Dreaming of launching your own restaurant? Funding may be your biggest initial obstacle. Today, restaurant startup costs can range from $275,000 if you're renting to $425,000 or more if you want to own the building.
But here's the good news: there are multiple funding options for aspiring restaurant owners. Here's how to secure the financing for restaurants you need to launch your eatery.
First, Define Your Needs
Before you even compare your loan options or speak to investors, take the time to determine your funding needs. You need to have a clear understanding of how much you need, why you need it and where every dollar will go.
Calculate Your Startup Costs
Start by identifying all of your startup costs - every last expense you'll incur before that first customer walks through the door.
Every business is unique, but common startup expenses include:
- Equipment and furnishings: Kitchen equipment (like ranges, refrigerators, dishwashers and other essential equipment), furniture and decor.
- Licenses and permits: Health permits, zoning approvals, liquor licenses, music licenses and any other relevant permits and licenses.
- Lease and deposits: Prepare to have at least the first and last month's rent if you're leasing. You'll also need a security deposit and may need to pay broker fees. Some landlords require up to 6 months of rent upfront.
- Renovations: Often one of the largest capital expenditures for startups. Costs may include kitchen installation, structural upgrades, HVAC installation, lighting, bathroom compliance and outdoor signage.
- Insurance: General liability, commercial property, workers' compensation, liquor liability and other relevant coverage.
- Initial inventory: Beverages, food, cleaning supplies and disposables.
- Marketing: Branding, signage, marketing campaigns, grand opening promotions, menu design and other marketing materials.
- Technology: POS system and integration, reservation platforms, website, payment processing systems, inventory software and other tech you'd like to integrate into your operations.
You may also incur expenses for professional services, like legal, consulting and accounting fees. These can range from $5,000 to $10,000 or more.
Project Your Operating Costs
Along with your startup costs, you'll also need to consider how much capital you'll need to sustain operations until you start turning a profit.
As a general rule of thumb, you want to secure enough operating capital to cover at least 12 months of expenses.
Traditional Restaurant Financing Sources
Now that you understand your startup and operating costs, you can start comparing your financing options.
There are multiple traditional funding sources available, including:
Conventional Bank Loans
Traditional bank loans have advantages, including lower interest rates. However, the qualifications are more stringent.
While every bank will have its own requirements, you generally need:
- Significant collateral
- A high personal credit score (680+ minimum in many cases)
- Previous experience in restaurant management
- A comprehensive market analysis
- Financial projections
- 20-30% cash investment from your own personal funds
If you can meet these requirements, you can gain the benefit of longer loan terms, a quick processing time and low interest rates.
Small Business Administration (SBA) Loans
The SBA doesn't lend money directly. Rather, it guarantees portions of loans from lenders to reduce risk and make lenders more willing to fund restaurants.
There are several options for small business loans for restaurant owners, including:
- 7(a): Up to $5 million
- 504: Up to $5.5 million with terms up to 25 years
- Express: Up to $500,000 with accelerated approval times
- Microloans: Up to $50,000 with less stringent requirements
To qualify, you'll need a credit score of at least 650, a down payment of at least 10-30%, a detailed business plan and to meet other requirements.
Equipment Financing
Specialized equipment financing is another option, and it's often easier to obtain this type of funding than traditional restaurant business loans.
In many cases, you can finance 100% of the equipment costs, and the equipment itself serves as collateral.
You'll still need to meet credit score and down payment requirements. Depending on the lender, you may need to have been in business for at least a year before you can qualify.
Commercial Real Estate Loans
If you plan to purchase the property instead of leasing, you may qualify for a commercial real estate loan.
You'll need to meet some stringent requirements to qualify, such as:
- A credit score of at least 680 (700+ is preferred)
- At least a 20% downpayment
- Personal financial statements
- More
Alternative Options
Outside of traditional loans to open a restaurant, you'll find some alternative funding options, such as:
- Private Investors, which include angel investors, hospitality investment firms and restaurant groups.
- Crowdfunding platforms, such as Crowdo or Crowd4Cash, help you raise cash from individuals.
- Restaurant incubators and accelerators, which offer a combination of funding, mentorship and industry connections.
Present Your Restaurant for Funding
Choosing a funding source or avenue is just one piece of the puzzle. To secure funding, you'll need to present your restaurant to investors or lenders.
Here's how:
Build a Pitch Deck
A pitch deck is a visual presentation that summarizes your business venture for potential investors and lenders.
Limit your pitch deck to just 10-15 slides, and make sure that you communicate:
- Your unique selling point
- Proof of market demand
- Your business model, marketing strengths and financial projections
- Funding requirements to launch your restaurant
Incorporate high-quality imagery and infographics to make your presentation more engaging and impactful.
Prepare Your Presentation
Once you've built your pitch deck, start preparing your presentation. Rehearse it until it becomes second nature and prepare to answer investor questions.
Think outside of the box to impress investors or lenders and incorporate interactive elements (like samples of your menu) to win them over.
Here are some tips to help you succeed:
- It's critical to base your approach on your audience (i.e., the people you're pitching to).
- Be adaptable. Have a few variations of your presentation (an elevator pitch and a lengthy presentation), so you can adjust based on audience feedback and interest.
It's always better to be over-prepared than to wing it and appear unconfident in your abilities.
Have Your Finances and Business Plan in Order
When applying for restaurant loans, you'll need to have a clear business plan and solid financials (including projections).
Make sure these are all in order and ready to be presented well ahead of time.
The Takeaway
There are so many restaurant financing options today, from private investors to traditional loans and alternative lending options. Weigh your options carefully and consider which methods of funding you're most likely to qualify for. Have a solid plan, and you'll greatly increase your odds of approval success.