Is a merchant loan right for you?

Craig Coleman

Angelo Peloni, a successful restaurant owner in Los Angeles, has established a loyal customer base by curating a robust and varied wine list. “The name of the game is innovation,” Peloni says, “and if you don’t change things up, your customers will go away.”

Like most restaurateurs, Peloni knows what it takes to grow his business—working capital. Recently, this entrepreneur wanted to expand his wine list to grow his clientele, he but needed financing to complete the project. After researching his options, Peloni chose to apply for a short-term merchant loan that provided the ease, flexibility and timeliness he needed. As a result of his menu expansion, Angelo saw his customer base grow by 20 percent.

Many independent restaurant owners have capital needs that come in various forms. Planned growth, time-sensitive opportunities and remodeling all require money. In the past, the traditional route to capital was to attain a business loan through a bank or to finance business capital through personal credit. Today, there are more options for small business owners to explore including merchant loans.   

What is a merchant loan?

A merchant loan is a short-term loan designed to meet the needs of Main Street businesses. Merchant loans are unique in their attainability and speed, and most loans are funded in a matter of days after an application is completed.

Merchant loans don’t require collateral, which makes them a particularly good choice for independent restaurant owners because often their businesses don’t have significant amounts of collateral, and because small business owners are understandably reluctant to pledge personal assets for a business loan.

In terms of documentation, most merchant lenders only require the last few months of a restaurateur’s credit card statements along with a one- or two-page application. This simplified application process is ideal for busy owner-operators.

How is a merchant loan different from a bank loan?

Business loans from banks are usually secured by some form of collateral like property, cash reserves or other personal assets. In contrast, merchant loans do not require collateral and therefore, approval isn’t tied to the value of the business or personal assets.

Merchant loans are designed to be short-term in nature. As opportunities arise, a business owner may take out a merchant loan and pay it back in a matter of months, unlike bank loans, which typically have repayment in terms of three years or more. Due to the short-term nature of a merchant loan, lending amounts are usually smaller compared to a bank loan and are designed for a specific purpose such as expansion and renovation, hiring seasonal staff or offering new menu items.

Merchant loans also differ from bank loans in their repayment structure. Rather than requiring a large fixed monthly payment, merchant lenders offer a more manageable daily payment that is either a fixed dollar amount or a fixed percentage of each day’s credit sales. The latter option works particularly well with a restaurant’s cash flow because repayment rises and falls with daily sales levels.

Is a merchant loan right for my restaurant?

A merchant loan may be the right option for your business if:

• You have a time-sensitive need for financing. Merchant loans deliver funds faster than other forms of financing.
• You do not want to use personal assets to obtain a business loan. Merchant loans do not require collateral—either business or personal.
• You want an easy, straightforward application process. Merchant loans have a simpler application process that saves hours compared to a bank loan.
• The revenues from the financing will have an immediate impact on your business. The short-term nature of a merchant loan means that your business pays off the debt faster, giving you the capacity to borrow in the future if necessary.   

The bottom line is that if you’re looking for funding to grow your business and need that funding in a timely manner, a merchant loan may be right for you. The good news is that there are numerous options for you and your restaurant, so always consider and explore all of your alternatives to make the best choice.  

Craig Coleman is cofounder and c.e.o. of ForwardLine, a provider of small business financing. Learn more at ForwardLine.com.