Financing is the first and foremost challenge when it comes to starting your new restaurant business. You can finance your restaurant business using the traditional loans, alternative loans, personal savings, private investors, strategic partnerships and crowdfunding. Then, you need to organize for ongoing working capital. Rather, if you have to hold off from debt or do not have a lot of working capital available to you, you could start your business using innovative and nontraditional ways.
To qualify for funding, you need to have a stable business plan and a precise budget, as well as you’ll have to prove that you accurately manage your business and personal credit.
What Are The Startup Costs Of A Restaurant?
The costs vary. The experts suggest that budgeting for less than $100,000 for an average restaurant is good. However the established restaurant owners suggest that doubling the budget to cover the unexpected costs as well as the ongoing expenses after opening the restaurant is good. However it is also noticed that some of the restaurant owners will need as high as $500,000.
Where To Get Traditional Funding For Restaurant Business?
Here are some of the major funding sources for restaurant businesses;
Traditional Restaurant Loans
When you are looking around for loan to buy a restaurant business, banks and investors will ask to present your detailed budget and business plan. Additionally, your business and personal credit history will be examined. The traditional lending resources may additionally consider that how much amount of money you are willing to invest as well as how much worth of collateral you are willing to in place. Before you are applying for restaurant financing options or approaching any investor, it is advised to have a strong business plan.
SBA 7(a) Loans
These are government-backed business funding and for businesses a great place to start when looking for a traditional small business loan. The terms and rates on these loans are competitive, and even large amounts of funding are available. However the documentation process is quite extensive; but well worth your time, as these loans come with very lean and affordable terms.
The local banks are more than willing to fund a local venture that can benefit the community. Some people find success with the local banks rather than the national banks. You need to start with the bank you have your account with; however you may need to apply at a few banks before you’re approved.
The private investors normally don’t possess part of your business; however they probably will have a repayment settlement. You can find one big investor, or a couple of small investors, it is up to you. If you have several investors on the board, you need to remember the fact that some restaurant owners offer hosted VIP events and different special activities for investors.
Where To Get Alternative Funding For Restaurant Business?
With many new restaurants failing within the first few years of running, getting the traditional type of funding is nearly impossible. The alternative lending resources include crowdfunding. In the crowd funding setting you payback the donors or even offer them some discounted services. Only some of the business owners have found success with this type of alternative funding resource, which they deposit in their accounts in order to help them get traditional funding.
This involves accepting investments from numerous investors. In case you do not get that objective, you need to reimburse the cash. Others provide you the funds you raise even if you do not get your objective. You’ll need to self-promote this effort to make it successful. Some of the people have found that even if their funding was failed, they have been able to get capital from other investors.
The alternative lenders provide nontraditional business funding. However, they’ve minimal consideration requirements. Some of them require that your restaurant be in business for a particular amount of time and that your annual revenue meets a sure onset, which is almost $100,000 annually. Interest rates can be higher with alternative lenders as compared to the traditional lenders.
Funding For Working Capital & Restaurant Expansion
After you start your restaurant business, you still might struggle to cover the ongoing costs for expansion and improvements. For these types of loans, you’ll need to reveal current revenue history of your business, and you will be required to have excellent credit. Both installment loans and lines of credit may be available to you. Installment loans require a regular monthly fee to pay back a large payout with interest. Business lines of credit are more like credit cards that you use as needed rather than all at once.
Here are some of the important types of loans available to restaurant businesses:
Working Capital Loans
Working capital loans are meant to help you cover the operational expenses consisting of payroll, rent, inventory purchases, bills and debt payments. They’re intended to cover short-term requirements rather than the purchase of property or business expansion. Some businesses have used credit cards to help them with continuing costs, which they have to repay monthly. Carefully evaluate the terms of your loan.
These loans are meant to help you cover the food and beverage costs of your restaurant. You’ll need to demonstrate a business history to get this type loan program, especially thinking about the fact that food isn’t long-term collateral. An inventory loan is often a short-term loan of 6-12 months.
Merchant Cash Advances
These are normally negotiated with your current credit card processor, or you may have to contract with one that will provide you the merchant cash advance. This type of funding arrangement is primarily based on the potential sales. Generally the terms contain the processor taking a portion of daily credit card sales till the cash advance amount is repaid plus the agreed-upon percentage.
Invoice factoring program is basically selling your account receivables at a discount in exchange for the funding. However, most of the restaurant businesses aren’t selling the services without getting the immediate payment. It can be feasible when you have catering debts.