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As a restaurant owner, you know ready sources of capital are a key to success. You also know that you typically have more than one choice when you need financing.





This document may help you put some structure to your financing decision by comparing 4 common financing options:

1. Bank Loans

2. Unsecured Working Capital Loans

3. Credit Card

4. Factoring Advances (MCAs)

5. Taking On An Investor Or Equity Partner





To facilitate an orderly decision making process, these 4 alternatives are compared across 6 key criteria:

1. Need For Collateral

2. Speed

3. Cost

4. Flexibility

5. Cash Flow Diversion Or Interruption

6. Document Requirements





The chart below summarizes these 4 alternatives across those 6 key criteria:

Bank Loan

Working Capital Loan

MCA Partner/Investor

Collateral Yes No No Possible

Speed 3-6 months 7-10 days 10-14 days

1 month or more

Cost Low Med High High

Flexibility Maximum Maximum Minimum

Minimum

Cash Flow Diversion

No No Yes Possible

Document Requirements

High Low Low High





•The only financing alternative that requires collateral is the bank loan.

•Both the working capital loan and the merchant cash advance are unsecured.

•Depending on the terms of the equity investment or partnership agreement, taking on a partner may require collateral. It will almost certainly require an assignment of a share of your profits.

Collateral





Speed

•Both the working capital loan and the merchant cash advance are fast, typically taking less than 2 weeks.

•The MCA takes longer because that alternative generally requires changing credit card processors or setting up a lockbox, which can delay the funding process by a week or more.

•A bank loan will take the longest, with a funding decision taking a minimum of 3 months and often as much as 6 months or more.





Speed

• Depending on the complexity of the investment in your business, taking on a partner or an investor may take a minimum of 1 month and can take much longer.

•Another factor bearing on “speed” is document requirements.

•The clock starts ticking on the above time estimates after you have submitted all of the lender’s or financier’s required documents as part of its application process.





Cost

•A bank loan is most likely the least expensive funding alternative.

•The next lowest cost alternative is an unsecured working capital loan, with an MCA and taking on a partner being the most expensive.

•A bank loan and an unsecured working capital loan have the added advantage of allowing you to deduct the interest expense for tax purposes which further lowers your overall financing costs.





Cost

•In addition, since the bank loan and the working capital loan both have fixed payments, terms and rates, you can calculate the financing costs beforehand and the costs don’t change over the term of the loan.

•The same cannot be said for an MCA or taking on a partner.

MCAs involve taking a percentage of a restaurant’s daily credit card receipts, the payment increases as the restaurant’s credit card receipts increase.

•If a restaurant’s overall business improves over the term of the MCA, the restaurateur will pay back the MCA more quickly which increases the restaurateur’s financing costs.




Advance Restaurant FinanceFlexibility

•Both the bank loan and the working capital provide maximum flexibility

•Both give you abundant options for the term of your loan and both allow you to pay off early and only pay for the time you used the money.

•On the other hand, an MCA and taking on a partner severely limit your flexibility once you sign the deal.

•The moment you sign the deal, you are committed to the full amount of financing costs.





Taking on a partner typically requires not only giving up a share of profits, but can also involve giving up a share of decision making authority. Removing a partner can be complicated and expensive, as well.

Flexibility




Advance Restaurant FinanceCash Flow Diversion•Both the bank loan and the working capital loan are

straightforward financing options that do not involve diversion of a business’s cash flow.

•An MCA will require diverting the restaurant’s credit card receipts through a credit card processor with an arrangement with the funder (change in credit card process typically required) or through a lockbox.

•This alternative will involve a delay in the business receiving its credit card revenue.

•Likewise, taking on a partner or investor may result in a diversion of cash flow depending on the terms of the partnership or investment agreement.




Advance Restaurant FinanceDocument

Requirements•Document requirements can also be a significant consideration.

•The more time you spend gathering documents for financing that may or may not come through is time taken away from running your business.

•Both the working capital loan and the MCA typically have relatively modest document requirements – an application and some period of monthly credit card and bank statements.

•Determine in advance what documents will be required and the burden to collect them and factor that into your decision to pursue any particular financing alternative.




Advance Restaurant FinanceSummary

•If a restaurateur has unencumbered collateral he or she is willing to pledge, time is not a critical factor, and the restaurateur is willing and able to comply with the bank’s documentation requirements, a bank loan is most likely the best alternative.

•If a restaurateur does not have unencumbered collateral, time and/or document requirements are a factor and total financing costs are also important, an unsecured working capital loan is clearly the restaurateur’s best alternative.





•In the event the restaurateur cannot obtain a bank loan or an unsecured working capital loan and the restaurateur cannot defer its cash needs until it can obtain one of the better two alternatives, an MCA or taking on a partner or investor may be the restaurateur’s only choice.

Which of these last 2 alternatives is best for the restaurateur is likely to depend on each restaurateur’s particular

situation.

Summary





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