How To Fund Your Dream of Starting A Restaurant
The Rezku Team
So you’re planning to open a restaurant, and you’re working out your business plan. Now you’ve come to the part where you list your funding sources.
In this guide we will cover the many ways, both traditional and modern, that you can use to you can fund your restaurant startup dreams.
Credit Cards
One of the riskiest ways to fund a startup venture is by using personal credit cards. It also has the highest interest rates of any other options. And those interest rates can be variable, which can make planning more complicated.
However, despite these drawbacks many restaurant owners starting a small operation as a sole proprietorship will use personal credit cards. They are by far the easiest way to secure additional cash.
Because of the liability and effect on your personal credit score, we recommend saving this option for smaller purchases with short term pay-offs and for emergencies.
If you’re planning to fund your restaurant via credit cards, it is highly recommended that you first set up a business entity and instead, use corporate credit cards in the business’ name, rather that personal credit cards.
Personal Loans
There are many types of loans that can be used to fund a restaurant startup. Loans are designed for longer-term borrowing than credit cards, so they typically feature lower rates.+
Unsecured Personal Loans Unsecured personal loans are available from banks and other lenders for small to medium-sized purchases. They do not require any collateral, have lower interest rates than credit cards and are generally easy to get.
However, unsecured personal loans typically are not available for larger amounts. How much you can get an unsecured personal loan for will be based on your personal credit and income. $1,000-10,000 is the typical range.
Secured Personal Loans Secured personal loans are also available from banks, and do require collateral. Since the bank is getting something as a contingency if you fail to pay, the interest rates can be lower and the borrowing amount higher.
But read that again: If you are unable to pay, the bank will take your collateral – your house, your car, any assets you put up. Opening a restaurant is risky and businesses fail despite the best intentions of the borrower. We recommend limiting your liability and not taking personal loans.
Business Loans
To get a business loan, you’ll need to jump through a few more hoops before getting started. But this time you take to lay a solid foundation will reward you in the future. The first step of getting a business loan is creating a business entity, like an LLC or Corporation. You can read more about creating a business entity, crafting a business plan and applying for an SBA loan.
Business Credit Cards Business credit cards can provide flexible short-term financing and build business credit. Look for cards with rewards/cashback on business purchases. However, just like all unsecured loans, interest rates are typically higher than other loan types.
SBA Loans These loans are backed by the U.S. Small Business Administration and issued by participating lenders. They have low interest rates and long repayment terms but require extensive documentation and can take a while to gain approval. The SBA loan program aims to make business funding more accessible. In our opinion, the benefits outweigh the hassle and highly recommend new restaurant owners participate in the SBA loan program.
Traditional Bank Business Loans Banks offer term loans, lines of credit, commercial mortgages and a variety of financial services for new restaurant owners. Qualifications for these loans are stringent - you’ll need good personal credit, sufficient collateral, a strong business plan and financial projections. While these requirements can seem onerous, they’re designed to help you to make sure your restaurant can stand on it’s own. This is good for you and the bank.
Private Business Loans Today there are many online lenders and alternative funding sites like Prosper and OnDeck provide lending that can provide faster access to capital than banks, with fewer requirements. However, expect higher interest rates and a smaller borrowing amount. These services may also restrict use of funds to a specific purpose, such as equipment purchases or remodeling. Also, a personal guarantee for funds may be required. This means you’re personally be on the hook if the business is unable to repay the loan.
Partnerships and Investors
Capital can be raised by selling a stake in the business. Investor relationships range from silent investors to hands-on mentorships. The right type of investor for you is highly personal, as investors dilute your ownership in the business and therefor, future profits as well.
Equity Investors & Partnerships Giving up equity stakes in your business can help raise capital from investors, though you sacrifice having full control of the business. Partners will also receive a relative portion of any future profits. Partnerships spread the risk of funding a restaurant but at the cost of giving up some autonomy. However, each partner with an equity stake dilutes your ownership and control of the restaurant. Seek strategic partners who can contribute skills and expertise, as well as capital investment.
Angel Investors & Venture Capital Another type of investor arrangement is with individual “angel” investors or with venture capital firms who provide funding in exchange for partial ownership. To help protect investors from risk, VC funding is not provided all at once. A phased approach is used with requirements to be met at each stage to “unlock” more capital.
Revenue-Based Financing RBF allows restaurants to receive upfront capital in exchange for a percentage of future revenue. Unlike a loan, there is no set repayment schedule. The investor gets paid back through a share of the restaurant’s ongoing sales until their investment plus a return is recouped. The cost is typically higher than bank loans, with repayment ranging from 1.3x to 3x the original investment. For a restaurant startup, it can be difficult to secure this type of investor as it is typically reserved for growing restaurants with proven sales traction.
Creative Business Funding Tactics
Here are some more creative tactics you could include in you startup restaurant funding plan. Starting a restaurant can be expensive and these alternative funding methods can help to provide additional capital when needed.
Crowdfunding Crowdfunding websites like KickStarter, GoFundMe and IndiGoGO allow raising smaller amounts from many contributors. While crowdfunding may not be ideal for raising the full startup capital, it can still be a useful tactic for restaurants that need additional funding. You could run a crowdfunding campaign to raise funds for specific projects like equipment, renovations, or to test interest in your restaurant concept before fully launching.
Peer-to-Peer Lending P2P lending platforms like LendingClub or Upstart allow borrowing smaller amounts from individual investors rather than a bank. This could provide supplemental funds for things like purchasing initial inventory or specific pieces of equipment. To attract investors who are averse to risk you’ll need to write a compelling proposal that assures them they will be paid back.
Microlending/Microfinance Organizations like Kiva and Accion provide microloans, which are small loans (typically under $50,000) geared towards entrepreneurs and small businesses. These could cover a portion of startup costs. Typically these sites reserve funding for specific causes and are targeted toward disadvantaged peoples who are unable to get funding from traditional lenders.
Restaurant Incubators/Accelerators Some startup incubators/accelerators like Relish and TechStars focus specifically on fostering innovation the restaurant industry. They provide seed funding along with mentorship, training and shared resources in exchange for equity. If this is your first restaurant the knowledge, guidance and experience these organizations provide can be more valuable than dollars alone.
Business Plan Competitions Participating and winning local, national or niche business plan competitions for restaurants/foodservice can provide prize money to fund your concept. These programs are most often offered to students and function somewhat like a scholarship. Winning the competition can put you in contact with investors who believe in your idea and are willing to provide additional funding and mentorship.
Preselling Gift Cards/Memberships Offering founding memberships or preselling discounted gift cards can provide an influx of cash before opening. This is a way to leverage friends, family and customers who belive in your concept to help provide a cash-injection when needed.
Summary
The key to funding your restaurant startup is to get creative about ways to raise money from many different sources that can cumulatively cover more of your startup costs. The truth is, starting a restaurant is expensive, so exploring a basket of funding sources both traditional and creative will help you accumulate the capital you need.
This guide to restaurant startup funding sources is part of a free series on how to start a restaurant, provided by Rezku. Rezku is an innovative restaurant technology developer dedicated to providing seasoned restaurant owners and startups alike with the latest systems. Our products and services help members of the food and beverage service industry get more done and achieve greater success.