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Restaurant Cash Advance: Merchant Financing For Dining Establishments

Cash Advances For Restaurants

The United States restaurant industry does over $782 billion each year in total sales. With over 1 million restaurant locations nationwide, this crucial industry is crucial for the U.S. labor market. In fact, well over 14 million Americans are employed by a restaurant or dining establishment. That means around 10% of the total U.S. workforce is directly employeed by a restaurant. When you look at trends moving forward, this industry will create 1.7 million new jobs by 2026.

Not only is the restaurant industry crucial in creating jobs, it also provides plenty of options for advancement. Around 90% of restaurant managers, as well as 80% of owners started as entry-level positions. Most restaurants are smaller in operations with the great majority having less than 50 employees. As with many small operations, cash-flow can fluctuate, and the small business may find itself needing immediate financing to help cover their important expenses. During those times obtaining bank financing may not make sense because timing is important. If you have an immediate expense that needs to be handled immediately, applying for a bank loan and waiting for the funding process to complete can take weeks if not months. Or maybe you are a restaurant owner with bad credit who simply can’t obtain traditional and alternative financing. During those times the best financing option may very well be a restaurant cash advance merchant financing.

What is a Restaurant Cash Advance?

Restaurant cash advances are the sale of future restaurant receivables in exchange for immediate money. The restaurant will sell between 5-20% of its future business revenue and the funding company will give them those expected receivables at a discount to the funder. The funding company will analyze the restaurant’s cash flow (along with the dining establishment’s credit rating, as well as the establishment owner’s personal credit) and then forward the restaurant an amount the funder thinks the borrower would comfortably pay back.

How Does a Cash Advance Differ From a Loan?

While both a restaurant loan and a cash advance are ways for restaurants and small businesses to obtain financing for the capital needs, they are both fundamentally different types of financing. With a loan, a business is borrowing money from the lender with an intent to pay it back plus interest. A cash advance isn’t a loan at all. A cash advance is the sale of future receivables at a discount, so no actual lending occurs. These types of transactions are actually business to business transactions, therefore they aren’t governed by state and federal lending laws (including usury). Loans also are repaid very differently, with most conventional lenders requiring monthly repayments. A cash advance lender will require payments on a daily or weekly basis. A loans interest rate is usually represented using an APR, whereas a cash advance calculates interest using a factor rate. Loans can usually be paid-off early and the borrower can save substantial money because less compounded interest, but with a cash advance there are generally little savings (because it’s a sale of receivables). A loan usually has terms that last for years, but a cash advance usually has a repayment term that last only months. A loan usually heavily-depends upon a borrower’s past credit rating, whereas a cash advance lender generally doesn’t put too much focus on credit, but instead focuses on cash flow.

How Does a Restaurant Cash Advance Work?

A cash advance lender generally requires a credit application and business bank statements to begin their pre-approval process. While running the restaurant and its owner’s credit, they will also analyze the restaurant’s cash flow as represented in their bank statements and credit card processing statements. The funder will look at the total deposited into each account each month, the total number of deposits into the bank account, the total number of credit cards transactions made at the restaurant by diners, the daily balance and minimum monthly balances, and whether or not the bank account had any insufficient funds. The cash advance underwriters will use the company’s own model to decide whether the restaurant qualifies for the cash advance, and how much cash advance financing they will fund the restaurant. If the restaurant agrees to the cash advance amount, the funding company will then provide contracts that will need to be signed, and a list of stipulations that need to be provided before closing. The contracts will reflect the rates and terms of the transaction, and will detail how the funding will be repaid. Repayments of restaurant cash advances include:

  • ACH repayment: repayments made each day by having a specified dollar amount transferred from the restaurant’s bank account to the cash advance funder using Automated Clearing House.
  • MCA repayment: repayment made each day by having a percentage of the restaurant’s credit card transactions withheld and sent to the funder until the loan is repaid.

What Are the Types of Restaurant Cash Advances?

The type of cash advances can generally be described by the length and rates. Long term merchant cash advances for restaurants are 1st position cash advances that range from 12-24 months long. Long term 2nd position cash advances will range from 6-18 months. Short term restaurant cash advances usually range from 4-8 months, regardless of it’s the restaurant’s 1st position, or if the restaurant stacked multiple cash advances.

What are the Rates?

A factor rate is the multiple of the funding amount you are expected to payback. Therefore, if you have a factor rate of 1.2 for a funding amount of $10,000, the restaurant would be expected to payback $12,000 ($10,000 X 1.2 = $10,000).

Factor rates can very for cash advances depending upon how much risk is involved in the transaction. If the restaurant has great cash flow and good credit, they can get fairly affordable rates. But if the restaurant has bad credit and the cash flow fluctuates greatly, the rates can be very expensive. The best factor rates are usually around 1.10, whereas the most expensive factor rates can be as high as 1.50.

Fees?

Fees can vary, and may be as little as a few hundred dollars to cover underwriting fees, and other cash advance funders may have underwriting, closing costs, banking fees and other fees that can be as much as 10% of the total funding amount. On top of that, there may be additional fees for failed payment, default and stacking of advances.

Restaurant Cash Advance Uses?

  • Working capital
  • Purchase property
  • Purchase equipment
  • Hire & pay employees
  • Pay taxes
  • Expansion & remodeling
  • Emergency reasons

Restaurant Cash Advance Application Process?

The application process for a merchant cash advance and business cash advance vary just a little, in that calculations of an ACH loan will require between 4-6 months of bank statements, where a MCA loan will require both bank statements and credit card processing statements. A restaurant can expect to get an initial approval or decline with just a couple of hours, and if they do get approved and provide all stipulated documents in a timely fashion, they can get funded with a couple of business days, and if the funding amount is small, the restaurant can get funded the same day.

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