How to Finance a Restaurant | The Complete Guide

Whether you’ve been in business for a while or your dream of owning a restaurant is still in its infancy, you need capital to ensure that operations move forward. If you’re a veteran restaurant owner, it’s important to have sufficient financing to keep your business modern. Regardless of where you stand, it’s important to understand what it takes to secure funding. In this guide, we’ll show you the best options for financing your restaurant . We’ll also show you some of the differences between your options and how to find the most suitable financing. With the right direction, you can learn how to make the most of your restaurant and turn your dreams into a reality!

What is Financing and Why Do I Need It?

When you receive financing, you are getting money from a lender who agrees to establish a business arrangement with you. Over a period of time, you will have to pay back the money you were loaned. Many restaurant owners don’t have the working capital to start everything from scratch. After all, you have not served any customers yet and therefore haven’t made money from your restaurant. But you can’t make money from your restaurant until you’ve established your business so that you can serve customers. In what is somewhat of a catch-22, you need funding to make it all come together. This is where restaurant financing comes into play. This financing allows you to move forward with your plans so that you can make income and work toward paying back your lender. You might need financing for a number of reasons. Some of the most common are:

• Hiring a consultant to help you improve your restaurant’s operations
• Forming a reserve that so you can offset necessary expenses
• Expanding your restaurant to accommodate more guests
• Adding new items to your inventory to sell to customers
• Investing in new operating equipment
• Updating your restaurant’s aesthetics
• Financing your operational expenses
• Renovating an existing location
• Rebranding your franchise
• Opening another location
• Opening a new business

Knowing exactly how you plan to use your funding will go a long way in helping you establish an agreement with a lender. As such, it’s a good idea to draw up a detailed outline of your goals. Being able to present a comprehensive outline to a lender will give them the confidence to loan you money and increase your chances of securing funding.

Financing Options

Now that you understand the importance of restaurant financing, it’s time to look at your options. At one time, business owners and startups were limited in how they could get a business loan . Thankfully, things have changed considerably from the loaning procedures of yesteryear, giving you many options to choose from. If one option doesn’t pan out, you have several others to fall back on. Depending on your needs, you may find that some options are more suitable for smaller projects, while others are designed around long-term goals.

Term Loan

Secured from a physical banking institution, term loans require that you put up collateral. For example, you may need to put your house up to secure your debt. If you’ve already invested in new restaurant equipment, you may have no option but to use it as collateral. Term loans often come with compounding interest . As such, not paying back the bank in a reasonable amount of time will result in you needing to pay back even more. What’s more, you need to be aware that compounding interest doesn’t care if business is slow one month and you can’t raise the money needed to make your payments. If you’re late, you’re going to pay for it, regardless of the circumstances. Because of this, you need to have a backup plan in place for securing your monthly payments if your restaurant can’t provide the capital needed. Most term loan agreements run between 3 and 10 years. This can play well in your favor, as it allows for customization in your monthly repayment fee. The shorter period you agree to, the better. Agreeing to pay back sooner will often secure you a better interest rate.

SBA Loan

An SBA (Small Business Administration) loan is funding that comes from the United States Small Business Administration. It’s important to mention that the SBA is not who actually loans you money. They partner with a network of lenders across the country that, in turn, agree to loan you capital. What makes SBA loans so appealing is that they are a sure-fire option for business owners who qualify. You have a much greater chance of getting funding because the SBA agrees to make your repayments up to a certain percentage if you default on your payments. This is compelling to lenders, as they are guaranteed to get some money back whether you come through or not.

Alternative Loan

Alternative loans come from lenders who can offer more flexible payment plans. They often have more accurate ways of determining whether you are qualified for a loan. Whereas bank and SBA loans rely heavily on the status of your credit score, alternative loans from lenders look at other aspects of your life to decide whether to loan you money. This could be anything from projected sales analyses to the potential you have as a new restaurant startup. If your credit is less than stellar, you may want to consider taking out an alternative loan, which will also serve to help you improve your credit score in the process. What’s more, this type of loan is typically much more flexible when compared to traditional loans. Unlike a business line of credit (see below), alternative loans can be adjusted to where your repayments are based on a percentage of your restaurant sales. So if you have a bad month of business, you won’t be forced to scramble for ways to come up with a set monthly payment. This flexibility alone is a huge plus for new business startups who can’t guarantee that they will have concrete sales.

Business Line of Credit

A business line of credit functions very much like that of a credit card. You receive an open line of credit from a bank or alternative lender, which usually comes with a spending limit. You will need to repay this line of credit, either with monthly payments or annually, before you are allowed to take out additional funding in the form of credit. Lots of small business owners prefer this option because it gives them the financing they need right away, and it lets them choose the monetary amount they need. This is ideal for things like making small repairs or replacing broken-down equipment in a timely fashion. In the restaurant industry, broken equipment can spell certain doom for a business. Without an essential piece of equipment, you could see your dreams go down the drain in short order. With a business line of credit, you can get your restaurant operational quickly and efficiently without too much of a delay. What’s more, this financing option is a great way for business owners to improve their credit.

Crowdfunding

Thanks to modern technology – namely, the internet – crowdfunding has become a popular choice for people and businesses to get the funding they need to turn dreams into realities. What’s more, you aren’t limited to just a single entity. There are several crowdfunding options available online for you to choose from. GoFundMe, for example, allows you to secure financing without having to pay back your backers. Of course, getting the money needed to establish a working restaurant may be challenging, to say the least. Kickstarter is likely a better crowdfunding option for such a venture, as they have a section solely devoted to people looking to crowdfund their restaurants. But regardless of which crowdfunding platform you choose, it’s safe to say that this financing option would be nearly impossible without the advent of the internet. Crowdfunding has been used to finance everything from medical bills to new vehicles to inventions . Getting your funding from generous strangers may seem like a lost cause in the 21 st century, but it’s a program that actually works and has helped change lives. To date, the United States alone has seen over $17 billion in successful crowdfunding efforts. As you can see, this financing option definitely has legs.

Summary

After you have drawn up a business proposal and have thoroughly researched your financing options, you will be ready to start comparing loans. There are a few key points you want to focus on when comparing your financing options. The most important are the cost of the loan, the term of the loan and how quickly you have to pay it back, how soon you can receive your business financing , and who the lender is. With these in mind, you will be able to make a sound decision about whom you choose to do business with. Good luck! Sources https://www.nerdwallet.com/best/small-business/small-business-loans/small-business-term-loans https://www.bankofamerica.com/smallbusiness/business-financing/learn/understanding-business-lines-of-credit/ https://www.newsweek.com/kickstarter-inventions-products-1363992?slide=1