The restaurant business is a high-risk proposition in more ways than one. Restaurateurs often face huge competition and they have numerous details to perfect. They must have the right menu and ensure regular, timely procurement of their ingredients and uncompromising food quality. The location and the environment of the restaurant are also important for the overall success of the business.
If you maintain a fine balancing act in your food business and have plans to take it further from its current stage, restaurant loans can be of significant help. Such a loan may be used to boost working capital, refurbish the premises, purchase new cooking equipment, or to take your brand to a new location.
In India, business owners also get certain income tax benefits on the loans they procure in a financial year. The interest paid on the borrowed amount is deductible from the gross income.
Getting Prepared for the Loan Application
Having a documented business plan is one of the important initial steps to apply for funds. You must have a blueprint of how you intend to use the loan amount and the way it will help you generate better revenue. No formal institution of finance – be it a bank, a conventional non-banking finance company or FinTech – will consider advancing money without seeing a well thought-out plan.
Although formal business plans are very important when procuring funds for a new venture, they are just as important to financial lenders when you are borrowing funds to expand or develop your business. This is all about clarity of the purpose of borrowing.
A formal credit report is another attribute for
restaurant business financing. Although most lenders can create this report from your business financial history and the bank account statements that you submit, it is good to be familiar with the information on the report. You can alternately get this report done and submit it to boost your application for a loan.
If your credit score is low because of delayed payments on bills or frequent reminders by collection agencies, you need to explain the reasons clearly to the lender, preferably in writing. Be candid about the reasons for any delay in payments. If it was a difficult month for the restaurant due to the seasonal drop in your sales, the lender will appreciate your honesty and be able to gain better clarity about your business operations.
Also, if any information influencing the credit report is incorrect, ensure that you get it rectified before you apply for restaurant loans. For example, if you had paid a supplier on time but the bill shows outstanding, produce the receipts or the relevant bank account statement to verify that the payment was made.
The common documents that lenders need with the loan application are KYC documents, identity proofs of owners, bank account statements of the restaurant, tax returns for the last two or three years and financial statements such as the balance sheet and profit and loss accounts.
Selecting Your Lender
In addition to being prepared with the right paperwork, you need to choose the right source of funds for your project. At present, there are many business loan providers in India and borrowers have access to competitive credit products. The choice then depends on the amount you need to borrow, the tenure within which you plan to pay off the loan and the total cost of the loan that you are prepared to pay during this tenure.
FinTech organisations that lend to small and medium enterprises (SMEs) in myriad verticals have also emerged as restaurant financing companies in India. Their flexibility of accepting the loan application and supporting documents online, the lower processing fee and the quickness in disbursing funds into the account of the borrower make them an attractive source of finance to start-ups. Furthermore, they do not require you to mortgage any physical asset as security for your restaurant business financing.
Based on the purpose for which you have borrowed and intend to use the loan amount, your restaurant may
need a term loan or working capital loan. While term loans are more suitable for restaurants that have bigger plans such as an expansion of the current premises, a quick working capital loan is a better choice for purchasing equipment/food delivery vehicles or adding a new attraction to your current brand.
rnA typical example of restaurant business loans becoming game changers in your business is of Mr Rajesh Trivedi, who has been running a small but successful South-Indian food joint in his hometown Ajmer. All the products served in the restaurant are wholesome and much loved by the regular patrons. However, some of his customers had one complaint. Whenever they opted for takeaways to eat at home, the dosas became soggy in minutes and lost their original taste. Mr Trivedi knew that such food items can only be enjoyed fresh. Home deliveries and takeaways were not effective options. But there had to be a way to satiate the customers who lived at a distance from the restaurant. That’s when the enterprising owner decided to invest in a food trailer where workers could cook and serve fresh items at different locations.
The total cost of purchasing a sparingly used truck and customising it with kitchen equipment was Rs. 6.5 lakhs. Mr Trivedi applied for the loan online and chose a merchant cash advance from a FinTech company because he frequently received bill payments by credit or debit cards. He got the amount in his bank account in less than a week. His regular course of income from the mainstream restaurant enabled him to
make EMI payments and within three months, the food truck business also started yielding good returns. He was able to pay back the loan within a year.
Working capital loans in the form of merchant cash advance are one of the chief attractions of FinTech companies. These are suitable for business owners who generate a majority of their revenue through credit and debit cards. Established FinTechs can lend loan amounts of up to 200% of the monthly card settlements.
To summarise, the restaurant owners in India today have substantial support from the credit industry. The digital technology has opened new doors for restaurant loans, and usable funds get disbursed faster. Paying a slightly higher interest is not a deterrent when the lending model is accompanied by extra benefits.
If you have a plan to upgrade your restaurant for further profitability, start your research for a financing institution and a loan product based on your precise needs and your preparedness for repayment.