Need Advice on Funding Your Restaurant? Experts Toss in Their Two Cents

The only thing that should be ringing at your restaurant is your cash register, not the alarm bells in your head when you start to notice your profit margins thinning.

While a labor of love and passion, there’s no doubt that the restaurant industry can be a brutal one. Competition is crowded with more than 616,000 restaurants in the United States, and rewards may seem minimal at an average 5 percent profit. Unfortunately, the restaurant business does not run on love and passion alone. There are bills to be paid and lights to be kept on.

Figuring out finances can be a daunting task, especially when not too many banks are keen on giving loans to aspiring restaurateurs in a high-risk industry, but it’s not impossible. Need a few words of advice on how to fund your restaurant? Here are what some experts had to say.

Are You Ready to Expand?

Before digging deeper on the best ways to fund your restaurant, how do you know it’s time for your business to spread its wings?

“Timing is everything when you run a restaurant. Knowing when to pursue growth is part science and part art,” Ty Kiisel, editor and small business expert of OnDeck, the largest online small business lender in the U.S., said. “Understanding when it makes financial sense to finance that growth is a critical part of building a successful business.”

Here, Kiisel offers three signs to determine if your restaurant is ready to grow.

1. An increase in customers: Wait time is a necessary evil in today’s dining experience, but if people are waiting too long for their meals or for a table, it may be time to consider expansion. Whether it’s in the size of your space or your staff, your business may want to grow with a design project or with onboarding a new chef or server.

2. An update in menu: Have you added to the menu? Are you now serving breakfast along with lunch and dinner? Short-term capital can help your brand purchase supplies and accommodate for the increased staff or new work hours.

3. Ask yourself — does financing make sense? What to know: Do you need capital to grow? Ask yourself these three questions.

  • Is my restaurant healthy with good cash flow? “Borrowing capital is a lot easier if you have a healthy business and the cash flow to make the periodic payments. Unlike an equity partner who is willing to fund your growth in exchange for profit, a lender expects timely payments throughout the term of the loan and will want to confirm you have the cash flow to support those payments,” Kiisel said.

  • Do I have a plan for success? Be sure to identify what you are using your capital for and how much you really need. There are associated costs with borrowing. Be precise to keep those costs under control.

  • Do the numbers make sense? Is there a clear ROI for your expansion product? Is your cash flow enough to sustain your periodic payments? Will you be able to manage these in a timely matter? Your answers should be yes before applying for any financial assistance.

Hit the Books

This should be a given, but knowing each detail of your vision is key. As the saying goes, a goal without a plan is merely a wish. The most amazing idea in the world cannot be be built without a solid profit and loss statement and realistic projections. Put that passion to paper.

“The business plan is like a map and it lets investors or lenders know that you have thought this thing out thoroughly. The more details you can have written out, the better off you’ll be. When I work with clients looking to open up a restaurant, [I] will really dive into market analysis, demographics, and pyschographics. In today’s market, you need to dive into the psychological aspects of your target avatar,” Donald Burns, The Restaurant Coach™, said.

Planning as an Established Restaurant Owner vs. New Restaurant Owner

Business lenders typically seek a minimum credit score of 650, a small business credit score (SBSS) of 170, and 20 percent equity injection for a start-up business plan. But how does planning differ when it comes to established restaurant owners versus new restaurant owners?

Unsurprisingly, established owners tend to have an easier time applying for financing due to their history in the market — and because they’ve already made the mistakes they needed to make in their first rodeo, and won't likely make them again.

“An established owner will have the benefit of historical financials. Lenders will pay particular attention to cash-flow trends and your ability to pay off the debt you are looking to take on, often referred to as the Debt Service Coverage Ratio, or DSCR,” Jessica Sarter Weiland, senior director of business development at business financing marketplace BoeFly, said. “New restaurant owners should know that lenders will take a hard look at your industry and management experience, as well as how well you’ve thought through a plan for how your restaurant will hit cash flow break-even.”

Established restaurateurs bring credibility and solid business relationships into the recipe, but nothing is ever guaranteed when it comes to convincing an investment group that your concept has scalability, profitability, consistency, sustainability, and ability to adapt to the continuously changing needs of the restaurant and hospitality industry. Still, first-time owners shouldn’t fret.

