If you’re considering starting a catering business or looking for money to expand an existing one, you might have heard that restaurant loans are difficult to come by. And, in a sense, it’s true—banks don’t always want to give out loans to high-risk businesses (restaurants included). Lenders need to make sure they get their money back from your business—that’s their business, after all.
That said, there’s plenty of good news for catering businesses seeking financing. Alternative lenders offer many different types of options for consumers that have had a hard time seeking bank loans. Here’s what you need to know about how to finance a catering business.
Your First Step
Before you apply for financing, you need to have a few things in order.
First, make sure you have a business plan—lenders will pour over this in order to understand how you will make money (and how you’ll pay them back).
Next, you’ll want to have the licenses you need to do business. There are a lot of details you need to put in place for a food-service business specifically; serving food requires specific licensure and approvals that vary state to state. It’s a question of putting your best foot forward to lenders.
Finally, you will want to have a sense of your credit score so you know the options for which you’ll qualify.
4 Types of Catering Business Loans
Next, you’ll want to figure out what kind of business funding you need. For instance, are you looking to buy a specific piece of equipment? Are you looking for a lump sum of working capital? How quickly do you need the money? All of these questions, and more, will determine the kind of catering business loan you should seek.
A note: If your credit is not strong, or you don’t have any operating history, you will want to be flexible with your asks to open up your options.
We’ll start with what’s considered the gold standard of small business loans: the Small Business Administration loan. These loans don’t come from the government agency, but rather they’re backed by the SBA. That means that lenders (often small banks) are able to offer some of the best, most competitive rates available because their risk is lower. SBA loans are long term, which means that they’re generally less expensive to repay. SBA 7(a) loans are the most popular for working capital.
The catch? These highly coveted loans are among the most difficult to get, so they are only awarded to the most qualified business owners. This means very good credit as well as at least a couple of years in business. So, if you’re just starting out, this isn’t going to be your best option, but you may be able to apply for one down the line if you’re diligent about keeping your credit score high.
Business Line of Credit
You can think of an business line of credit as a sort of hybrid between a business credit card cash advance and a traditional business loan. Typically less expensive than credit cards, a business line of credit is a loan that’s typically approved for up to a certain amount. Then, you can “draw” against that total, and you’ll only pay interest on the amount you’ve used.
Business lines of credit can be from the low thousands up into the millions. And, their flexibility is crucial for catering companies who want to not only have working capital, but also a safety net in the event of an emergency—or an opportunity. You can draw against a business line of credit if, say, all of your staff are booked one night and you need extra cash to pay temp staffers to work another event.
Worried less about payroll, and more about having the gear to get the job done? This is where equipment financing can really help. Catering business owners use equipment financing to finance purchases such as industrial ovens, or even serving trays and other accouterment.
The key to this loan is that you need to have a specific physical asset you want to purchase; in fact, you’ll bring the quote to the lender in order for them to approve your request. Because these loans are what’s known as ‘self-collateralized’ (in which the thing you’re financing becomes the loan’s collateral in case of default), they’re a bit easier to access for newer business owners and those without perfect credit.
Zero percent Intro APR Business Credit Card
Actually, let’s talk about one more catering business financing option. It’s a little unconventional, but for many new business owners, it’s a great option.
Your business may already have a business credit card, but have you applied for a zero percent introductory APR business credit card? These cards are excellent, somewhat surprising financing tools, because you can essentially use them as interest-free loans for the specified intro time period. If you have a high credit line, that’s very powerful—especially because many of these cards don’t begin charging interest for more than a year.
You’ll also want to consider transferring any balances that are accruing interest to these cards, which can save you a lot of money.
These are just some of the options for financing a catering business. The good news? There are lots of sources for capital to help make your dreams a reality. You just need to find the right one for you.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business financial solutions. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.