Change is a constant in the restaurant business—everything is fluid, customers are fickle, food costs rise and fall, consumer spending rises and falls with the economy. Growth in this type of environment can be challenging, and financing that growth with any kind of debt can be a make-or-break decision. To mitigate that risk, many restaurateurs opt for lines of credit over traditional loans. This enables them to reap the benefits of a cash infusion for their business without some of the challenges that come with a loan.
Here, we’ll dive into the unique benefits of a line of credit and share tips on how to use a line of credit to grow your restaurant business.
Why choose a business line of credit over a traditional loan?
This question comes down to the difference between fixed and variable expenses. For a fixed expense, like the purchase of a building for a set price, business owners take out a mortgage, which is a fixed rate loan. Growth expenses, on the other hand, tend to be variable. Using a fixed loan for these fluctuating expenses can feel like attempting to put a square peg in a round hole.
Some of the costs of expansion might look fixed, like a buildout to add more tables or widening the parking lot. Other expenses, like the addition of more products to expand your menu, will clearly vary over time. It’s almost impossible to put an exact number on any of these costs, so a flexible financing source is a necessity. That’s where lines of credit come in.
A line of credit, unlike a loan, is an option to tap into funds as you need them. With a fixed loan, the business owner borrows a certain amount of money and agrees to pay it back in fixed monthly payments. If the amount is not enough for the growth plan, the business will face a cash crisis; if it’s too much, you might find yourself in the fickle predicament of having used your excess funds imprudently only to have to pay it all back within the predetermined time frame. That doesn’t happen with a line of credit. Funds are available upon demand, and you need only draw money when you need, and in the exact amount you need.
Beyond making for an easier, more flexible financing option, a business line of credit comes with other benefits over a traditional loan. For example, from a shareholder perspective, a line of credit looks better on the balance sheet. Rather than an entry in the long-term debt category, lines of credit often classify as short-term debt because they’re paid back in stages as each phase of the expansion is complete. This makes it easier to see the profitability of the growth plan as it happens.
How to use a line of credit to grow your restaurant business
There are several ways to grow a restaurant. Changing the seating plan to accommodate more customers is one of the more popular options. Investing in new equipment to make the restaurant more efficient or expand the menu is another. The following list can help you understand some of the best ways to apply a business line of credit while growing your restaurant business.
Adding more tables or changing the ambiance in the restaurant can make a big difference in bottom line profits. Foodies love to visit the “hip new spot” in town, and creating a space that feels up to date and has a unique identity can go a long way in attracting more customers. It’s also important to make sure that you have the space to accommodate more customers. Creating a refreshed dining experience and a more spacious setting by renovating your existing restaurant will accomplish that.
It could be argued that new equipment is a fixed cost and could be obtained with a traditional loan, but the return on that investment will be variable. There’s also a possibility that the equipment won’t work out and you’ll choose to return it. Lines of credit don’t have early repayment penalties. That flexibility is important when making larger purchases and investing in equipment that can help accelerate growth.
Opening a second location
Construction costs never come in on budget. They’re typically higher than the original estimate, so a business line of credit is a better option when you plan on opening a second location. Another factor to look at is the time frame. It could take several months to build a new structure or renovate an old one. The fluctuating cost of food, fuel, paper, and other essential materials will likely change—read: rise—during that period, and a line of credit gives you a flexible option to lean on to accommodate unexpected costs of expansion that it can be difficult to budget for.
Off-season reserve fund
Ask a restaurant owner on Cape Cod what their business looks like in the middle of winter. Many of them close once tourist season is over, but that doesn’t stop the bills from piling up. A business line of credit can provide the funds to carry a restaurant through the off-season, whether it’s covering overhead, investing in ongoing marketing, and menu development. As you plan for the next busy season, a line of credit can help facilitate any costs associated with preparation.
Expansion isn’t always the best way to go. Hiring a restaurant consultant to help strategize your next moves is a wise investment, and it’s a variable expense. Consultants charge by the hour. Your need for them will fluctuate based on the stage of growth your business is in. It’s best to add the consulting fees to your growth budget and use the line of credit to pay for their services and expertise.
If you’re looking to expand on a wider scale than simply opening a second or third location that you oversee, you might consider franchising your restaurant operation. Setting up a franchise structure for your business can be costly though. It can cost restaurant owners upwards of $80,000 between legal fee development, filing and registration fees, operation manual and onboarding development, advertising, franchise brand development, etc. A business line of credit can help you cover the expenses involved in getting a franchise set up for your restaurant and taking your growth to new heights.
The restaurants that had the most success during the 2020 pandemic were those that offered a retail line of products online. This is a growth strategy for the digital age. Developing a retail line of products that can be marketed on social media and through digital advertising is a great way to not only boost your revenue, but also drive brand advocacy and awareness. Using a business line of credit to invest in the development and creation of merchandise can be a great growth strategy that shows you know what the modern consumer is looking for.