Bringing the vision of your new restaurant to life involves everything from thinking of a concept and taking stock of your market to choosing a location and making sure you have the right team in place. Despite even the best laid plans, however, getting them off the ground could be challenging without the funds to do so.
Securing funding for your restaurant build-out is not always easy. It’s gotten harder to lock down traditional SBA Loans since the great recession hit in 2008, according to Nerdwallet.
At the same time, there are more options available to small business and restaurant owners than ever before.
Some means of financing are more conventional, while others are out-of-the-box, offering a more creative approach than we’ve seen in years past.
Whatever the case, figuring out what works best for you and your business can be overwhelming. Here are some types of financing to consider, and the pros and cons for each.
Traditional Commercial Term Loan: One of the most basic ways of securing finance for your restaurant, is a traditional term loan, which is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The word “term” in “term loan” comes from its set repayment term length, which will typically be one to five years long. If you have a high credit score, you’ll be well positioned to secure this type of financing, which will offer lower rates and monthly payments if you do have flawless credit. If your credit is less than stellar you may have trouble getting approved or at best be stuck with a high interest rate. The pros involve a set payment structure and the fact that this type of loan can be used for a wide range of purposes and offers longer terms than short-term financing. There are often pre-payment penalties and not everyone is able to qualify.
Business Line of Credit: Like a credit card, a business line of credit features a maximum credit amount you can use for your business and you’ll always have access to capital as you pay down the credit line. The business line of credit is flexible in this way and interest is only assessed as you borrow. However, banks have higher lending standards and you may not borrow as much money with this loan as compared to others. Business lines of credit can be secured or unsecured. Secured credit lines usually have higher maximum credit limits and lower interest rates but you usually must provide collateral. On the flip side, an unsecured line of credit doesn’t require collateral. But this is harder to secure as lenders tend to heavily weigh a business’ credit, which includes its history of paying past debts. Lenders may also need to evaluate the personal credit of the owner if there isn’t enough business credit already established.
Small Business Loan: The most conventional funding for startup restaurants is a small business loan from the Small Business Administration. These can be hard to acquire. SBA loan approval can be a lengthy process and banks usually require collateral as a condition of funding. One unique feature of this loan is that you can get approval even if you have borderline credit, with a credit score as low as 650, and these loans usually have lower interest rates. The 7(a) variant of an SBA loan can be used to buy real estate, equipment and maintenance, or as additional capital for your business. The purpose for which you are securing this type of funding greatly factors into how much time you’ll have to repay the loan. Real estate loans can be paid back within a 25 year-term, while equipment and working capital loans must be paid back in 10 and 7 years, respectively.
Merchant Cash Advance: A cash advance allows you to purchase a short-term cash loan and withdraw money from the bank. This isn’t exactly a loan but a good option in case you need money immediately for your business. They are usually tied to the receivables of the business and require a regular automatic payment that is drawn from the business bank account. The downside? You’ll have to pay back the loan in addition to a fee and interest, which are often higher on a merchant cash advance than other loans since they are viewed as riskier than other types of financing and contingent on business performance and profits.
Crowdfunding: This is an interesting option for restaurant owners who want to create an online fundraising campaign. The problem? It often requires the restaurant owner to put a lot of marketing muscle behind the campaign to get the most exposure. This can mean upfront investment in advertising and publicity to promote the campaign, secure interest and hopefully achieve the targeted fundraising goal. It could also take a while before the campaign hits the mark to secure all the necessary funding. Most crowdfunding platforms feature numerous businesses, including restaurants, that are competing for the same online investors. So, if your concept isn’t different or interesting enough, a crowdfunding campaign may not provide you with the draw you are looking for. On the other hand, crowdfunding can be a great way to reach interested investors that you otherwise may not have access to. It also offers another way to promote and potentially pre-sell your restaurant to your target market by allowing you to showcase what you have to offer from your menu to your atmosphere and design. Plus, if yours is a concept that is innovative or if you are bringing a unique type of cuisine to market, consumers are likely to engage with your campaign and contribute – especially if you are sweetening the deal with the right incentives.
Recruiting Investors
How do you go about finding investors for your restaurant? What does this mean for the business and your ultimate ownership of it? Many serial restaurateurs have gotten their start by getting support from their immediate sphere of influence – friends and family – who invest money in the business. That comes with benefits, as you can often negotiate better terms when it comes to the equity share that you walk away from. This can also make for a difficult relationship, so may would prefer to recruit a professional investor.
No matter which route you choose, you’ll need to have some skin in the game first, so you’ll want to tap into savings or other assets like a Home Equity line of credit or think of other creative way to come up with the cash.
Owners from Loyal Nine restaurant in Massachusetts raised as much capital as they could from their own sources before finding a primary investor, cites Nerdwallet. First, they set aside a solid amount of savings after creating pop-ups and supper clubs to raise some initial funds. These dinners helped the owners address a few different needs – not just financing. They also allowed them to test drive their concept and cuisine on the local public and recruit interested investors. At any rate, Local Nine secured loans from family before they signed the dotted line with their investor – all to make sure they were able to retain as much equity in their business as possible.
Whether you choose to secure a traditional or non-traditional loan, go the more creative route or court outside investors, make sure you are prepared with the data and documents you need. Always have a detailed business plan ready to go that you can share with an investor or lender to get them as excited and invested in your idea as you are. It’s also a good idea to have the following documents available: a profit and loss statement, projected financial statements, ownership and affiliation documents, your business license, a history of your loan applications, and loan tax returns.
Securing the right level of financing for your restaurant is extremely important. There are many different funding options available in today’s market that can help your restaurant take off from idea to project phase – all the way until it lands in a great grand opening.