Restaurants can be a challenging business to start. When you’re starting a new food business, you’ll need a range of equipment – from a commercial ice machine to a 6-stovetop commercial range, depending on the nature and type of your business. You’ll also need funds for the decor, lighting, and furniture. Employee salaries and overheads like gas and electricity are a source of monthly expenditure as well.
Investing personal funds can be difficult as the initial capital required to start a new establishment can be quite high. The break-even point for a new restaurant can be as long as 18 months to 2 years. Coupled with the long wait time to make your restaurant successful, it is common industry knowledge that most restaurants fail within two years of launch.
So how does a prospective restaurateur go about procuring funds to establish a new business and make it a success? Some of the ways to go about financing a restaurant are below…
Smart Money Funding
Smart money is the capital invested in a business by investors who have a high degree of faith in its success. By proving to your backer that you can run your business smoothly, you can procure funding for it.
There are a number of loan types that can help you set up your business, such as:
Brick-and-Mortar Bank Loan
These loans have a long application process and often require you to put up collateral.
Lenders that provide alternative loans tend to use sophisticated technology to determine your credibility in repaying the loan.
Small Business Administration Loans
Provided by the federal U.S. Small Business Administration, an SBA loan helps you expand your business with a guarantee by the federal organization, and also includes ‘Lender Match’, a program that allows you to find lenders for your business.
Commercial Real Estate Loans
These loans are provided by banks, private lenders, insurance companies, pension funds, and even the SBA to purchase income-producing property used to conduct your business.
Ask Friends or Family Members
Generous, well-off, or interested friends and family members can also be approached to finance or invest in your business.
Other Viable Options
Securing capital for your restaurant business can be tough, but if a loan isn’t the way to go, you needn’t fret. Here are a few other viable options for you to ensure your restaurant hits the ground running:
Think more Kickstarter and Indiegogo than Gofundme. Crowdfunding is a surefire way to finance your small business, but it comes with a huge asterisk – public interest. By using small amounts of capital from a large number of volunteering individuals, crowdfunding helps you finance your business with the assistance of many generous investors. This can be done through social media as well and is regulated by the SEC to ensure neither party is defrauded.
Financing can be an excellent option for your business. However, which equipment you choose to finance will depend on its necessity for your establishment and its affordability according to your budget. For example, commercial ice machines are indispensable at a bar, but a commercial convection oven may be optional. The inverse applies to a bakery.
Merchant Cash Advance
An MCA is a high-risk cash advance from dedicated MCA providers that is repaid by daily credit card sales at your restaurant. The last resort for smallest businesses, MCAs come with high annual percentage rates and are usually repaid between 3 months and 1 year from the date of receipt.
Business Credit Line
Similar to a regular credit line, business credit lines are provided by most banks and credit companies to finance your business over a short period. Much like a business credit card, lenders set a limit on the amount you can borrow every month. A more stable option than an MCA, a business credit line also comes with the standard APR and a mutually agreed-upon contract.
Purchase Order Financing
Purchase order financing allows business owners to pay for the raw material required to produce a service before the service is provided. Purchase order finances are charged to your clients’ or customers’ accounts before they receive service from your restaurant.
Before zeroing in on the best equipment, financing option, and operations for your brand-new restaurant, make sure to do ample research on every requirement. New equipment for an up-and-coming restaurant is most cost-effective when it strikes a balance between quality and price without sacrificing longevity. Financing your business, on the other hand, is a tougher decision that requires a comprehensive analysis that factors in your debt, credit history, your experience in the industry, business revenue, and other financial factors.