How do restaurant ideas get funding?

Posted by Damian Roberti on August 9, 2022

What exactly does it mean to finance a restaurant?

The term "restaurant finance" refers to the money that is obtained (borrowed or loaned) by a restaurant from a lending institution such as a large national bank, a small regional bank, the Small Business Administration (SBA), or an alternative financing source. This is money that has been borrowed or loaned out with interest attached to it.

The typical loan amount for a small business in the United States is close to $400,000, and the typical interest rate on a small business loan ranges from 2.5 percent to 5 percent. The conditions of the available financing alternatives for restaurants are extremely variable, and can include a variety of repayment schemes in addition to other benefits and drawbacks. In a moment, we'll get into the specifics of the situation.

When it Comes to Financing, Why Do Restaurants Apply?

You wouldn't be the only one to contemplate submitting a loan application, either. In point of fact, restaurants offering full-service are the most common recipients of SBA loans, with approximately 30,000 eateries receiving such loans in 2019. On top of that, during that same year, loans from the SBA were granted to roughly 20,000 additional limited-service restaurants, with the dental business coming in a distant third.

There are many different reasons why restaurant owners decide to seek for financing, but in the end, it comes down to a personal choice that is unique to each individual restaurateur. Let's take a look at the three explanations that crop up the most frequently.

1. Establishing a Brand-New Business

The opening of a restaurant is a period filled with excitement, but it may also be filled with anxiety. It takes a lot of financial investment to get a restaurant up and running. A building, employees, equipment, and a marketing budget are required, in addition to food, of course.

Because of the intense competition in your market and the little margins of profit you can expect, it is critical that you carefully handle your company's finances at all times. This is especially true when you are first getting started and trying to build traction in your market. For this reason, a restaurant loan is frequently an essential component in the process of beginning a new enterprise or expanding to another location.

2. Restaurant Renovation

When was the last time you upgraded your ventilation system, walk-in refrigerator, or oven? You don't want to be working with equipment that isn't up to standard because these are essential components of an efficiently managed commercial kitchen. Because of the high cost of this type of kitchen equipment, you could require some more funds to assist you in making the purchase. Financing options are available for businesses in this industry, including restaurants.

You can pay for up to one hundred percent of the purchases made in a commercial kitchen by gaining access to this type of funding, which is a rather simple and uncomplicated approach to obtain funds. In this manner, you won't have to be concerned about high-priced ingredients obtained locally going bad in a malfunctioning refrigerator.

3. Restaurant Rebranding

If the fact that your restaurant has used the same logo for the past ten years is driving you absolutely insane, you may be wanting to rebrand the company. This is a natural step in the development of a restaurant, and it may have a beneficial effect on both your reputation and your bottom line; but, before you can start the process of rebranding, you will need to come up with the financial resources.

The quantity of money you'll need is directly proportional to the scope of your rebranding effort. Are you going to use the same brand colors but switch up the design of your logo and menu? Or are you planning to completely redecorate your venue and install brand new furnishings? If the latter is the case, you will likely want funding for your business. Let's look into the different ways that we may make it happen.

The 7 Different Ways That a Restaurant Can Obtain Financial Support

There is no one technique that is inherently superior to any other when it comes to understanding how to finance a restaurant. Listed below are seven possibilities for you to think about, depending on the circumstances.

1. Loans from conventional banks

You might be able to get a conventional bank loan for your restaurant from either a major national bank or a small regional bank. Both of these types of financial institutions provide these kind of loans. Borrowing a predetermined sum of money for a predetermined period of time at a predetermined interest rate is typical for loans offered by traditional lenders such as brick-and-mortar banks. These loans typically come with an agreement that must be fulfilled on a monthly basis and that expires within a year's time.

Advantages and disadvantages

Large banks lend an average of $243,000 to small businesses, whereas smaller banks typically provide only $156,000 in loans to small enterprises. Traditional bank loans offer a number of benefits, one of the most significant of which is the opportunity to gain access to a significant quantity of capital. One more advantage of these loans is that the interest rates are typically cheaper than those offered by other alternatives.

