Restaurants don’t just appear out of thin air. They need money to start out and, in some cases, millions of dollars. Understandably, the steep cost of starting a restaurant makes it a daunting process to obtain funding, unless you are independently wealthy.
You probably have heard the great sacrifices people have made to open their own restaurant. The fact is you can get a mortgage on a house much easier than a small business loan for a restaurant, even if you have an immaculate credit record. Financiers know how dicey it is to predict small business success, and they understand that the restaurant industry is especially brutal.
However, locating the money is a necessary part in opening the restaurant that you have always dreamed of. It is not a hopeless endeavor. But a first-time restaurant owner may have to get creative and perhaps even accept considerable personal risk. It also may require patience, as you don’t want to take the leap if your restaurant will start out under financed.
The initial steps to opening a restaurant are quite straightforward, and we cover them in other chapters. You must develop a concept that will attract enough customers to be profitable. You must write a thorough business plan. You must draw out an accurate budget of pre-opening expenses. After that, you should outline realistic projections of your business finances. You must scope out locations. Realism is your friend, if you want to make your dream a reality.
And You Must Find Funding
There is no one way that restaurants receive financing. Each financing situation and restaurant project is different, and we advise you to seek as much professional assistance (lawyers, accountants, & consultants) as you might need. But we do see some funding patterns for first-time independent restaurateurs. Each deserves investigating but there is normally no silver bullet. Funding a restaurant is often mix of many different methods.
Be prepared: the process can be frustrating and you should not necessarily take any setbacks as a sign that your restaurant will fail. You might not get funding because investors don’t believe in your concept, or the economy might just be bad, but as long as you believe in your venture and have done your due diligence, you should keep moving forward.
Owners Starting from Scratch
You have dreamed of opening a restaurant, and probably waited some time to commit yourself to your first restaurant. You have saved but not nearly enough to comfortably finance a restaurant on your own.
If you considered taking out another mortgage on your home, you may be in this kind of situation. If you could imagine periods of relying on credit cards, you probably share a lot in common with this type or restaurateur. Restaurants are starved for cash in the beginning from costs of the initial setup.
For these first-time restaurant owners it is all about timing and compromise.
Working with Banks and Professional Investors.
You can go to a bank or professional investors, but unless you have a long history of managing a restaurant or other similar operations, they may turn you away or not offer you good terms. They may want your house as collateral. Of course, there are exceptions and sometimes, you may be able to seek assistance from the government or government-backed organizations. But you should test out the waters with banks and investors if only to get some feedback about your business plan.
Frequently, this kind of new owner must ask what level of investment they can put into the business and if they want to risk their personal finances (and their families).
This is what others expect too. The first-time owner normally will face more resistance if they put little of their own money directly into the project from the get-go. If you don’t buy in, how will others? Sometimes, this owner goes to family members or friends to make up any shortfalls in funding. This is a delicate matter and the owner has to establish what the person is to expect and what risk he or she is taking. There is also the possibility of damaging relationships if the business fails despite disclosing the potential for failure.
Indeed this group has to be the most creative and patient, but when the funding falls into place, they tend to have a better sense of the what a dollar buys in the restaurant industry and will have a better idea of how to spend the money wisely.
Restaurateur with Resources
Many come into the restaurant business not through a long history of working in restaurants but through a background in entrepreneurship, and a healthy love of food. This kind of restaurant owner may have worked in real estate or finance or banking, and probably has connections to interested parties based on prior business dealings. Access to loans may be easier but less needed. This owner may have collateral outside their house that they can use for a loan.
There are pitfalls for this group too, because they may underestimate the ups and downs of the restaurant business. Cash flow issues are a hallmark of the restaurant industry. Meeting payroll and paying rent keep restaurant owners up at night.
The business plan may fully take into account the expenses and volatility of the restaurant industry. If they finance the restaurant entirely on their own, they may not hear the criticisms that will prevent mistakes. Some may not even write up a formal business plan and have no strategic foresight. Essentially, this kind of owner may get in trouble if they function in a bubble. A restaurant is not a pet project but an investment of time, money and strategic planning.
Indeed, the owner here may benefit from a partnership with someone with a complementary skillset. They would not give up control of the company but bring in another party to help them avoid mistakes. Few people are perfect restaurateurs being equally adept at operations as business dealing.
Some restaurants from the very start are the collective work and funding of teams. They may share ownership and frequently, all are involved with the business. The difficulties here arise when the partnership cannot provide all the necessary financing for the restaurant or always find consensus with big decisions.
Bank loans, investors, exhausted credit cards and borrowing from family members can complicate a balance between the owners and promote animosity and discord. One owner can be the source of the other’s financial ruin so it may mean that the restaurateurs would be less likely to seek more risky forms of funding.
Of course, with more partners, the partners will probably be less reliant on the success of the business. But unless they are committed to being silent partners, the decision making process may become extremely difficult. Restaurant owners have to make decisions in a timely matter, like entering contracts and a top heavy structure could hurt the business and add unneeded grief. Even close friends, who never had any conflict before, can bicker over business issues. In short, you need to account for the human element along with the financing once you take on partners, and make sure that it is manageable enough so that it does not interfere with the business.
It is good to involve a completely neutral business lawyer to counsel all parties how to set up the business. Almost all first-time restaurant owners need their role and risks explained by someone who understands different ownership structures. This lawyers should assist in going step by step through the process of funding and setting the terms of the business.
Financing is unpredictable with restaurants. Sometimes, it comes from surprising sources. Normally, it is not 100% convenient and takes a little patience. But it is more important that you have enough financing (some stored away for a rainy day), relatively good terms and a good working relationship.