Funding Your New Restaurant
Start-up restaurants are popular—yet expensive—enterprises. Start-up costs vary enormously from case to case, but often range from the tens of thousands all the way up to millions of dollars. Most prospective owners do not have the total sum of cash available right up front. However, this does not necessarily dash all hope of ever opening your restaurant. Many people take advantage of one or more borrowing options when planning their new restaurant.
Determine How Much Start-up Capital You Need
Restaurant owners require a good deal of start-up funds for a variety of purposes. Before you can really get started, you need to get an idea of how much your new business endeavor is going to cost. Consider the following potential start-up expenses and use them as a launching pad to determining how much money you will need to finance your new restaurant.
- New construction. Building a new restaurant is probably the most expensive way to get started in the industry. Building materials, labor, and real estate costs can all add up to a pretty colossal sum.
» More on Buying an Existing Restaurant vs. Starting from Scratch
- Renovation. Renovating an existing building can also be pricey, especially for purchases like commercial kitchen equipment, furniture, a point-of-sale (POS) system, décor and other furnishings.
- Employee wages. Whether you are building your restaurant from the ground up or simply paying a few employees to help out before opening, some of your capital will go to those working for you along the way. » More on Employee Wages and Benefits
- Marketing capital. Restaurant owners often launch their marketing campaigns well before opening day. Marketing and advertising can incur a significant cost, so thorough planning is critical. » More on Restaurant Marketing
- Commercial kitchen equipment. A new restaurant requires reliable kitchen equipment and supplies. Every restaurant is different, so consider your menu, service-type and kitchen layout before purchasing equipment. » More on Procuring Restaurant Equipment and Supplies
- Beginning inventory. Your first purchase of food inventory will likely be a large one. Many operators like to have a little extra on hand at first, to act as a cushion for any unexpected high sales days during the first week or so of business. This may involve finding and securing a food vendor, as well. » More on Choosing Food Vendors and Accurate Ordering
- Working capital. Once you open, you will need some cash reserved for the start-up period—the period during which your restaurant has more outgoing expenses than incoming cash flow. This reserve is commonly referred to as working capital. You should plan to have a year or more worth of working capital available for the period before your restaurant actually becomes profitable.
Plan Before Financing
Planning your new restaurant involves a lot of research and preparation. Financing your restaurant is no different. If this is your first restaurant endeavor, you will undoubtedly need to work even harder to convince your lenders—whether they are bankers, investors, or family members—that your business plan will be successful. Consider the following tips as you prepare to explore your financing options:
- Maximize your own investment. Successful restauranteurs have invested themselves in their business, both personally and financially. Be sure you commit your own money before asking anyone else to do so. This indicates your commitment and lowers the amount you may need to borrow. Demonstrating vested interest makes you a more likely candidate for loans, as well.
- Record all pertinent experience. Any experience in the food service industry, business management, accounting or culinary arts are important—even better if you have managed or started a successful restaurant in your past. Investors will study your past performance when determining whether to grant your loan request. Experience also prepares you for the rigors of running a restaurant.
- Assess your location. Restaurants can fail simply because of location. Sometimes lenders refuse to grant financing options simply because of a historically poor location. Additionally, make sure you can afford the lease or mortgage terms in your chosen location before starting your restaurant. » More on Choosing a Location for Your New Restaurant
- Develop a business plan. The business plan gives a general description and purpose of the restaurant, providing research and insight to support the restaurant concept. A business plan is integral to gaining financial support from lending institutions, as well as educating and preparing the restaurant owners and operators.
Explore Your Financing Options
Once you have an estimate of your restaurant’s start-up costs, you can approach the matter of financing your new business. Some people have all the necessary cash on hand already, or perhaps plan on using their retirement savings to fund their new business. However, chances are good that you will need to borrow the majority of your start-up capital. The following list outlines the most common options for an owner looking to fund a new restaurant:
- Inherent risk factor. Commercial banks typically find start-up restaurants extremely risky to finance, since more than 25% of new restaurants fail within the first year of opening. Bank loans are risky for restaurant owners as well. If the restaurant business does go under, the owner is still responsible for repaying the loan.