On the other hand, restaurants typically have a difficult time getting regular bank loans approved, which is a limitation of this type of financing. This is especially true of large banks, which often have an approval rate for small company loans that is lower than 14 percent. Small bank loans have an acceptance rate that is lower than twenty percent of the time.

In addition, in order to get a loan, financial institutions would typically need collateral from the restaurant owner. This could be in the form of cash, stocks, or real estate. However, borrowers do not always have the ability to produce collateral when they apply for loans. If you're just getting started, getting a bank loan might also be a particularly challenging endeavor. Be ready for some lenders to turn down your application because their rules might require that your restaurant has been operating for at least a year in order for you to qualify for financing.

Alternative Lending Options

Many restaurant owners view obtaining finance from alternative lenders as an appealing and potentially fruitful course of action. Online lending platforms such as OnDeck, Kabbage, LendingClub, and FundingClub are examples of the types of lenders that fall under this category. Although there are alternative lenders that offer loans of up to $200,000, the typical amount for a loan of this kind to a small business falls somewhere between $30,000 and $50,000.

Loan applications and approval times for non-traditional restaurant financing are typically very short. Some can even be accessed within twenty-four hours of submitting an online application. The duration of loans might range from a few months to several years, and the interest rates can be quite different. When establishing your eligibility for an alternative loan, your credit score is taken into consideration, just as it does with a bank loan.

Advantages and disadvantages

If you are planning to open a new restaurant, it is quite likely that you will have more success obtaining money from a non-traditional lender than from a bank. Because some alternative lenders will give you with collateral equal to 50 percent of your loan, it is possible that you will be able to obtain the loan even if you do not present any collateral in exchange for it. These types of loans for restaurants have acceptance rates that are greater than loans for brick-and-mortar businesses, coming in at over 25 percent. This is another advantage of these kind of loans.

However, even non-traditional lenders will typically still need that your restaurant has been operating for at least 30 days in order to qualify for financing, which might be a disadvantage for some new business owners who want to operate restaurants. Additionally, the interest rates on these loans can be as high as a 99 percent annual percentage rate, which means that you will likely want to pay off the money as quickly as you can. However, you may not have the option to do so if your lender penalizes early repayment, as some lenders do. If your lender does not penalize early repayment, however, you will likely want to pay off the money as quickly as you can.

Funding provided by the Small Business Administration in the form of loans

The Small Business Administration (SBA) provides business owners with a variety of funding alternatives, ranging from an average of $100k to a maximum of $5 million in loans; however, its guaranteed lending programs are particularly applicable to restaurant owners.

If you wish to buy a building for your restaurant, the 7(a) Loan Program offered by the Small Business Administration is probably the best option for you to pursue.

This is by far the most well-attended program that the group offers. On the other hand, if you are interested in obtaining financing for a sizable piece of machinery, the 504 Loan Program is most likely your best option. In addition, the Microloan Program for Startups offers funding of up to $50,000 to get your business off the ground, even if you only require a modest injection of capital.

Advantages and disadvantages

The approval rates for SBA loans are typically higher than those for bank loans and other alternative forms of funding, which is one of the primary advantages of these types of loans. They also have interest rates that are within a respectable range, ranging from 5.5 to 8%. To be eligible for a small business administration loan, your credit score does not need to be very high. If you score 690 or better on the exam, you should be able to qualify for the position.

SBA loans, like any other type of restaurant financing option, come with their fair share of drawbacks. If you are applying for a loan that is greater than $25,000, the Small Business Administration will most certainly need you to provide collateral in exchange for the funds. This may include financial assets. In addition, the approval process for these loans is longer than the approval process for alternative loans. It is possible that it will take anything from thirty to sixty days before you find out whether or not your application was successful.

