Restaurant Funding – Financing Options for a Restaurant Business
The amount that you require in startup capital for your restaurant business will depend on many factors. These include your concept, scale of operations, necessary equipment, inventory purchases and the risk that you want to take on in terms of having funds set aside in case things don’t go as expected.
Startup costs for a new restaurant can run into six-figure for some operators but can be minimized down to the five-figure level for other startups. Either way you will need access to startup funds or your dreams will not get off the ground at all.
If anyone is going to take a risk by financially backing your restaurant venture then you will have to prove to them that what you have planned is viable and that they will get a return on their investment. Restaurants are known to have a high failure rate so the onus is on you to prove that you are an exception. It is essential to have a well-researched restaurant business plan if you are serious about convincing others to trust you with their funds.
Always plan for your restaurant funding needs well in advance as you will undoubtedly encounter long application times or other roadblocks while you wait for the cash to appear.
Remember that when you start a restaurant you will not only need to meet your startup costs up to the point where you open your doors for business. You will also need to budget for operating costs during the first few months while income is slow and you need to think about your personal living costs.
These are a variety of ways that you can fund a restaurant business. Let’s consider some of the more common restaurant funding options that are out there so that you can compare all the options.
Personal Assets and Savings
This is the safest way to proceed if you can afford it. You may have saved in a bank account, some assets that you can sell or some investments that you can cash in.
Friends and Relatives
If you can arrange to get funding from people who you are close to then this method is also among the best options that you have. Friends and relatives are likely to give you low interest rates and relaxed repayment terms. Be very careful with this approach though as it would be devastating to damage relationships with loved ones over a financial matter.
You may find that you are simply unable to get access to the amount of startup capital that you need to start a restaurant alone. By taking on a partner you can share the financial burden. However you will have to be able to cooperate with any partners that you take on as your business plans will never work out if you don’t see eye to eye.
You may be able to find an investor willing to invest funds into your restaurant in return for an ownership stake. Getting venture capital like this is often not easy for small businesses though. If you do find an investor it is likely that they will come through your personal network of friends and associates or through your restaurant industry connections. As with a business partner, investors will want full access to your business records and they may want to have some say in key management decisions.
Many investors like the idea of being able to say that they own a restaurant. They can have a place that they can be proud to bring friends and can possibly receive special treatment while they dine there. This is a good selling point.
Loans from Banks or Finance Companies
Banks and other financial institutions often lend money to small businesses such as restaurants. At the very least it would be wise to establish a line of credit with a local bank just in case you needed to access funds at short notice. Lenders will assess the viability of your business model and they will also want you to put up some of your personal assets as collateral. Talk to the banks that you have a good credit history with first.
One way to reduce your expenses during the early days of your restaurant’s life is to ask your landlord about deferring some of the rent before you sign a lease. During the crucial first few months, your revenue levels may be slow to grow. In the right market, you may be able to ask for a rent-free period. Alternatively, you could ask for the first few month’s rent to be reduced by a certain amount that can be added on to future rent payments, possibly in the second year of the lease.
Equipment and Supplies
It is likely that a large part of your startup costs will be related to equipment purchases as well as buying initial supplies. You may be able to get financing on certain equipment items so that you can pay for them over a period of several years rather than having to pay the full price amount up front. Leasing equipment is also a good idea.
Suppliers are usually willing to let you pay invoices up to 30 days after supplies are delivered so this also gives you some flexibility to delay payments.
In a slow economy, you may find that there are plenty of contractors looking for work. It may be possible to have them do the remodeling work that you need for a minimal amount upfront if you can arrange to pay it back slowly over a longer time period.
There are government grants and loans available to entrepreneurs wanting to start small businesses. There is always a catch though and you will probably find out that you are not really eligible in some way. Even if you do see an opportunity then you will find that the application process is lengthy and you will have many limitations or restrictions placed upon you.
The US Department of Housing and Development sometimes targets run down urban areas for development. Grants are available for renovating run down buildings in such areas although these locations are usually not the best spots to be opening a new restaurant.
Credit Card Financing
As a last resort, many entrepreneurs these days are using credit cards to finance themselves into new businesses.
You would be best to leave this option for a rainy day that may come some time in the future. Although, if absolutely necessary then you could fund a small percentage of your startup costs with a variety of credit cards. Interest rates on credit cards are higher than other funding options so if you do go with this method make sure that you are confident in your ability to be able to start making repayments within a fairly short time period.