Jacques Famy Jr cofounded Advancepoint Capital, a small-business loan agency. He has over 20 year’s retail lending experience.
A business line of credit is a flexible business financing option that allows a company to access funds on demand from a revolving credit line up to a specified credit limit. Businesses can withdraw funds up to the approved credit limit as needed and are required to pay interest on the outstanding balance.
This financing option can be used for any legitimate business purpose, including paying expenses or making purchases. As long as the business remains within the credit limit and abides by the lender’s requirements, terms and conditions, the business can continue to draw funds as needed, making it a flexible and convenient financial tool in the toolbox.
When can you use a business line of credit for your restaurant?
Restaurants are a competitive industry and often have many different needs to address to manage, grow and succeed. A few popular uses for a business line of credit include:
• Purchases: Restaurants might need new kitchen equipment, furniture, decorating items or an upgraded point of sales system, and having access to additional credit can help the restaurant avoid depleting cash reserves.
• Expenses: Sometimes, funds are short at a restaurant and equipment needs to be repaired, or you need to make payroll or pay monthly bills. You can use a business line of credit on the spot to resolve issues such as expenses.
• Cash flow: Restaurants can have seasonality where additional funds can be handy to provide cash flow reserves during slow revenue periods.
• Advertising: Another possible use for this financing option is to invest in advertising to increase brand visibility and attract new customers, such as launching online campaigns, social media promotions and community outreach. You might even want to invest money to use online presence websites or delivery-service providers.
What are the benefits?
Some of the pros of using a business line of credit include:
• Access to funds for emergencies and opportunities: This financing option allows restaurants to access money on demand, so they can afford an unexpected emergency or take advantage of time-sensitive business opportunities that require acting quickly.
• Favorable rates: If you have good credit, a business line of credit may offer more favorable interest rates and terms than some other financing options, such as term loans or credit cards.
• Build credit history: Having a credit facility in place that you manage properly can improve the overall credit rating of a restaurant.
What are the drawbacks?
Of course, it’s also important to consider the potential challenges associated with this financing option to ensure you’re making an informed decision. In my experience, some drawbacks to keep in mind include:
• Lower borrowing amounts: If your restaurant has a fixed cost bottom line that is needed for the financing, a business line of credit might not provide you with the credit needed to get the job done, as borrowing limits tend to be lower than business term loans in my experience.
• Potential misuses of money: With this financing option, a lender doesn’t monitor the reasons for your draws off of the line. The temptation could lead to the misuse of funds, which could put your restaurant into unnecessary debt.
• Qualifications: Qualifications for a business line of credit are strict because of their draw feature and flexibility. In my experience, credit scores typically need to be above 660, and a restaurant must prove good cash flow management and profitability with bank statements and tax returns.
• Draw fees: Unlike a business term loan, some lenders charge a draw fee every time you draw money off of a business line of credit. That fee, if applied, might make this financing option more costly than other options.
What’s the application process?
I recommend always starting your search at the bank you do your business banking with. Alternative lenders are also available online and offline that offer business lines of credit with varying qualifications and document requirements.
You should expect to supply the following information to submit an application and gain approval.
1. Application: The application asks for both business and personal information of the business owners.
2. Bank statements: Business bank statements will be required so underwriting can evaluate the restaurant’s ability to manage cash flow.
3. Financial statements: Business tax returns, profit and loss, balance sheets and other financial documents like accounts receivable/accounts payable aging reports may be requested, depending on the lender and/or bank.
4. Credit: Both business credit and the personal credit of business owners will be evaluated by the financial institution you apply to for underwriters to evaluate credit history and worthiness.
5. Supporting documentation: A restaurant might be asked to provide proof of ownership, licensing, background checks or other supporting documentation to resolve any questions underwriting might have.
The Bottom Line
A business line of credit can be a helpful business financing solution for restaurants because it can offer flexible and attractive rates and terms. However, make sure your credit and documents are in good order before applying because lenders will demand such. Always start by researching and identifying potential lenders, ask questions, and compare qualifications, requirements and terms before making any decisions.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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