How to Finance Expansions, Franchises or Ongoing Restaurant Operations

Getting funding for restaurant expansions, starting new chain operations or buying franchises is an issue that many successful restaurant owners face. Customers often enthusiastically endorse their favorite dining spots and swear that they would invest if given the opportunity, but these promises seldom come to fruition in the real world. Owners need to raise funds for any business expansion using traditional business loans, angel investors or creative financing strategies.

Franchising Your Operation

Franchising your restaurant could be an effective way to expand your operation, but you will have to accept trade-offs that limit your control.

  • Franchising is a business operation that might be different from running your restaurant.
  • Business skills are essential for franchising success.
  • You will need a highly organized franchise plan that clearly defines legal responsibilities, codes of conduct, preparation methods and service expectations.
  • If your concept works well, franchisees will realize most of the profits and benefits of success in exchange for financing your expansion plans.

Angel Investors

Investors tend to specialize, so if you seek funds for expansion from investors, you can expect a high level of scrutiny. Investor entrepreneurs like to stay involved and give business advice, so think about whether you can accept this level of outside input before you seek financing in this way.

  • Expect to write a detailed business plan to justify each expense.
  • You will need to consider due diligence, conduct exhaustive market research, assess competition and estimate income from your expansion plans.
  • Angel investors check your business model thoroughly, so expect longer decision delays than getting approved for business loans.
  • Most investors will want to have their say in business decisions, so expect them to test your limits by criticizing your current restaurant operation.

Cutting Costs to Strengthen Financial Reporting

You should cut costs, implement a strong management system and get your financial records in perfect order before trying to find investors or applying for loans. Investors and commercial banks tend to favor restaurants with long track records of success, consistent financials and principal officers who have excellent personal credit and earning histories.

  • If you seek to buy into a franchise, banks and investors prefer proven franchise operations with brand-name appeal and multiple locations.
  • Your choice of a franchise could help or hinder your ability to secure a loan or attract an investor.
  • Banks seldom offer commercial loans without significant collateral.
  • Owners might need to raise at least 20 percent of the money they need for their expansion plans.
  • SBA loans could offer better prospects for approval because the government guarantees part of these loans, which makes them less risky.

Government Grants, Tax Incentives and Merchant Cash Advances

Alternative financing options include using your home or personal collateral to secure a loan, getting money from friends and family members, applying for government grants or getting preapproved for merchant cash advances.

  • Government grants support restaurant remodeling to make facilities ADA compliant, cut energy usage, rebuild crumbling neighborhoods or encourage minority business owners.
  • Some franchisers offer internal financing, but you will usually pay higher interest on these loans.
  • Some restaurant owners tap into their 401(k) retirement accounts instead of seeking loans.
  • Tax incentives might help to finance expansions by encouraging solar energy development, urban renewal, retrofits for public safety and other government-sponsored initiatives.
  • Restaurant owners with excellent credit often enjoy a line of business credit that they can access through merchant cash advances.
  • Veterans can get business financing through the Patriot Express program, which offers loans up to $500,000 for active-duty military members who plan a transition to civilian life and spouses and survivors of veterans.

Choosing a financing strategy depends on the kind of restaurant owner looking to expand and also the amount of risk the owner wants to absorb. Starting or joining a franchise becomes easier when you have strong management tools in place to target waste, control inventory, delegate responsibilities and automate your operation. Activist restaurant owners often do poorly as leaders of franchises and chain operations because they tend to micromanage their businesses and get buried in details. Successful expansions require more of a CEO-type of owner who can look at the bigger picture, delegate authority and hire talented staff to manage details. Choose your financing strategy based on your management style for the best chances of success.