Restaurant Financing Options

It might seem impossible at first, but many (if not most) restaurants start with no more than a dream and a plan. Elsewhere, we have discussed how to become a restaurant manager; in this guide, we’ll look at the restaurant financing options available to you, and what you need to get that precious startup capital. We’ll go into restaurant financing companies and options, but first, here are the reasons for restaurant financing, some of which go beyond the initial startup phase.

A common and probably best known reason is to get the business started in the first place, but financing might also be necessary to:

• Open a new restaurant branch
• Pay for renovations
• Invest in new equipment (more on that later)
• Alter the floor plan or expand the premises
• Expand into new avenues e.g. selling sauces or merchandise
• Cover marketing expenses, especially for a one-off campaign

Arguably the most traditional form of business finance, bank loans still provide small businesses with startup capital throughout the world, and restaurants are no exceptions.

Advantages

• Autonomy: banks do not get involved in the day to day running of your business, unlike business partners or shareholders.
• It’s temporary: once the loan is paid off, your business with the bank is finished (unless both parties want it to continue). This is not the case with equity partners, for instance.

Disadvantages

• It can be difficult to qualify as banks are notoriously conservative lenders, so even if you do qualify, the loan amount might be smaller than you need.
• Interest rates: these are the lifeblood of lending institutions, so are often understandably high. Be sure to factor repayments into your business plan.

This is becoming increasingly popular, especially for bars and restaurants that serve a niche market. Some existing restaurants even use crowdfunding to expand or renovate. Well known crowdfunding sites include GoFundMe and Kickstarter.

Advantage

• It’s not a loan: often, it takes the form of advance sales (vouchers in exchange for investment), goodwill, sponsors’ names on the wall or the donation is exchanged for merchandise. So naturally, the payback is much easier than a traditional loan. Some repayments might even be non-cash perks (like a guaranteed table on opening night, for instance).

Disadvantages

• It’s cumulative: instead of receiving one large payment, you acquire several small ones, which can take a lot of time and effort.
• It’s a sales drive: selling a restaurant that doesn’t exist to several customers at a time is undeniably challenging and requires marketing expertise.

Business partners are a common form of finance for any business, combining finance and often expertise.

Advantages

• Combined skill set: a business partner (or team) could bring skills and education that you may not have, bringing out the best of all backgrounds.
• No loan repayments: money tends to be invested, not loaned.

Disadvantages

• A shared vision: this can be tricky to manage, especially in something trend-based and creative like a restaurant.
• Long term potential problems: it can be difficult to extricate oneself from business partners further down the line.

Your own savings, of course, could provide the capital you need to get started. Many restaurateurs start with a food truck or stall or save money in their job at a restaurant before getting started in their own business with their own capital. (We’ve previously talked about how to open a food truck business.)

Advantage

• No repayments: the most obvious advantage is that the massive expense of ongoing repayments will be absent from your nascent business.

Disadvantages

• It takes longer: gradually accumulating your own capital takes a lot more discipline, time and patience than getting a lump sum from a third party.
• You’re more vulnerable: bad luck or a business downturn might not just mean the end of your business, it would also influence your own personal finances.

In many countries, including the UK, the US and EU countries, there are government grants available on both national and regional levels. The UK has several business grants, across all sectors.

Advantage

• Low or no repayments: this is money provided by your government, funded by your taxes. This means that you pay back with minimal interest, if at all.

Disadvantage

• Paperwork and accountability: grant financing can be quite strict and rigorous, so be prepared for paperwork and research.

Before receiving finance for a restaurant, you will be expected to have:

1. A business plan
2. Projected/estimated incomes and overheads
3. A sample menu
4. Market research

These are covered in more detail in our blog post, How to Start a Restaurant.

Financing restaurant equipment is a good way to maximise your restaurant’s efficiency. You might need a new dishwasher, oven, coffee machine, or to repair or upgrade anything already there.

Financing restaurant equipment should, theoretically, be more straightforward than getting the initial startup fund because:

• You will already know your company’s profits and overheads
• You have a clear vision for the purpose of the loan
• Repayments will be smaller
• The lender will have access to records showing how your business is performing

Any of the above options are applicable for restaurant equipment financing.

When shopping around for potential lenders, financiers and partners, it’s worth your time measuring them against the following criteria, most of which apply to loans:

1. Interest - What’s the interest rate on this loan?
2. Term of loan - How long will you be paying it off? Might it be extended?
3. Size of loan - What’s the combined cost of every payment with interest?
4. Speed of available capital - How long does approval take? And how long is the gap between loan approval and the money appearing in your account?
5. Reputation of lender - Is it a reputable or relatively unproven loan provider? Have you talked to anyone who’s borrowed from them? How do they react to missed payments - penalty fees, seizing of property, initial round of warnings?
6. Fixed vs variable rates - Will the interest rate of your repayment fluctuate (up and down) or remain the same over its term? There are advantages and disadvantages to both approaches, with fixed rate being safer but variable offering the chance of lower interest down the line.

Le Cordon Bleu London has a sterling reputation for training professionals of every stripe in the hospitality industry; check out our:

• Culinary Arts and Business Management Courses
• Hotel & Restaurant Management Courses
• Professional Cookery Courses