Restaurant Cash Flow Solution

An article by Wayne Jordan    1 Comment

Restaurants Have a High Failure Rate

Many would-be entrepreneurs dream of owning their own restaurant.  They imagine walking around a full room on a Friday or Saturday night, chatting with customers and giving out complimentary drinks.  They dream of having a full reservation book and a register full of cash.  Too many of these dreamers start a restaurant and fail within their first year, because they are better at dreaming than planning.  Restaurants lead the list of small business failures.  

Many Profitable Restaurants Fail due to Cash Flow Issues

Restaurant owners are frequently perplexed by cash flow; they can’t understand why, if they are profitable, that there isn’t any cash.  Let’s have a look at a basic cash flow scenario:

You start with $10,000 at the beginning of October; you take in $50,000 in sales, but your expenses come to $55,000; so you end the month with only $5,000.

You start November with the same $5,000, but you only take in $40,000 in sales and your expenses remain the same.  You end the November $10,000 in the hole.

You catch up a little bit in December because it’s the holiday season and there are a lot of people eating out.  But, what do you do about the shortfall in November?  What if your suppliers won’t extend your credit so you can buy what you need in December?  If you don’t have inventory to fix the meals, you can’t service your customers, and if you can’t service your customers, you’re out of business. 

That’s how profitable restaurants go out of business; it’s all a matter of not having cash when it’s needed. 

A Short-term Loan Can Smooth Out Cash Shortfalls

The most useful resource that a small business can have is a line of credit at a bank.  Unfortunately, banks are rarely interested in loaning money to restaurants.  Restaurants have a high failure rate, so they are very high-risk loans for a bank to make.  So, what’s a restaurant owner do when they see a cash shortage on the horizon, as in the example above?

Credit Card Receipts Are a Key Asset

Most consumers pay their restaurant checks with a credit card.  Consequently, restaurants quickly develop a substantial monthly portfolio of credit card sales.  A restaurant can get an advance against their merchant credit card account in order to compensate for future cash shortfalls.  A merchant cash advance is a valuable cash flow tool that can help a restaurant through slow sales periods.  The benefits to a restaurant owner are: 

• Re-payment of the loan is done from credit card receipts; there is no fixed payment.  When sales are down, your payment is low.  When sales are up (and you can afford it) your payment goes up. 
• No fixed repayment term
• No collateral
• Approval not based on your credit score

A merchant cash advance can take the fear and uncertainty out of cash flow shortfalls.  Restaurant owners can benefit by adding this flexible financial tool to their management toolbox.