You have a great idea for your first restaurant, and you have experience (ideal for anyone looking to start a restaurant). But, like most businesses just starting out, you don’t have the money to fund your startup.
Even if you were a chef for years and have a stellar business plan, it’s difficult to get restaurant loans.
It's not that your idea isn’t a hit with the loan officer. Chances are, your idea may sound great, your business plan may be impeccable, but restaurant financing is difficult.
Why?
Collateral.
It takes a lot of money to get a restaurant started, and even when started, a lender might believe that the restaurant itself doesn’t suffice as collateral. All of the fancy new equipment you purchased starts to depreciate in value. Money used to pay staff cannot be recuperated, nor can utility payments or food costs.
Inventory is also going to spoil before its sold, in most cases, so a bank will want more collateral to cover their risks.
You can:
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Take out a second mortgage
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Take equity out of your house
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Use money from your savings
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Dip into a retirement account
The moral of the story: banks don’t want to take on more risk. For smaller restaurants, you may be able to dip into all of your savings or take out equity in your home. Some people even maxed out all of their credit cards.
But when you plan on opening a restaurant that costs $200,000 - $1 million, you’re going to need to find restaurant investors. Restaurant funding is available, but it’s not the banks that are going to be doing the restaurant investing.
You're going to need to learn how to find investors for a restaurant.
Restaurant Financing: How to Get Funding to Open a Restaurant
Financing a restaurant is difficult because traditional lenders will be very difficult to get a loan from. There are a few ways to get the startup capital for a restaurant:
1. Ask Friends and Family
If you’ve exhausted all of your own capital, it may be time to discuss your options with friends and family. A lot of businesses will start this way, and it’s a good way to fund most any business. The trick is helping manage everyone’s expectations.
The truth is that 90% of independent restaurants close in the first year. And the remaining 10% often have a 5-year lifespan. That's huge, and it’s easy to see why so many lenders are reluctant to get into the industry. Yet, there are over 1 million restaurants across the country that bring in $800 billion+ per year in revenue.
Chain restaurants have a better chance of success than an independent operation, but in all cases, it’s never a good idea to allow expectations to get too high.
Why?
You're dealing with friends and family.
A lot of people may believe in you, and just because they believe in you, they’ll be willing to put their entire life savings on the line.
If your business isn’t overflowing with customers the first year, these same investors may come knocking on your door. People often don’t understand the work and effort that goes into operating a restaurant.
Explain the following to friends and family:
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You have a high chance of failure
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There's a good chance they’ll never see their money again
Being blunt and honest with friends and family is a must, and then it’s up to them to decide whether or not to invest in you.
Use social media or discuss your business with friends and family members in person. If they want to invest, discuss terms, and you may have the funds to start your restaurant.
2. Find a Partner to Help Fund the Business
You may have all of the culinary skills, and the entire restaurant may be your idea, but without funding, your dream is going to stay a dream. Partnerships allow you to team up with someone that has the capital and wants to be part of your dream.
Keep in mind that you have partnership options – the person doesn’t need to be a part of the daily operations.
A lot of partners choose to be silent partners, meaning that they collect their money, but these individuals do not have a say in the way that you run the business.
How do you find a restaurant investor or partner to work with?
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Tap into your own personal network.
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Network at events and online.
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Attend business courses and training where others may be looking for an investment opportunity.
I remember going to the bank, depositing money and speaking to one of the financial advisors at the bank. At the time, I was interested in the restaurant business, and he told me that while I could get a restaurant business loan, there were some clients of the bank interested in funding a restaurant business.
These individuals wanted to be silent partners, so even a simple and honest meeting with a bank’s advisor may provide the connections you need to find a partner to fund your business.
3. Seek Out Angel Investors
Angel investment networks exist online, and they will provide you with a loan for a restaurant. If you’re looking for restaurant investors, this is a great option. These private investors for restaurants will use their own capital to fund your idea.
And loan amounts can be as low as $100 or as high as millions – it depends on the investor.
What these individuals often want to do is diversify their income and investments. The terms of the investment are of the utmost importance, and this may mean:
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A percentage of the business
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A percentage of sales
You're essentially selling equity in your business for a loan. Sure, it may seem like you’re giving away part of your dream or idea, but these individuals will be bank-rolling the operation.
4. Search Out Grants
You may be able to find grants to fund your restaurant, and minorities often have an easier time finding these grants than others. You'll want to seek out nonprofits that are trying to help local businesses, and a few ways to search for grants, include:
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National Restaurant Association
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Federal Domestic Assistance catalog
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Online searches
There may be a grant available to you, especially if you’re in an area that is underserved. Applications are strict, and you’ll need to come with a business plan and bank statements.
Restaurant Investor Proposal and Business Plan
There are a lot of restaurant funding options available, but none of them are guaranteed to provide you with the funding you need for your restaurant. At the very core of every loan or investment, the person or institute investing wants to be able to limit their risks and find excitement in your restaurant.
If you want to know how to get investors for a restaurant excited, you need to do two things very well:
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A detailed business plan
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Investor proposal
Your investor proposal will be very important, and you’ll be selling your dream to an investor. Essentially, you want the investor to be able to envision your dream and help you finance it.
Your proposal should include:
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Executive summary outlining all of the details of the business, from the purpose of the loan to the investment required and how the funds will be used. You'll also want to make note of the company history, management experience, market, competitors, strategies you’ll use to market the business and objectives (short-, medium- and long-term).
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Company information, including ownership, legal structure, acquisitions, subsidiaries and products or services.
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Products and services which will detail suppliers, production costs, cost of stock, sales prices, sale forecasts for the next three years and credit terms.
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Marketing and advertising plans. Great, your restaurant is open, but how will you attract customers? What will you do differently? What are the sales and expense forecasts for all of your products or services? You'll also need to be able to explain how you’ll be able to compete with the competition.
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Management and staff information that will further entice an investor. Perhaps the owner is a 5-star chef, so they have a history of running a successful restaurant in the past.
Of course, if your restaurant is already running, you’ll need to provide references, financial information and even an investment exit strategy.
A lot of investors will put all of their focus on one thing: financials. You need to show how your restaurant will become profitable and how the investor will be able to profit from your success.