How to Apply for a Bank Loan for a Food and Beverage Business

12
April 2019

The food and beverage industry is highly competitive and high risk. Over half of new restaurants close their doors within a year of opening, and about 80% fail by their fifth year. Many businesses fail because they don’t have sufficient working capital.

You need to have enough working capital on hand to meet your business financial obligations for about a year. These expenses would include:

• Rent/Payroll

• Covering food costs

• New or replacement equipment

• New or replacement serving items and décor

• Business expansion

How to Calculate Working Capital

Figuring out how much working capital your small business has is fairly easy. Besides the cash you have in the bank, working capital includes assets that you can fairly quickly liquidize into cash such as inventory and accounts payable. From that figure, you deduct obligations that will be due within the year.

So, as an example, let’s say you have $150,000 in ready cash and current customer invoices, plus another $5,000 in marketable securities. Your current assets are $155,000.

Now deduct your obligations. For example, $30,000 in payroll, $20,000 in operating expenses, and another $25,000 in supplier lines of credit. Your current liabilities are $75 ,000.

Divide your current assets by your liabilities to calculate your working capital ratio. $155,000 divided by $75 ,000 gives us a working ratio of 2.0. In general, you want a ratio of 1.2 and 2.0 – anything under 1.0 is a predictor of serious business liquidity problems, while a figure over 2.0 suggests it’s time to consider ways to expand the business.

Obviously, before you make any business decisions based on that number, you’ll get a proper financial review from an accountant or a financial advisor who knows your business and can perform a comprehensive calculation of all your assets and liabilities.

How to apply for a business loan

You really don’t want to operate without the right ratio of working capital – over time, a shortage can cause even a profitable business to fail.

Sadly, owners of smaller businesses – and especially food and beverage business owners - often struggle to access working capital from bank loans. The application process is complex and demanding, requirements are strict, and banks really do not like loaning money to small business owners working in risky industries.

If you do not have the time, know-how, patience and/or perfect credit history to qualify for the same financing options that were designed to meet the needs of big businesses, there are options. The most popular include funding from alternative sources.

Alternative Funding for Food and Beverage Businesses

Alternative lenders work with businesses that have revenues as low as $5000 a month, and funds are typically available within 72 hours. Business owners don’t need to have perfect credit scores to be approved. And the typical application process takes minutes, not months.

Other advantages of alternative small business funding also include more flexibility, with options – such as equipment loans and invoice factoring - designed to meet the needs of smaller businesses. That said, alternative loans are risker for lenders, which means fees and interest rates are typically higher for borrowers when compared to a traditional bank loan.

The types of funding available through alternative sources may include:

Equipment loans:

You may be able to get up to 100% of the value of your business equipment. The equipment/machinery itself also serves as the collateral for the funding, making this an option that may met the needs of business owners who have substantial equipment assets but will low or no credit ratings.

Invoice Financing/Factoring:

it’s not uncommon for small businesses to wait 30-90 days for invoices to be paid. If your business involves catering or other special events that you don’t get paid for in full immediately, this type of funding may be perfect for you. You get an advance on a portion of the invoices due. The funder later collects the full invoice amount, plus fees and interest. This can be a great option if you have reliable customers who are just a little slow on paying their invoices.

Merchant Cash Advances (MCA): these are paid back via a percentage of the merchant’s daily or weekly sales. For small businesses that see daily or weekly transactions, such as restaurants or shops, this can provide an easy way to access funds quickly. Lenders look at a business’ receipts to determine whether to approve the advance, so small business owners with low credit ratings who are considered too high-risk for traditional loans are often able to get approved for an MCA.

How to Apply

Requirements vary according to the type of loan, and the amount. One easy way to get started is by getting pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.

One Park Financial works to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.