How To Fund a Restaurant Startup

So you’ve already determined what the personal capital investment into your restaurant is that you can afford but you still don’t have enough. Welcome to the club!

Starting a restaurant can take a lot of money. Nearly everyone is going to need outside investment funds to get off the ground. The good news is that there are lots of places to look for restaurant startup funding—not just between the couch cushions!

This guide to restaurant startup funding will weigh the pros and cons of outside funding and where to find traditional and non-traditional sources of additional funding for your dream restaurant.

Credit Cards

If you have great credit it’s easy to get multiple credit cards with reasonable interest rates. Your reliable on time payments help to build your credit score even more.

Be aware that if you use personal cards to fund your business it’s highly recommended that you do not use the same card for personal expenses. It helps with bookkeeping when tracking business expenses, especially if you get audited.

Personal Loans

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Personal loans are easier to obtain than business loans because the standards aren’t as rigorous. Unlike business loans that require collateral, most personal loans are unsecured.

However, unlike a business loan, you are personally liable for repayment of the loan. Failure to maintain timely payments will negatively affect your personal credit score.

Bank Business Loans

Getting a bank business loan isn’t the easiest but it’s worth trying.

The bank will look at:

Your credit
Collateral you can put up
Your reputation and demonstrated business skill
Your business plan — especially as a startup restaurant

The more strength you can show in these areas, the better your chance of being approved for the loan.

The nice thing about traditional bank business loans is that they provide you with a large lump sum of cash upfront.

It’s important to compare not just interest rates but the additional fees, as these vary widely between lenders. A lender with lower fees and a higher interest rate may actually end up being the cheaper loan if you repay it on schedule.

SBA (Small Business Administration) Loans

The U.S. SBA is a government organization designed to help and encourage small businesses.

SBA loans are not given by the government. They are 3rd party personal loans with a portion of the loan amount guaranteed through the U.S. Small Business Administration. This limits the risk for the lender, making it easier to get the loan.

Additionally, SBA loans must conform to certain standards which are favorable to small business owners. But as you can expect with a government organization, the amount of paperwork and slow processing time may prove too frustrating for some.

To apply for an SBA loan, you must prepare an SBA loan package. Complete information is available at SBA.gov.

Friends and Family

You may be able to entice friends and family members who share your vision to invest funds into your restaurant dream.

Friends and family loans are unsecured loans typically without interest or an equity stake in the restaurant.

Basically, they are doing it as a favor because of their close relationship to you. They are also the ones with the most to lose if you’re unable to pay.

Make it clear to your friends and family the risk involved and not to invest more than they can comfortably live without. Because of the social and relationship cost of losing your loved one’s hard earned money, paying them back as soon as you can find other sources of funding should be a priority.

Microloans

Microlending is a new way of securing smaller amounts of cash for short periods of time. With the advent of the internet and people looking for new ways to “beat the market” regular people can now invest small amounts of cash into short term loans.

They will judge the risk based on your reputation on the site and your credit score. While the amount of most microloans are probably not enough to fund a startup they can potentially help get over a hump when all other sources have been exhausted.

Restaurant Investors

Investors are other business people who you may or may not know personally who are willing to go into business with you.

Investors come in many flavors.

There are many types of investors. They may want to be involved with the business to varying degrees or not involved at all.

Typically they will invest in your restaurant considering:

The strength of your business plan
Your reputation
Demonstrated business skill
Experience in the restaurant industry
Seeing an opportunity for growth
Perceiving a future return on investment

All investors have a say in your business, either through strings attached to money, or influence from owning a portion of your restaurant. Every investor will make some demands. They are interested in protecting and maximizing their investment, after all.

Taking on an investor is a little like finding a roommate or getting married. Make sure you see eye to eye with your investors. And get everything in writing.

Equity and Non Equity Investors

The ways that investors protect their interest is by getting something of value from the restaurant in return. There are many creative ways that an investor can financially benefit from an investment in your restaurant.

Equity Investors take more risk. If your restaurant fails, their money goes with it. By investing in your restaurant startup without collateral they need to balance the risk with a greater reward.

It’s advisable to only take on an equity investor if you don’t see any other options. As a business owner it’s very important to maintain equity, or ownership in your restaurant.

You might take on an equity investor if you have a solid business plan but your restaurant concept will require significantly more funding than you can provide yourself.

In this case you are weighing the reward of owning a portion of a capital-intensive restaurant concept over a less cash-hungry one that would allow you to maintain ownership.
Debt Investment is a way investors can provide cash for your startup restaurant without taking an ownership stake.

