Running a restaurant is akin to juggling a flaming chainsaw while riding a unicycle. You’re constantly managing staff, inventory, vendors, marketing, and of course, your customers and their needs. On top of all that, you need to make sure your financial tightrope doesn’t snap. Is a loan from your POS provider the best safety net for your highwire act, or are there better options to rely on? Below, we’ll review the ins and outs of POS loans and share some loan alternatives that might make you breathe a little easier.

We’ll discuss:

  1. Why a POS Loan Might Not Be Your Culinary Companion
    • Overall Financing Cost
    • Fast Repayment Requirements
    • Lack of Transparency
    • Fluctuating Payments
  2. Example of POS Loan Details and Costs
  3. Top 5 Alternatives to a POS Loan: Your Culinary Toolkit
    • Fast SBA Loans
    • Equipment Financing
    • Lines of Credit
    • Working Capital Loans
    • Other (non-POS) Cash Advances
  4. See Expert Guidance: Your Culinary Consultant
  5. Conclusion – You Have Options

Why a POS Loan Might Not Be Your Culinary Companion

One of the biggest hurdles you may face as a restaurant owner is access to capital. Whether you’re looking for working capital to make renovations, add staff, pay vendors,  upgrade equipment, or cover those unexpected expenses that seem to pop up like mushrooms after the rain, you’ll likely need cash help at one time or another.

One popular option for restaurant owners to get fast financing is a POS loan. These are loans offered by your POS provider, and they can be a quick and easy way to get some cash.

While POS loans might seem like a tempting option due to their ease of access, they can sometimes be the culinary equivalent of a burnt soufflé – full of potential but often ending in disappointment. Here’s why:

Overall Financing Cost: These loans are offered quickly and with virtually no qualification. No surprise then that they are also very high-cost! In the spectrum of possible business loans you can get for your restaurant, the POS loans are among the most expensive. POS vendors trust the ease of access will offset their high costs. Given the typical restaurant profit margins of 5-7%, the high costs can put a significant burden on your restaurants cashflow.

Fast Repayment Requirements: POS loans often come with a repayment schedule that would make even a marathon runner sweat. We’re talking 4-6 months. This can be a major burden, especially during slow periods or when unexpected expenses crash your restaurant like an uninvited guest.

Lack of Transparency: POS loan terms can often be as clear as mud, making it difficult to understand the true cost of borrowing. It’s like trying to decipher a foreign language – you’re left scratching your head, wondering if you’re being taken for a ride. Many POS vendors offering loans trust the convenience offsets the murky details.

Fluctuating Payments: Imagine your restaurant’s daily revenue being like a rollercoaster – one minute you’re soaring high, the next you’re plummeting into the depths. POS loan repayments are tied to this rollercoaster, meaning your payments fluctuate just as much. For some, this works ok, but for others the fluctuation can create unintended financial strain compared to predictable payments.

Example of POS Loan Details and Costs

Let’s look at a real-world example from a leading POS provider. This restaurant has monthly revenue that averages from $125,000 to $150,000:

Amount restaurant will receive: $140,000

Amount to be repaid to POS lender: $168,000

Fixed fee being paid to POS lender: $28,000

Daily card sales holdback: 13.2%

Expected repayment period: 7 months (210 days)

In plain terms, the restaurant will receive $140,000. They will then have 13.2% of credit card sales held back each day until $168,000 has been paid back to the lender.

The financing cost is therefore $28,000 ($168,000 – $140,000). The loan is expected to be repaid in 7 months. Important note: this is an estimate only, and for a growing restaurant, the repayment time will be even shorter than estimated.

This $28,000 financing cost in 7 months translates to an annual financing cost of 34.3% ((28,000 / 7 x 12) / $140,000). The annualized financing cost is 40.0%* if repayment happens in 6 months.

*The true APR on this example is actually quite a bit higher. It’s not possible to calculate a true APR percentage on a cash advance, since APR is intended for fully amortizing loans. However, to get to a financing cost of $28,000 on a traditional $140,000 6-month loan, it would take an APR of 65%.

It’s important to consider the cash flow impact for the restaurant. The repayment is 13.2% of sales each day. For a restaurant operating with a profit margin of 5-10%, they will be cash flow negative the entire time they are paying back the loan.

