Using Gift Cards to Finance Your Restaurant
“Would you like fries with that?” It’s question uttered by many cashiers, every day, to every guest. Given that the average American eats almost 30 pounds of them a year, chances are the answer is yes, which means having a functioning fryer is a must for many fast casual restaurants.
But like any piece of commercial kitchen equipment, fryers can be temperamental and give up on you when you least expect it (sometimes in the middle of a busy lunch service, most likely).
When a piece of kitchen equipment, like a fryer, breaks, or when a restaurant is knocking it out of the park and wants to upgrade to increase capacity, there are plenty of financing options around:
Cash: A restaurant might have a little money put aside as a “reasonable reserve” that it can dip in to—great in theory, but given the slim margins and seasonal revenue, this is not something that can be relied on.
Bank loan: It might be possible for a restaurant to get the bank to loan it the money, but if the restaurant is looking to spend $5,000 to $50,000 on some new equipment, it might not hit the bank’s minimum threshold for lending, and even if it does, there will be origination fees, rigid payments, and a collateral requirement (often the owners personal property).
Short-term cash advances: These will typically give a restaurant the money it requires and then take a percentage of its credit card sales, direct from the restaurant's merchant, until the funds have been repaid. The interest charged is usually very high and this puts a strain on cash flow.
Here’s another way:
Gift Cards: Most restaurants probably already sell some type of gift card. A consumer is trying to pay the restaurant now for goods and services that they do not want until some future date.
Why are gift cards so good?
Gift cards don’t just rock because the restaurant gets money now for services later. Gift cards are also much, much cheaper to service than any form of debt. Even if a restaurant were able to get a loan with 1 percent interest, to borrow $10,000 for a year, it would need to repay $10,100. With a gift card, a restaurant is already paying for its rent, operating expenses, back-of-house labor, and management salaries by serving regular guests. Therefore, the cost of providing a meal to a gift card holder is just the food cost—typically around 25 to 30 percent of the meal price. To service $10,000 in gift cards can therefore cost as little as $2,500, considerably less than $10,100.
In addition, not every gift card sold will be used in full. Industry statistics show that around 20 percent of gift cards sold are never redeemed (people forget about them, move away, loose them). So really, of that $10,000 in gift cards sold, a restaurant will only need to service $8,000, or $2,000 in food costs.
How do you sell $10,000 in gift cards?
A restaurant can try pushing gift cards around the holidays but it would be hard to rely on these sales to finance equipment costing $10,000. It would require a focused and dedicated marketing campaign and social media, strategies to enhance sales, such as “flash sales” offering more for less, and a seamless payment/checkout process. If that was all a restaurateur was doing, they might be able to do it. But of course it’s not. They are running a restaurant—managing staff, ordering inventory, doing the books. However, if a restaurant can sell a single, large gift card at a discount and leave the recipient to on-sell the gift card in smaller denominations to multiple people, gift cards can be the best possible way to finance kitchen equipment, heck, to finance anything a restaurant might need.