4. Line of Credit for Businesses

Restaurant owners also have the option of obtaining money through a line of credit. Your credit score, along with a number of other considerations, will play a role in whether or not you are approved for a line of credit, which is similar to a loan. On the other hand, there is a significant distinction.

According to Investopedia, loans have a non-revolving credit limit, which indicates that the borrower only has access to the funds when the loan is initially taken out. After that, the borrower is responsible for making payments that include both the principal and the interest until the loan is paid in full. The borrower gets a predetermined credit limit with a line of credit, just like with a credit card, and is required to make regular payments that include both the principal and the interest on the loan. The borrower, in contrast to the case with a loan, is granted unrestricted and repeated access to the line of credit while it is still open.

Advantages and disadvantages

If you want to make a number of smaller purchases over a longer period of time rather than one large purchase at one time, the fact that a line of credit provides continuous access to funds may be an advantage for some restaurateurs. For instance, those who want to make a series of smaller expenditures over a longer period of time rather than one large purchase at one time.

Do not postpone the process of applying for a line of credit until you are in a position in which you absolutely require one. Keeping in mind that it may be challenging to access lines of credit when your financial situation is precarious is one reason why you should not wait. You should apply for a line of credit well in advance of any major purchases you intend to make.

5. A Cash Advance Obtained From a Retailer

A merchant cash advance (MCA) enables restaurants to receive funds against future payments. This type of financing is best suited for companies who have an immediate need for finance to address either unexpected short-term expenses or gaps in their cash flow.

According to NerdWallet, "with an MCA, a company lends you an upfront quantity of cash that you return using a percentage of your debit and credit card purchases, plus a charge." You can get more information about merchant cash advances here. An MCA is typically set up such that the provider takes an automatic deduction of a daily or weekly percentage of your debit and credit card sales until the advance is paid off in full. This is the usual way in which an MCA is established.

Advantages and disadvantages

MCAs are typically authorized in a short amount of time, and you can have the money in your possession in as little as 24 hours. In addition, even if your company is just starting out or if you have a history of bad credit, it is possible that you will still be approved for the loan, which is not the case with other types of loans.

One of the issues that is associated with MCAs is the fact that some of them demand a daily payment, which can be challenging to keep up with. You will also want to steer clear of taking out more than one MCA at a time because this type of financing might bury you in high interest (we're talking about rates in the triple digits here).

6. Relatives and friends

Everyone reacts to the prospect of borrowing money from family and friends in their own unique way. And the amount of wealth that one's own family and friends have can vary greatly (and varying levels of willingness to lend it to others). Therefore, this method for financing your restaurant might work for you, but it also might not.

If you do want to pursue this option, make sure that you and your partner reach an agreement on the terms of the loan as well as the amount that you are both comfortable with. How long do you anticipate it taking you to pay back the money, and will you be subject to interest charges? If so, how much would it be? What will happen if you are unable to repay the money according to the parameters that were originally agreed upon?

Advantages and disadvantages

One of the most significant advantages of borrowing money from family or friends is that they might not expect you to pay interest on the money you borrow from them. However, this is not always the case because they are allowed to lawfully charge interest at a rate of up to approximately 18 percent.

Borrowing money from loved ones and close friends comes with its fair share of potential complications as well. These range from having to deal with the logistics of borrowing modest sums of money from a number of different individuals to perhaps putting a strain on your relationship with those people over the matter.

It is important to keep in mind that, from a legal standpoint, you will want to obtain your loan arrangement in writing in order for it to be enforceable and to protect all parties involved in the transaction. Moreover, if a member of your family or a close friend gives you money for your restaurant as a present, you may be obliged to report this income when you file your taxes, depending on how much money was given.

7. Funding via a crowd

Through the use of crowdsourcing, as opposed to obtaining money from a single lender, you are able to gather funds from a wide group of individual contributors. Because of this, it is an appealing choice for restaurants with a focus on community or grassroots activism.

You have the ability to share your pitch with a wide variety of possible investors all over the world when you use online crowdfunding platforms. After that, they will be able to make financial contributions directly through the site.

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