Top 5 Alternatives to a POS Loan: Your Culinary Toolkit

Given the potential drawbacks of POS loans, here are five alternative financing options that might be more palatable for you and your restaurant:

1. Fast SBA Loans:

The Small Business Administration (SBA) is like a friendly chef who’s always ready to lend a helping hand. SBA loan programs are designed to help small businesses, including restaurants. These loans have lower interest rates, longer terms and more flexible repayment terms than POS loans, making them a more digestible option.

Many owners shy away from SBA loans because of the paperwork and time to get funded. However, some lenders recently started offering faster, streamlined SBA loans that still have good rates and terms but can close in as little as 1-2 weeks. If you qualify, these fast SBA loans are a great alternative to a POS loan.

2. Equipment Financing:

If your restaurant’s equipment looks a bit worse for wear, equipment financing can be a great way to spread out the cost of that shiny new oven or state-of-the-art espresso machine.

This type of financing is secured by the equipment itself, so you don’t have to put up additional collateral. The rates are great compared to POS loans, the terms are multiple years, not just months, and you can get funding quickly.

Another plus – you can finance not just typical equipment items but also things like software or POS systems, furniture, fixtures, and signage. For more on this topic, visit How to Get Restaurant Equipment Financing. 

3. Lines of Credit:

A line of credit is like having a secret stash of money hidden away for rainy days. It’s a revolving line of funding you can access as needed, making it a good option for businesses with variable or unpredictable cash flow needs.

Some lines of credit can be obtained in just a few days, and they offer much more flexibility than a POS loan. Even for lines of credit with higher interest rates, you won’t pay when you’re not using it. This can make them far less costly than POS loans. More details here on Small Business Lines of Credit.

4. Working Capital Loans:

Working capital loans are like a financial injection for your restaurant, giving you the cash you need to keep your day-to-day operations running smoothly. There are many types of these, offered by many different lenders.

In general, working capital loans can range from terms of 1 to 7 years, they are often repaid monthly, and their interest rates and fees vary widely based on personal and business credit.

5. Other (non-POS) Cash Advances:

POS loans are a class of financing called “cash advances”. These are funding options based mostly on your restaurant’s sales and offering fast cash paid back in a relatively short time (less than a year).

There are many cash advance options beyond POS loans, and many are preferable. First, many alternative cash advances will be less costly than POS loans. Also, many cash advances have longer repayment periods, sometimes as much as 12-24 months. Another important benefit – some other cash advances feature discounts for early payoffs.

Many cash advance options offer consistent weekly payments not tied to a percentage of your sales. Some owners prefer this, finding that fixed payments provide a more predictable and manageable repayment structure.

For more information on the above five options and other ideas for restaurant financing, visit the Insider’s Guide to Restaurant Loans and Financing.

Seek Expert Guidance: Your Culinary Consultant

When navigating the restaurant financing maze, consulting with a qualified financial advisor or loan specialist is always a good idea. They can be your culinary consultant, helping you assess your financial situation, understand the different financing options available, and choose the best option for your specific needs.

A good loan broker or loan advisor will know the ins and outs of all of the options available to you, and they will be familiar with which lenders, out of the hundreds of available lenders, are good sources for you.

And don’t think having help will slow you down or require cash: a good loan specialist should be able to work very fast, help you get money quickly, and not require any upfront fee from you.

Conclusion – You Have Options

The right financing can be the secret ingredient to your restaurant’s success. The POS loans are a relatively new offering, providing very fast access to cash for many restaurants. However, they are quite expensive and require quick repayment. For many restaurants, these will create an unwelcome and often unexpected financial burden.

Remember – you have options. There are other loans that you can access in just 24-48 hours, or if you can wait a bit longer, you can possibly get financing that is much, much less costly than a POS loan and with much better repayment terms.

If possible, take a bit of time, talk to fellow owners, work with a seasoned loan broker and choose the financing option that best suits your restaurant’s taste buds. With the right financial backing, your restaurant can flourish for years to come.

This Guest Article was written by Mike Spitalney. Mike is the CEO and founder of Everfund, a leading small business financing advisory firm. Mike is on a mission to help small businesses get the best financing for their needs and avoid the big C’s (confusion, clutter, complexity) of today’s lending world. Over two decades, Mike has helped thousands of businesses thrive and grow using a variety of short and long-term loan options, from working capital loans and lines of credit to SBA and bank loans. Contact Mike to learn more or discuss your business needs, or grab a seat with the Fork CPAs to get your financials financing-ready.