With a debt investment, you seek out investors who are willing to privately loan you money. With a debt investment offer you specify the terms of the loan, including collateral and interest rate.

Remember that to get anywhere with your loan offer, it must be enticing to investors. Consider the investor’s opportunity cost. Where else could they invest and achieve a greater return or encounter less risk?

An investor with no ownership stake in the company needs greater assurance that they will ever see their money again and also expects to be rewarded for the risk they take.

Crowdfunding A Restaurant

Right now “crowdfunding” is a big buzzword. But it’s important to get in touch with the reality.

Although your friends may say something like “Just make a Kickstarter, and you’ll get a million dollars!” The truth is that crowdfunding campaigns aren’t really appropriate for a restaurant startup venture.

Maybe if you already have thousands of social media followers or you engineer a grassroots media campaign you can leverage your notoriety to achieve some worthwhile results.

Kickstarter - Perhaps the most well-known crowdfunding site. Post a product, idea or business and elicit pledges from the general public.

People will be interested if they get something in return. Either your restaurant is doing some social good or they receive a finished product in the future.

It’s not really appropriate for restaurant startup capital but if you’re creative, you might be able to use it to sell a product that can help to fund your restaurant.
GoFundMe - This service takes a fee from every dollar pledged. For this reason, it’s not the most practical way to fund a restaurant concept.

This format lends itself more to collecting money for charity. To have much of an impact you’d need to reach out to a large network of people willing to donate money to help you open a restaurant concept that tugs at their heart-strings.

Peer to Peer Lending

Peer to peer lending is similar to microlending but can fetch higher amounts. Risk for investors is mitigated by investing a small amount across multiple loans.

Typically loans offered on these sites are in the 20-40k range. Although you can also apply for smaller loans.

These sites are definitely a viable alternative to a traditional bank loan for your restaurant. If you need less than $50,000 to get off the ground and have other sources of investment lined up they are definitely worth looking at.

Investors on these sites will examine your credit score, the amount and term of the loan and the interest rate. Interest rates can be quite high in order to attract investors. Typically in the 20% range.

Sites to explore if you’re interested in P2P loans are:

The loan amounts offered are intentionally kept small to reduce the lender’s risk. This may be the extra boost of cash you need.

Local Business Groups

Local business groups are a great place to network and find potential investors outside your existing social circle.

You can also find advice about loans and investments from other restaurant owners who have more experience.

Find your local restaurant owner and community business organization and get involved.

Groups that can help you find loans and investors:

The National Restaurant Association
State restaurant associations
Local community business meetups
Rotary International
Your local Chamber of Commerce

These are all great places to meet other business owners who can help you find the resources you need to fund your restaurant startup.

Your Personal Credit Affects Loan Availability and Interest Rates

Before you start making plans to take out new loans, open additional lines of credit and look for investors it’s important to know your credit score.

Because your credit score affects what your financing options are you might have to spend time working on your credit before you start looking for loans.

If you improve your credit score before shopping for loans, it will save you from major headaches and tons of rejection. When you take into account the lower interest rates you can qualify for, it can also save you a lot of money.

The following classifications are the generally accepted credit score ranges:
Below 579 - Poor
580-669 - Fair
670-639 - Median
740-799 - Above Average
800-850 - Exceptional
Only 3% of consumers score in the above average range!

Get the Lowest Rate You Can

Don’t Forget The Little Guys

Just to get a traditional bank business loan, you need very good credit. Large banks are the most stringent in their qualifications. But don’t just look there!

Compared to the big banks, local credit unions and community banks may offer you more favorable terms.

If you have a high-average credit score make sure to apply to community banks and small credit unions when you are looking for a business loan.

Good Credit Goes A Long Way

When considering interest rates on a loan, the amount of money you can save over the few years spent paying it back is truly remarkable.

By raising your credit score and lowering your interest rates you could save tens of thousands of dollars on a long term loan. It’s definitely worth the time and expense to clean up your credit before trying to fund your startup restaurant.

Summary

There are lots of ways to fund your restaurant startup. Some traditional sources are bank loans, credit cards and asking friends and family for money.

Additionally, you could seek investors in your startup. They will either take a portion of the ownership or will provide a private loan.

Some new opportunities to fund your restaurant are facilitated by the internet, and microlending and p2p loans are viable alternative funding sources for smaller amounts of money.

The most important thing you can do to help fund your restaurant is to improve your credit score. It will help you qualify for loans, lower interest rates and attract investors.

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, affordably.