Running a restaurant is the dream of many gourmets. But often an obstacle stands in the way: finding the money to open it in the first place. A restaurant is a big investment, and most people don’t just have a few hundred thousand dollars to burn a hole in their pockets.
Luckily, there are many ways to get money to start your own restaurant. In this guide, we will look at some of the most popular methods.
What is restaurant financing?
Restaurant financing is the process of finding money to open a restaurant, whether it be by earning and saving money on your own, getting a loan from the bank, borrowing money from family, or any other way you can think of. This money will cover the cost of your location, equipment, and other start-up expenses.
Many restaurateurs take out bank loans as this often provides the most direct route to financing your restaurant. Because of this, financing a restaurant often refers specifically to getting a bank loan to cover the cost of a restaurant, in the same way that financing a car refers to getting a loan to pay for a car.
Why do small business owners apply for financing?
Opening a restaurant costs a lot of money – the average cost, according to survey from RestaurantOwner.com, is $375,000 ($3,586 per seat). As you might expect, most aspiring restaurateurs can’t just open their piggy banks and find that kind of money. Similarly, accumulating the full price can take a lifetime, leaving no time to turn restaurant management into a career.
Applying for bank financing is often the easiest way to find the necessary start-up funds. However, getting approved for a business loan can still be difficult, so it’s not a panacea. However, it is certainly one of the most promising directions for a restaurant that is short on cash.
6 restaurant financing options to consider
There are many options for entrepreneurs interested in opening a restaurant. Here are a few of the most important ones to be aware of.
1. Term loan
An emergency loan is your stereotypical bank loan: you borrow a certain amount of money from the bank and pay it back on a fixed schedule called an amortization schedule.
When you take out an urgent loan, you not only repay the principal (the amount you borrow), but you also pay interest – this is how the bank makes money. Without interest, the bank would have no incentive to lend you money.
Because of the interest payments, a term loan is less attractive than a loan from friends or family who will not charge interest. But, of course, very few people have access to friends and relatives who can find that kind of money in them.
2. Alternative loan
Alternative restaurant loans are similar to emergency loans, but are offered by institutions that are not part of the traditional banking industry. This makes it often easier to get approved for an alternative loan, but they may be from less reputable companies or use predatory lending methods.
Be careful when looking for alternative lenders. If something seems too good to be true, it usually is. This does not mean that alternative credit is always a bad idea, but you need to be more careful than if you were taking out a loan from a well-known bank.
3. SBA loan
An SBA loan is a type of loan offered by the Small Business Administration (SBA) that is available to eligible US businesses. They are similar to emergency loans, but the federal government guarantees the loan, which means it will pay back the lender if the borrower defaults (cannot repay the loan).
This reduces risk for lenders and makes it easier for borrowers to get approved. This is often a good choice for borrowers who are having trouble getting approved.
4. Cash advance for the seller
A merchant cash advance is a type of cash advance (short-term cash loan) in which the lender receives payment by accepting a portion of credit card proceeds each day. These loans are usually very expensive, with interest rates ranging from 10-350% per annum.
If you can only get money through a cash advance from a merchant, you probably aren’t ready to open your own restaurant. Selling cash from a merchant should be a last resort, and even then it should probably be avoided.
5. Money from family and friends
If you are lucky enough to have family and friends ready to support your restaurant dreams, then this is often the best option. Family and friends will likely give you very low interest rates – assuming they charge you interest at all.
Crowdfunding involves funding your restaurant through platforms like Kickstarter. Crowdfunding allows you to bypass past interest rates, but you usually have to offer your backers something in return, be it free meals, memorabilia, company stock, etc.
3 Basic Funding Formulas You Need to Know
When looking at funding options, it’s always a good idea to know the math behind them so you can do some of the calculations yourself. Before we get into specific formulas, here are some symbols you should know:
P = initial principal balance
R = interest rate
n = number of interest accruals over a period of time
t = number of time periods
The depreciation formula allows you to determine what your monthly payments will be.
The simple interest formula allows you to determine how much you will pay over the life of the loan, including interest (assuming interest does not add up).
The compound interest formula does the same thing as the simple interest formula but calculates the compound interest.
Opening a restaurant is a huge undertaking that requires a lot of investment. This guide should serve as a good starting point, but you’ll need to do more research (and ideally talk to a financial advisor) about which funding options will work best for you.