This post originally appeared on tBL member Mark Chase's blog Restaurant Real Estate Advisors Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
According to a survey of restaurant owners published on Forbes, it might take three years for an average restaurant to lock in a profit. While some new restaurant owners may already have the resources to fund their new business, it’s very common to underestimate costs and run short.
One of the most common reasons for the failure of new businesses in general is a lack of capital. The restaurant business may be particularly vulnerable to this risk.
Where to Find Funding for Restaurants
Bank loan officers might agree to lend a restaurant owner money for startup, operating, or growth costs. However, banks tend to look for owners who have already proven themselves in the industry or in some other business. They usually want proof of an owner’s stake and good business credit scores before they will approve a loan. Banks also tend to favor large and long-term loans.
For established restaurant owners who need a large loan, a bank might offer the best option. For example, a restaurant owner with a few years in the business might contact a bank for money to build a second restaurant that is similar to one that has already been successful. However, new restaurant owners may encounter barriers to an approval if they cannot demonstrate experience and good credit.
- Online Lines of Credit
Online lending platforms may lend from $2,000 up to $100,000 for funding for restaurants. These lenders also want to see some proof that the restaurant owner can bring in revenues. However, they may not require as long as a track record as a traditional bank will. In addition, they don’t require business credit scores and can use other information to validate a borrower.
An online lender might offer a fairly new restaurateur a good option. The owner can apply and get approved online very quickly. In addition, online lenders are famous for funding approved loans very fast. The lender will only require the business owner to pay fees on the amount of money they need to withdraw, so this can be a very flexible option for a newer business.
- Business Partners or Investors
Investment money isn’t a loan; it’s actually a purchase of a share of the business. This is positive because it doesn’t require the owner to go into debt so quickly. On the other hand, the original founder may have to give up some control of his or her business to the investor.
People who would rather give up some control in return for greater security may benefit from finding a partner or investor. Still, it might be tough for fairly new owners to find wealthy people or partners who are willing to take a risk. Finding investors isn’t always easy.
- Personal Resources or Friends and Family
Most new U.S. businesses rely somewhat on personal resources. For example, the owner may choose to use his or her personal credit or savings account to fund the dream of owning a restaurant. While it’s common to use personal funds or ask friends and family to help, this approach has its limits.
It takes money to establish and run a restaurant until it turns a consistent profit. Unless the owner has access to wealthy relatives, he or she will risk running out of funds before the business really has a chance to thrive. If personal loans from friends and family can’t get paid back, the owner also risks hurting relationships with others.
When Should Restaurant Owners Consider Funding?
The best concept for a new eating establishment will fail if the owner lacks sufficient resources to keep it in business until it can sustain itself. Some low-investment kinds of restaurants may succeed very quickly, but commonly, it takes several months or even a few years.
One of the first thing a restaurant business should do is create a business plan that outlines how the company can pay operating expenses during the initial founding and growth stages. The process of drawing up these plans can help the potential business owner understand the reality of the restaurant business. In addition, the owner will need a good business plan to attract many lenders and investors and therefore gain the capability to keep their restaurant business growing long into the future.
Article provided by Kabbage.com.
Kabbage helps small businesses get the funding they need to grow. Through a fully automated, online platform, businesses can link their latest business data, allowing us to review the overall health of their business to approve and provide lines of credit up to $100,000 in minutes.