When owners of Midtown Manhattan’s Bukhara Grill decided to expand and purchase a catering hall in 2013, they started shopping around for bank loans to fund the purchase. Owner/partner Vicky Vij says two banks outright denied them and another put up obstacle after obstacle, dragging out the process for months.

“They were asking for a lot of stuff. A lot of paperwork,” Vij says. “It was not easy to get the loan. And we were running out of time.” After months of frustrations, Vij went another route entirely. An acquaintance pointed the company to Biz2Credit, an online marketplace that pairs small-business owners with a variety of lending sources. The company offers merchant cash advances, unsecured loans, and real estate financing, among other types of financing.

Biz2Credit approved Bukhara Grill’s $3.9 million loan within days. “They really were like a savior to us,” he says. Biz2Credit offered a 6 percent interest rate on the loan, which Vij says wasn’t great, but was doable. “It was not the best. We would have liked something better. But at that point we were a little stuck,” he says. Vij says his restaurant—a successful, proven concept that’s been around for more than 15 years—isn’t alone in having trouble accessing capital. “I think the banks are too uptight,” he says. “They are really, really shaky.”

Experts and restaurateurs say banks have never fully bounced back to their pre-recession lending levels. In the meantime, dozens of alternative financing options have opened up to small-business owners, including a slew of merchant cash advance providers, which recoup short-term loans by skimming off a percentage of future credit card sales.

Rohit Arora, CEO and co-founder of Biz2Credit, says loan demand has increased significantly since the Great Recession. “[Restaurants] are still considered very high risk for most of the banks,” Arora says. Additionally, others are stepping in to fill the void; he says more credit funds, family offices, and insurance companies are backing restaurant projects now.

“What is happening in the last two years is a lot of new money has come into the market,” Arora says. “These are guys looking for more reasonable returns compared to the cash advance places, and [they are] also looking for longer-term products.”

Restaurants have often used short-term loans or credit lines to help cover payroll expenses, purchase new equipment, or make repairs. But Arora says he’s recently seen a new incentive for restaurants to seek capital. “Part of the money they’re starting to borrow is going to marketing. That is something very interesting that we haven’t seen before,” he says.

While alternative means of financing can become a lifeline for restaurants struggling to find capital, experts warn that it often comes at a high price. Christopher Rogers, a corporate law and finance attorney with Jennings, Strouss & Salmon, compares short-term financing solutions to consumer payday or title loans. “They’re out there to provide a short-term solution, and they’re going to be compensated very handsomely for it,” he says. Rogers has seen rates as high as 50 percent, but he acknowledges that alternative funding sources aren’t always a no-go. “The trick then is to make sure they don’t get too far overextended,” Rogers says. “A restaurateur needs to be very mindful of his cash flow and make sure he can meet whatever obligations are made.”

Aside from merchant cash advances and the online lending marketplaces that have emerged in recent years, Rogers points to the influx of crowdfunding sites like Foodstart, which are bringing new sources of capital into the industry.

A 2014 working paper by Harvard Business School senior fellow Karen Mills laid out three categories in the emerging world of alternative financing: Companies like OnDeck that lend off its own balance sheets; peer-to-peer lending sites like Lending Club; and companies like Biz2Credit that match businesses with a wide variety of lenders.

“New tech-based alternative lenders are providing easy-to-use online applications, rapid loan decisions, and a greater emphasis on customer service,” Mills notes.

When John-Michael Sanchez opened his third restaurant in November, he considered applying for a loan backed by the Small Business Administration. Instead, Sanchez started shopping private investors to help get his Slice Deli and Cakery off the ground in Orange County, California. Banks want to see a track record, Sanchez says, which makes it difficult to launch a new concept. “I can’t get a huge loan based off a place that doesn’t have any volume or real projections yet. A lot of people want to see sales and volume,” he says a few weeks before his restaurant opened. “So if you don’t have that, 99.9 percent of the time you’re not going to get any [financing].”

However, Sanchez says smaller loans are still relatively easy to acquire. He received a $35,000 bank loan but says he didn’t think he could receive a bank loan for the full $365,000 he needed for his build-out. By finding three private investors, Sanchez avoided the red tape and long waits of traditional loans.

Feature, Finance