• Calla Norman

How Online Lenders Financially Crush Restaurants

Updated: Jan 11


Kiin Lao and Thai Eatery restaurant in Pittsburgh

Online lenders are responding to a very real need for small businesses like restaurants to access capital they need to grow, or to get through tough times. However, how much trust can we put into this kind of fast money?


Read on for the details on how online lending works, what factors lead restaurants to use it, and other alternative sources to funding that won’t put you deep in debt.


The DL on Online Lenders


Online lenders are a variation of a merchant cash advance, which is a type of online lending for small businesses. Essentially, it allows a business to quickly and easily take out money, but as we’ll get to in a bit, this money often comes at a price.


With an online lender, you can take out $300-250,000 - the amount you’re allowed to take out is based on your credit card sales. This loan can be processed almost mind-bogglingly fast, which makes it pretty attractive to restaurants who need money now.


On these online lenders, you pay a flat fee on your loan, which are usually 1.10-1.16x the borrowed amount. So, say you borrow $100,000 - you’ll be paying back $116,000. That’s a fee of essentially $16,000 you’re paying to the online lender! While this isn’t the worst fee you can get from a merchant cash advance, it’s still pretty significantly pricey money.


To pay back this loan, online lenders take a percentage of your daily credit card sales until it’s paid back. This is nice on some levels, because you pay a bit less on slow days, and more on busier days, but you also don’t have control over what and when you’re paying back.


What kinds of situations do restaurants use online lenders for?


Restaurants take out online loans when in crisis


When the coronavirus pandemic first began shuttering restaurants in spring 2020, many restaurateurs were struggling with keeping cash flow up so that they could keep their restaurants afloat.


One means through which businesses could access funding to pay employees, pivot their operations, and deal with rising costs was to take out loans from online lenders. While many lenders helped distribute PPP lending when it was available, they quickly switched back to their credit options.


To be honest, having as expensive of loans as these when restaurants are in crisis seems like they’re taking advantage of a bad situation. It also doesn’t set up restaurateurs for success down the line, just acts as a very expensive Band-Aid.


Need to take out quick cash for working capital


On a lighter note, sometimes restaurateurs are led to online lenders because they need working capital quickly. Perhaps there’s a big order coming in, like a wedding party, and there currently isn’t enough cash flow to cover the cost. That’s a situation in which quick money might be attractive.


With these online lenders, this means you’ll be paying off a pricey sum for a perhaps inconsequential reason. In this case, it may be a better idea to look into a business line of credit through a bank, which would have a significantly lower APR. Through a bank, the average business line of credit would be 7%. That being said, if you’re a young business without much financial history or collateral, it might be difficult to access a line of credit.


Wanting to expand, but can’t get a loan


If your restaurant does super well out of the gate, and you’re looking at expansion, you’re obviously going to need some kind of capital to make that happen. However, even if you’ve got the revenue and projections to prove that your growth project is a sound investment, it can be difficult to access a loan from a bank.


Take Iron Born Pizza, for example. This Detroit-style pizza restaurant in Pittsburgh grew rapidly so that they were looking to expand to a second location. However, the owner, Pete Tolman, had problems getting funding from a bank because of how young the business is, so he took out merchant cash advances. This saddled him with some pretty heavy debt.


Pete decided to run a Honeycomb crowdfunding campaign, which allowed him to refinance this debt to a more manageable APR (which was paid back to his customers, not a bank), and to pay off his new equipment in full.



Depending on the growth project, an expansion can cost hundreds of thousands of dollars. You don’t want to pay 1.10 to 1.16 times that amount in debt!


How do online lenders hurt restaurants?


As we’ve mentioned before, online lenders might seem like a great option at first for some quick money, but it can harm more than hurt your restaurant.


First, there’s the problem with the high fees. For an industry that operates on the tiny margins like restaurants do, having these high fees to pay off can be detrimental to your cash flow situation and your financials in general!


This is also an issue when it comes to the method through which online loans are paid off - the credit card percentages. This even further ties up your cash flow and makes it difficult for you to operate your restaurant.


What other financing options are out there besides online lenders?


Luckily, if your restaurant has struggled with financing in the past, and you think that an online lender is the only option left, you’re dead wrong. There are loads of other alternatives, including crowdfunding!


Many of the reasons why restaurateurs turn to merchant cash advances are because traditional forms of financing such as banks or the SBA are leaving them out in the cold. Whether it’s because they’re a young business, they’re in a risky business like the restaurant industry, or they don’t have the assets or collateral to back up a loan, these often make it difficult to access necessary money for growth.


Well, the good news is that when you crowdfund a loan through a platform like Honeycomb, none of these are factors than could inhibit your potential to get approved for a loan. We look at the whole picture - your entrepreneurial background, your standing in the community, your business plan, those kinds of things.


Refinancing loans


If you’ve taken out a loan through a high-interest online lender, you might be looking for a way to ease the load of that interest. You can easily refinance one of these loans with a Honeycomb campaign!


There are two major perks to refinancing with Honeycomb. The first is that it makes it possible for you to shoulder that debt with a much smaller interest rate, so instead of paying 200% you’re paying more like 5-12%.


The second benefit to refinancing with Honeycomb is that interest doesn’t go to us, or any other bank. Instead, it gets paid back to the investors who choose to invest in your business! Wouldn’t you rather pay back your neighbors than some faceless online lender?


Don’t let online lenders get you down


And let your customers, family, and friends lift you up! Running a Honeycomb campaign can help you grow your booming restaurant and form tighter connections with your community in the years to come. To learn more, fill out the form below!