What Financing Options Are Available to Restaurant Owners with lower Credit?

What Is Revenue-Based Financing?

Revenue-based financing is a form of business financing that provides borrowers with a lump sum and is repaid with a percentage of revenue of future receivables. Instead of having fixed monthly payments, repayment is tied to your future revenue or receivables.

It can be a flexible restaurant funding option that aligns your payments with your earnings, so that when revenue is up, your payments will increase. But when revenue drops, whether there’s a seasonal slowdown or an emergency, payments decrease as well.

Because repayment is based this way, many alternative lenders focus more on your cash flow, monthly revenue, and time in business. While your credit may still be a factor, your revenue and cash flow may carry more weight.

For restaurant owners with poor credit, revenue-based financing options offer a different avenue to access capital.

It’s key to understand that it doesn’t work like a traditional loan, where borrowers pay interest over a fixed period and set monthly payments. Instead, borrowers pay a specific percentage of their revenue on a daily or weekly basis up to a repayment cap.

The repayment cap may be 1.2x to 1.5x or more of what you borrow. So, if you receive $100,000 and the repayment cap is 1.4x, you’ll repay $140,000, plus potential fees.

Why Revenue-Based Financing Works for Restaurant Owners with Poor Credit

For many traditional small business loans, lenders place a major emphasis on your credit score and overall creditworthiness. If you’re a restaurant owner with poor credit, accessing financing can be tricky.

That’s where revenue-based financing can be useful. It's an alternative lending option that focuses less on your credit score and more on a number of other factors. Alternative lenders may look at:

• Daily sales
• Monthly/annual revenue
• Cash flow transactions and trends
• Business bank activity
• Time in business

Restaurants that have high customer demand and strong sales transactions may be eligible for revenue-based financing and get the capital they need. That can provide working capital for operations and cover cash flow gaps during slowdowns or periods of growth.

As a restaurant funding option, it can be good not only from an approval perspective but also a repayment perspective. Since the repayment is tied to your revenue, payments can go down when your revenue goes down. That also means if you see a surge in sales, your payments may go up as well.

Types of Revenue-Based Financing   Options for Restaurant Owners

Revenue-based financing is often used as an umbrella term for financing options that base repayment on a percentage of future revenue or receivables. Repayment structures can vary by lender and product, but typically come with flexible repayment that adjusts with your restaurant’s cash flow.

Revenue-Based Financing (RBF)/ Merchant Cash Advance (MCA)

Revenue-based financing gives borrowers a lump sum of capital, which is then repaid with a set percentage of your restaurant’s future revenue. Payments fluctuate based on your sales, so they may be lower when things are slow or higher during busy seasons.

Other Restaurant Funding Options for Owners with Poor Credit

For restaurant owners with poor credit, revenue-based financing can be a viable option when traditional loans feel out of reach. Even so, it may not be the right financing solution for everyone.

Below, we cover other restaurant funding options that may be accessible for owners with poor credit. As a caveat, each lender and loan product will have different underwriting criteria and eligibility requirements.

1. Working Capital Loans

If you need capital to pay for operating expenses like payroll or rent, you can look into working capital loans for restaurants.

Typically, these are short-term loans and, as a result, have shorter repayment terms. They can be a lifesaver if you need to stay afloat. For that convenience, they can also be more expensive and come with higher interest rates.

2. Equipment Financing

The restaurant industry relies heavily on equipment. Many of those items are also very expensive, which can create a difficult situation for restaurant owners running on super slim margins.

Equipment financing is one solution to make stocking up on commercial ovens, freezers, fryers, and POS systems easier. Equipment financing generally refers to loan and lease options that help borrowers purchase necessary equipment while spreading out costs. Because the equipment acts as collateral for the loan, it may be a more viable option if you have poor credit.

3. Business Line of Credit

Business lines of credit give borrowers access to capital on a revolving basis. They can draw from an approved credit limit and pay interest on the amount used. As the balance is repaid, available credit increases, similar to a credit card.

Restaurant owners can benefit from this type of financing because it provides ongoing access to funds. When there is a cash flow gap, bulk ordering, or a costly repair, a business line of credit is a flexible financing option to get through various slumps and tough situations.

Having poor credit may make it difficult to qualify with a traditional bank or credit union. But some online and alternative lenders may work with borrowers with your credit profile.

4. SBA Microloans

The U.S. Small Business Administration (SBA) provides several financing options to eligible borrowers, including SBA 7(a) loans, 504 loans, and microloans.

If you’re looking for restaurant financing options but don’t have such great credit, consider SBA microloans. As the name suggests, these loans have a much smaller loan amount and typically help businesses start up and grow. The maximum loan amount is $50,000, but the average is typically around $13,000.

It’s important to note that the SBA doesn’t lend directly to borrowers. Instead, the agency provides funding to specific third-party nonprofit community-based organizations.

How to Improve Eligibility for Restaurant Funding Options

If you’re researching various restaurant funding options and want to apply soon, there are some actionable steps you can take to improve your eligibility.

• Review credit history: Check both your personal credit score and business credit score to see where you stand. Access your credit reports to check for errors. Always make on-time payments and manage debt balances wisely.

• Reduce debt: Lower the amount of debt you owe before applying for any new restaurant loans. Lenders may check your debt-to-income ratio or debt service coverage ratio. Reducing debt can help these metrics.

• Update business plan: Make sure your business plan is up to date and reflects your current business goals.

• Maintain cash flow: Steady revenue and sales can help with cash flow, which is attractive to lenders. If you’re applying for restaurant funding options such as revenue-based financing, this is especially important.

• Get organized: Keep clear financial records and gather items like profit and loss statements, tax returns, and bank statements so you have the documentation you need to apply for restaurant funding options.

Final Thoughts

As a restaurant owner, you’re used to working with different variables and shifting timelines. You know how to make the most of the resources you have. But sometimes you need access to capital to get through a lull, an unexpected surprise, or a period of growth. Having poor credit doesn’t necessarily mean you don’t have options.

While traditional financing may not be as accessible, other restaurant funding options exist that aren’t so heavily tied to your credit. For example, revenue-based financing, which is more tied to your revenue and cash flow.

If you have sufficient sales transactions and steady cash flow, you may qualify and be able to access funds. It can be a more expensive form of capital, but it may work for you when other options are not available. As a borrower, take the time to research lenders and understand how repayment works before applying.