Backing the Business

Shifting market demand, changing consumer behavior, and sales fluctuations may spur the need to open a new location, expand your current dining space or upgrade kitchen equipment. Large projects often require funding that falls outside of the current budget and rounding up those resources can take time and effort. Most of all, you don’t want to commit to a financial arrangement that will be tough to pay back later.

While credit cards and banked funds may serve a purpose, the reality is that there are many options available in today’s market. Often a combination of resources, along with a dash of creativity, can help turn a building plan or upgrade into a reality. That’s the route Village Idiot Pizza in Columbia, South Carolina, took in 2020. As Covid-19 brought changes to the area, owners Brian and Kelly Glynn closed their flagship location in a historic building. They kept their other two locations open and revamped their delivery and menu options to coincide with the pandemic-induced consumer demand. The profits that came in from these two locations helped fund a renovation project at the main location, which was 30 years old at the time. “We felt that we owed it to our community and to ourselves to not let our flagship location close for good, especially not during our 30-year anniversary,” says Kelly Glynn. “Our hope was that if and when we were able to reopen, the space would be more functional and allow us to better serve our customers.” After gutting and updating the kitchen, along with upgrading the bar and dining room, the location reopened in September 2020.  

It’s not always possible to fund projects with cash inflow, and other resources are available. These include everything from leasing to taking out a loan, using a line of credit, or asking others for help. Here’s a breakdown of common loan options and what to consider before filling out an application.

Ins and Outs of Leasing. If you need pizza ovens, stoves or other kitchen equipment, it may be possible to lease the appliances rather than purchase them. “Equipment can be leased through the manufacturer or supplier, or a leasing company,” says Tom Thunstrom, small business finance analyst at Fit Small Business. It may be easier to lease rather than take out a loan, as the requirements for a lease are often not as rigid as those for a loan. Also, at the end of the lease you can replace the equipment with newer models if desired. On the downside, interest rates may be higher than those attached to a loan. 

Taking Out a Loan. For a loan, “interest rates can be more favorable compared to leasing if a borrower has good credit,” Thunstrom says. “The disadvantages with trying to get a loan are approval times, which can take several weeks if not months, lender requirements which can make getting a loan incredibly difficult for a new pizzeria, and credit requirements.” If your credit score is low, it could be tough to get approval for a loan.

The Small Business Administration (SBA) guarantees loans made through banks and some online lenders. If you are a newer place or have average credit, this option may be feasible. Approval times could be more than 90 days, however, and you’ll need to submit a business plan for the process. “The SBA has low upfront payments for many of their loans,” says Peyton Leonard, a finance expert with Loans.org. “They also offer a 10-year term length for the majority of their loans. A downside is that many of their loans require banks to put a lien on your home or personal belongings.”

Looking into Lines of Credit. A business line of credit provides cash flow when you need it. These lines of credit “can be as low as $1,000 and as high as $250,000,” Leonard says. They may be difficult to obtain, as the qualifications are often steep. “Also having a line of credit is like having a credit card for your business,” Leonard adds. “There are limits to how much you can use.”

Crowdfunding Options. Websites that offer crowdsourcing typically ask you to share your story, the amount of money you’re trying to raise, and how the funds will be used. “Traditional crowdfunding is not an investment, such as debt or equity, but rather more akin to a donation,” says Adrian Mak, CEO of AdvisorSmith, a small business research website. As such, you won’t be expected to repay the amount given in cash. Instead, you might offer perks to those who contribute, such as free soda or a meal discount. “The hardest part of crowdfunding is finding backers and telling a compelling story,” Mak says. “For pizzerias which are important in their communities, they may have natural ways of getting the word out such as through youth sports leagues that frequent the pizzeria.” 

Before choosing a loan option, it can be helpful to look at your current budget, any extra cash resources and future sales forecasts. You might even speak with an advisor or loan officer about possibilities that could best suit your place. The extra legwork upfront can reap better benefits in the long term.

Best Practices for Informal Lending

If you borrow from family and friends, it may seem simple to set up a loose arrangement. Keeping details vague, however, can lead to struggles later. “Not having a clear agreement that’s in writing can yield some pretty ugly battles and legal issues down the road,” says Tom Thunstrom, a small business finance analyst at Fit Small Business. 

For best results, get the following in writing:

• The amount borrowed
• Whether the friend or family member is getting any ownership stake
• How the repayment will be made
• The timeline for the repayment

If possible, have an attorney vet the agreement to make sure it is fair to everyone. “It may cost money on the front end, but it will more often save the potential for issues later,” Thunstrom says.

Rachel Hartman  is a freelance writer who covers small business, finance and lifestyle topics.