is priced like short-term risk.

SBA 7(a) loans can be used for working capital, equipment and real estate, and the SBA doesn't lend itself: you deal with a participating lender. For a planned second site, that's worth the paperwork.

What it costs: a worked example

Say you take $50,000 at a 1.35 factor rate (the fixed multiple you pay back) over 6 months, paid daily.

• You repay $67,500.
• That's 126 business-day payments of about $535.71.
• The cost is $17,500, which works out to about 126% APR.

The same 1.35 factor stretched over 12 months, paid daily, is about 63% APR. A 1.20 factor over 12 months is about 37.5%. The factor rate alone tells you almost nothing; the term does most of the work. Run your own offer through the calculator on this page.

Sterling's take: if the money is for a piece of equipment that will last five years, don't repay it in six months.

In California, providers of commercial financing must disclose the total cost as an annualized rate when they make you a specific offer. Elsewhere you may need to ask for it, or work it out.

What funders typically ask a restaurant for

• Recent business bank statements, usually the last few months.
• Card processor statements, because they show daily card volume directly.
• Your lease, since a funder wants to know you'll still be at the address next year.
• ID for the owners, and proof of who owns how much.
• A list of any advances or loans already running, with balances.
• For equipment: the supplier quote. For an SBA loan: tax returns and a business plan.

Our funding partner's programs suit restaurants trading 12 months or more with about $80K a month in deposits, an owner credit score of 600+ and no more than two advances or loans running. Smaller restaurants can still ask.

Red flags specific to restaurants

1. A "holdback" that's really a fixed daily debit. If the same amount leaves your account on a dead Monday as on a packed Saturday, the flexibility you're paying for isn't there. Ask how reconciliation works and how often you can request it.
2. Stacking. A second advance on top of the first, both taking a share of the same card sales, is how a decent restaurant ends up working for its funders. Most programs, including our partner's, look hard at anything beyond two.
3. Collection terms that reach your home. The FTC has acted against cash advance providers that debited more than they disclosed and used confessions of judgment to pursue owners' personal assets. Read the personal guarantee and default clauses before anything else.

Before you sign

Work out what a bad month looks like for your restaurant, then check whether the payment still fits in it. If it only works in a good month, it doesn't work.