“If a new restaurant owner has some pedigree experience, [whether you] worked for some well-known chef or restaurateurs, ...they have some marketability. ...Once again, a solid plan reinforced with realistic numbers can overcome the lack of being a previous restaurant owner,” Burns said.

Expect the Unexpected

“Budget for hidden or unexpected costs — or you will greatly risk running out of money before you even open,” Doug Radkey, principal owner of restaurant and bar start-up development agency Key Restaurant Group, said.

After creating your feasibility, concept, and business plans, he encourages restaurateurs to be prepared by looking at all angles for financing and to compare interest rates, plus exit strategies, for each potential financial program or investor. Restaurateurs should also ensure they have a credit check report and a statement of personal net worth, and to clear any outstanding issues with creditors. Most importantly, he says, set aside savings for yourself and your family to pay your own personal bills during the start-up phase for at least six to 12 months.

Weiland agreed.

“One of the biggest reasons that businesses fail is due to undercapitalization. It is much harder to secure a restaurant business loan six months to a year into opening than it is before the restaurant opens. So, make sure to plan enough for working capital to ensure that you have cash reserves to dip into should getting to break-even take longer than expected, or if an unexpected event — such as a pipe bursts — [happens] and you have to close the restaurant temporarily for repairs, causing loss in sales,” she said.

What Financing Options Are Out There? What Are Their Pros and Cons?

Every situation will vary, so how do you know which loan is right for you? Are traditional lending avenues more restrictive? Will you be able to take advantage of microloans or qualify for government programs? What financing options are out there?

“OnDeck launched, an education site dedicated to simplifying the business lending landscape, to help business owners better navigate their financing options. This site includes information on how the different types and providers of credit, financing options assessment tools, and guides on how to successfully apply for a loan,” Kiisel said, also suggests that aspiring business owners take OnDeck’s Fundability Quiz to determine what options are most compatible for their vision.

While there is a slew of financial jargon in the industry, below, according to Weiland of BoeFly, are the typical types of loans and plans — as well as their pros and cons — that restaurant owners will run into:

  • SBA Loan: Whether it’s for a startup or existing business, for equipment or working capital, small business loans come in a myriad of forms and lenders are also federally-backed and guaranteed. PRO: Interest rates are usually capped at Prime + 2.75 percent. CON: They require personal guarantees.

  • Conventional Loan: These loan products are not backed by a government institution, so the bank takes a more inherent risk, but are great for borrowers with strong personal financial strength. PRO: These loans may not require a personal guarantee. CON: Interest rates may be higher due to greater risk.

  • Equipment Loan: This loan is used for the purchase or refinance of a business’ machinery or equipment. PRO: These are loans that can be offered at a smaller size. CON: Their interest rates may be higher than that of an SBA or conventional loan and may be short-term.

  • Merchant Cash Advance: This is an alternative loan product where the provider issues a one-time lump sum to the business owner in exchange for a percentage of future credit card receivables. PRO: This is quick cash available for individuals who have either good credit or not-so-good credit. CON: Interest rates are very high.

  • Rollovers as Business Startups (ROBS): With this product, restaurant owners are able to rollover their 401 (k) plan, IRA, or other retirement funds tax to pay for their start-up costs, acquisition, or refinance needs. PRO: This is access to money that can be used toward an equity injection, money owners may not have had otherwise. CON: If the business fails, the owner will lose retirement savings.

And what of alternative funding, such as crowdsourcing?

“They can be great, but definitely do not rely on them completely. You also need to have excellent storytelling skills to entice random strangers or your community to invest in your business. However, it will allow you to be creative to pay for a small percentage of your startup while generating community awareness for your upcoming restaurant,” Radkey said.

To reduce initial start-up costs, he advises leasing out kitchen equipment, furniture, and point-of-sales systems, if you can manage the increase in monthly operating costs.

Get a Mentor

Don’t be a lone (or loan?) wolf. This business is a tough one, and it always helps to connect with and pick at the brains of those who’ve walked the path ahead of you. SCORE is the largest, national nonprofit made up of more than 11,000 volunteers who provide free and confidential business advice. Restaurant owners can tap into the restaurateur community and access their resources.

“Find someone who’s actually been there and done it before. Having a coach can save you a lot of the learning curve associated with opening a new venture. The classic saying that coaching compresses decades into days,” Burns said.

Did these experts give you some food for thought to chew on while you’re embarking on your new adventure? Ready, set — grow!