A Restaurant’s Guide To Raising Capital

Setting up a new business venture is challenging. But it’s even harder for anyone trying to set up a new restaurant. The break-even period is still being determined, and it’s capital-intensive. Compared to restaurant owners who have been in the business and are looking to expand, first-time restaurant owners have the challenge of raising capital.  

Before raising funds for your start-up, you must prepare a business plan, financial projection, and start-up costs spreadsheet. This information will assist you in determining how much capital you need and what financial model will be ideal for your business. That said, here are some viable ways to guide you in raising capital for your restaurant business.

• Bank Financing

You can approach your bank for a loan if you have a good credit score. However, your bank may be reluctant to fund your new restaurant due to the inherent risk associated with start-ups. Other times they may lend you but ask for collateral to cover any risks. In addition, banks will require you to present your business plan before the appraisal.

The other option is getting a loan from Small Business Administration. You can use the SBA loan for restaurants for capital, inventory, equipment, or furniture. Using the funds for real estate purchases or debt reduction is prohibited. Entrepreneurs seeking funds below USD$250,000 can access these loans at a lower interest rate and with a repayment period of six years. Indeed, you’ll need a good credit rating, like other financial institutions.

• Self-Funding

You can raise your capital by transferring your savings or proceeds from other investments. It’s not advisable to use personal funds because of the risks involved and the fact that it may not be sufficient to sustain the business until it starts making profits. But if you’re sure the restaurant will do well, you can use your funds.

Happy cafe manager barista doing paperwork calculating small business profits

• Partnerships

A significant number of restaurateurs choose partnerships to start their restaurant business. The partners may be people with experience in the industry or newcomers like them. 

Sometimes, the partners may be in the industry, like a hotel manager partnering with a chef to start their restaurant. The advantage is that you are pooling your finances and expertise.

• Crowdfunding

If you have been trying to convince your friends or family to fund you but have yet to succeed, it may be time to find a crowdfunding platform. The advantage of crowdfunding is that it’s not a loan. It’s also a way of marketing your restaurant since you can reach out to many people.

The downside is that it’s uncertain. You are not sure if people will buy into your idea or how much funds you are likely to raise by crowdfunding, and it may take a long while before you achieve your target capital.

The crowdfunding platforms ideal for restaurants is Foodstart, specifically tailored for the food industry, and Kickstarter, which has a specific section for food industry projects.

• Private Investors 

You can find individual investors looking to invest in a similar business. Investors will fund you in exchange for a share of the company. They are entitled to a percentage of your profits even though they may not participate in the daily running of the restaurant. 

While you may lose partial ownership, the advantage is that they will also find ways to support the business from failing and mitigating other risks.

The funds you get from an investor are not a loan. Therefore, you save on any interest you would have paid on loans. Lastly, you are not mandated to pay back the investor if the business goes under.   

• Venture Capitalists

Venture capitalists are investors in limited partnerships that invest through an appointed commission. The commission is in charge of decision-making and monitoring their investment performance. Once they invest in your business, they own a stake in it. The time frame they set for their investment is between 7 to 10 years. Venture capitalists are ideal for a business that requires a considerable amount of capital.

• Government Grants

In selected situations, private corporations and other state agencies may offer grants or subsidies for specific segments of the business industry. You don’t need any credit rating or collateral to qualify for a grant. Find out whether there are any grants in the restaurant business and take advantage of them. 

Conclusion

Raising capital for a startup is the most challenging phase in setting up a business. Luckily, you can choose several options to grow your money. Choose an option that complements your business model. Suppose your option is a loan. In that case, factor any interest into your books before you settle on the type of loan. Choose options that require little or no interest so your cash flows will not be negatively affected.