So you are in the restaurant business and have beaten the odds. You have put in the long hours, given up your personal life, and are ready to expand.

Capital is needed and the first source that comes to mind in a restaurant loan. However, alternatives for investment capital exist that may work better for funding a restaurant expansion.

Expand Your Restaurant Business

Reality Check

In a study by researcher from Michigan State University and Cornell University, the failure rate of new restaurants over a 10-year period was found to be 27% in the first year, 50% in three years, and 60% in five years.

Yet during this economy the closure of new restaurants has been low in comparison. This may reflect resilience during tough times but more likely banks have reduced the number of loans given to restaurateurs whom they are cautious of even in the best of times.

Success, Growth, and Capitalization

For those restaurants that beat the odds and achieve success, expansion may be a consideration whether it is adding employees, new equipment, opening another location, buying supplies, or market diversification. To capitalize expansion restaurant, traditional bank loans are often the first option that comes to mind.

However, are bank loans the only option during an economy that does not favor loans of any kind? What alternative sources of funding exist?

Merchant Cash Advance

In response to diminishing restaurant loans and small business loans in favor of larger operations, the Merchant Cash Advance (MCA) industry took advantage of an opportunity to fill a need.

In 2010, approximately 40% of $540 million in MCAs provided to small businesses went to restaurants. Since loans are inherently risky, MCAs represent an innovative change in lending practices.

An MCA works like this. It acts as an investment in the future performance of a business in that future card revenues are sold in exchange for lump capital.

There are no payments. Instead a small percentage of each credit card sale goes to the MCA provider until the capital amount is paid in full. Payments increase or decrease depending on business sales.

Nonprofit

In some states, many nonprofit organizations have programs to promote economic growth by means of small business capitalization.

Generally aimed at businesses with less than 500 employees, loans are available from about $25,000 up to one million. Since it is a loan program, qualification is still necessary in the form of application, business plan, credit rating, and collateral.

Loans are obtained from participating banks. This type of funding which comes from federal funding is great for restaurant loans because the program works by reducing risk. There is a small percentage fee which is built into the loan that is matched by the program organization that covers loss in event of default.

Conclusion

Restaurant loans are risky business. Traditional bank loans are difficult to obtain. However, for those in the business who need investment capital several viable alternatives exist to provide restaurant loans to fund expansion.