- Bias against first-time owners. Lenders examine restaurant loan applications closely, and first-time owners usually confront skeptical lenders when presenting their business plans. For subsequent openings, the process becomes much easier. Lending institutions prefer applicants who can submit evidence of successful past performance.
- Probability of rejection. Many restaurant owners are rejected for loans the first time. Do not be afraid to try again at a different bank. With every attempt, refine your argument and perfect your business plan. It may take a while, but perseverance will usually reward you with the loan you need.
- 7(a) Loan Guaranty Program. 7(a) is the SBA’s most basic and most common loan program. These loans are available through commercial lending institutions, and most American banks participate as lenders in this program. Lenders typically grant loans up to $2,000,000.
Learn about the SBA 7(a) Loan Program
- CDC/504 Loan Program. The CDC/504 loan is a long-term, fixed rate loan program, typically repaid over 10-20 years. Certified Development Companies (CDCs) are non-profit groups who aim to boost economic development in their regions. CDCs around the country work with the SBA and government lenders to provide funding to small businesses focusing on new construction, renovation, expansion projects and new equipment purchases.
Learn about the SBA CDC/504 Loan Program
- 7(m) Micro-Loan Program. This program offers loans of up to $35,000 for start-up or growing small businesses. The SBA makes funds available to intermediary non-profit lenders, who then grant loans to small business borrowers. The average loan size is about $13,000, with a maximum payback term of six years. Lenders usually require some form of collateral for a micro-loan.
Find a Micro-Loan intermediary lender in your area
- Present your operational skills. Many investors are impressed when the owner approaches them with tangible skills, such as culinary skills or a background in accounting. Any experience in the food service industry is extremely helpful as well, not only for your investing parties, but for your own success.
- Offer incentives. Usually, investors receive equity in the restaurant business. This means that investors share a portion of the profits from the business, but lose only their investment if the restaurant does poorly. Still, some restaurant owners recommend giving investors something valuable in return for their investment. If you are able to pay back a portion of the invested money at a decent interest rate, you may attract more investing parties. However, being locked into interest payments may present a hardship for a restaurant owner who is just starting out. Always look at what is best for your situation.
- Look for several investors. Instead of trying to find one or two investors to cover your entire start-up funding needs, look for several investors to contribute smaller amounts. This is usually more agreeable to potential investors and an easier sell for the restaurant owner.
Traditional Bank Loans
Commercial bank loans are the most common form of start-up funding for aspiring businesses. However, securing a loan from a bank as a first-time restaurant owner has its challenges:
SBA Loan Programs
When turned down for a typical commercial bank loan, or when looking for additional loan resources, many restauranteurs turn to SBA loans. The SBA—the U.S. Small Business Administration—does not offer loans directly, but guarantees loans made by private and public institutions. Thousands of American banks grant SBA loans, and even the same bank that dismissed your application for a traditional loan may be able to grant an SBA loan. Factors affecting eligibility for an SBA loan include the type of business, the size of the business, how the funds will be used and the availability of funds from other sources, such as personal financing or investors. Below are the most common forms of SBA loans:
Another option for funding your start-up restaurant is receiving financing from investors. Restauranteurs often present their business plan before acquaintances within the industry and other willing parties. Gaining investors requires finding the right contacts and soundly proving your ability to make your new restaurant a success. Some tips for finding investors include the following:
Anticipate Your First-Year SalesAs you prepare to gather funds for your new restaurant, it pays to have an idea of how much money you can expect to make during the first year of operation. Compare it to your anticipated start-up and operating expenses. This is a good way to plan how much start-up capital you should have on hand.
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- Legal Structures in the Restaurant: Sole Proprietorships, Corporations, Partnerships and LLCs
- How to Open Franchise Restaurant: A Quick Guide
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- Organizing Your Restaurant as an LLC: Pros and Cons
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