How to Finance Your Restaurant Startup

Banks aren’t giving out money to restaurpreneurs, so you’ll need to get creative to fund your dream.
restaurant-finance
Explore the many available options for financing your restaurant startup. (Photo: Monkey Business Images/Shutterstock)

Starting a restaurant takes capital. Unless you have deep pockets, finding that capital can be one of the most challenging aspects of opening your business.

Having a stellar restaurant business plan will help no matter what avenue you pursue. But since banks rarely dole out money to first-time restaurant owners, you’ll likely need to get creative — and be persistent and patient — to find your pot of gold.

“When the clouds are darkest is sometimes when that bit of sunshine comes through,” said Stephen Zagor, dean of business and management programs at Institute of Culinary Education.

Here are your main options.

Related: Antonia Lofaso of ‘Restaurant Startup’ on What Makes a Restaurant Succeed or Fail

Equity financing

Most restaurant startups are funded through equity financing, said Zagor. This type of financing gives the investor some degree of ownership interest in your business.

You can probably skip right past venture capital firms. “You have to have a track record or past success in order for them to be interested. They’re looking for the next great thing,” said Zagor.

A better bet: angel investors. These individual investors — usually family members or friends, in the case of restaurant startups — may give as little as a few thousand dollars each, or you may have a rich uncle who gives more.

Ideally, the investor will be paid down over time until the operator becomes the full owner. Otherwise, stay away from the deal, advised Zagor.

“If you never become the main owner, you’re always working for somebody else.” -Stephen Zagor

No bites from family or friends? Talk up your startup to anyone who’ll listen. You never know where you’ll find someone who’s looking to invest in a great restaurant concept, said Zagor. “You are in a business that is really exciting and interesting to many, many people. If you talk it up — always be selling your idea — you never know.”

Another strategy: “If you’re far enough down the road you could have an investment party,” said Zagor. Find a space, have the chef cook samples and invite potential angel investors.

You can also run ads for an investor. Zagor suggested running them under the “Business Opportunity” section of the classifieds and not the “Capital Wanted” section.

Related: The Four Most Common Reasons Restaurants Fail

Personal loan

Family or friends who might not want to give you money may be willing to lend it. And if they are, they’ll probably give you favorable terms and a low rate.

Just remember, said Zagor, that the person who loans you money “may not come around your house on Thanksgiving if the business isn’t doing as well as everyone hoped.”

Bank loan

bank loan

‘The package you have to prepare for an SBA loan is really thick and really elaborate,’ said Stephen Zagor of the Institute of Culinary Education.(Photo: Amnarj Tanongrattana/Shutterstock)

A bank may seem like the obvious place to go for money, but don’t count on getting a bank loan to open a restaurant, especially if it’s your first business.

“It’s almost impossible unless you have a strong personal relationship with that bank from other things or you have collateral, usually two or three time the value of the loan.” -Stephen Zagor

Banks aren’t interested in taking risks, and starting a new restaurant is, after all, risky. If you’re lucky enough to get a commercial loan, you’ll likely need to sign a personal guarantee that could put your house, stocks and bonds and other assets in jeopardy if your restaurant fails, depending on the type of guarantee.

A loan guarantee from the Small Business Administration can help you land a loan. These guarantees aren’t loans per se; the checks are written by an SBA-approved lender. But they remove some of the risk for the lender, making a loan easier to get. The guarantees themselves aren’t easy to get, however. The requirements are strict. You’ll need relevant business experience, a good credit history and a percentage of the loan amount in cash, among other things.

“It’s a very high interest rate, usually way above prime, and there are limits to the amount that they will give based upon the winds of what’s going on in the country,” said Zagor. And be forewarned: When you apply for a loan guarantee, “The amount of paperwork is enormous.” Plus, it can take months to get approved. Nevertheless, it’s an option.

Microfinancing

If you need a relatively small amount of money for working capital, perhaps to bridge the gap between what family or friends will loan you and the amount you need, or you need money to buy furniture or an expensive piece of equipment, consider microfinancing.

These loans usually max out at around $50,000 and are offered through nonprofit organizations such as Accion, LIFTFUND and Opportunity Fund (based in California) that aim to strengthen communities and local economies. The SBA also has a microloan program. The average SBA microloan is about $13,000.

The terms are relatively expensive, according to Zagor, but the lender may also provide guidance and training along with the loan. Another plus: Paying back the loan can help you establish business credit.

Owner financing

owner finance

Owner financing is becoming more popular for startups and involves buying an existing restaurant. (Photo: Rawpixel.com/Shutterstock)

According to Zagor, this option, also known as seller financing, is becoming more popular. “It’s a way of getting into the business with very little capital up front.”

Here’s how it works: You buy an existing restaurant business and the owner takes back a debt. (He is, in other words, loaning you money.) You change the restaurant concept to make it your own.

“It’s structured so that at some point you’re paying off the debt out of profits so you eventually end up owning it,” said Zagor, who noted that a lot of waiters and waitresses start restaurants this way.

You’ll probably need a good credit score in addition to a persuasive business plan to seal the deal. If you can’t pay the debt in time, the owner gets the business back.

Related: 6 Legal Mistakes Small Business Owners Make (and How to Avoid Them)

Crowdfunding

If you’re willing to pour significant time and effort into marketing your concept on a platform such as Kickstarter, you can raise money through a crowdfunding campaign. In rewards-based crowdfunding, backers receive perks (such as free food) and premiums in exchange for their contributions — and ideally become loyal customers.

In recent years crowdfunding platforms specifically for restaurants and other food businesses have cropped up. These platforms, such as PieShell, EquityEats and Foodstart, may charge a lower percentage of what you raise than mainstream platforms do. And of course, they appeal to people who want to support a food business.

Equity crowdfunding, in which individual investors receive equity in your business, is another option. Be prepared to pay thousands of dollars in legal, compliance, security and other fees if you go this route.

Credit cards

resized-creditcard

Although it is not the best option, using credit cards to fund your startup is a last resort option. (Photo: cosmic_pony/Shutterstock)

If a combination of money from your savings plus any money from friends and family gets you close but no cigar, or you need to top off what you’ve managed to borrow, you may decide to go the last few miles on credit. It’s not ideal, but again, it’s an option.

The amount of credit you’ll be able to access is likely modest. “Most of the time it’s not going to be enough unless you’re opening very small restaurant or food truck or you only need it to top off what you’ve already borrowed,” said Zagor. He advised trying every other avenue before using this approach.

“Rates are really high. You’re mixing personal credit with business credit. You only do it as one of those last resorts.”

If your itch to open a restaurant is strong enough and so is your concept, you’ll find a way to fund it. Just don’t go so far as to bet the house on it, warned Zagor. “You don’t want to lose everything you own for the dream.”

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