The Restaurateur Insights
How to Fund Your New RestaurantAugust 31, 2017
Buying and funding a new restaurant....a more difficult feat than some would think. Here’s four financing options that could help your restaurant get the funding it needs.
Realizing your dream of opening your own restaurant begins with fearless passion, hard work and determination. But it can only be made possible with adequate funding. How do you get your feet off the ground? It is crucial that you understand your options and make sure you are not placing yourself at a disadvantage.
First thing’s first—picking the location
Read our blog, “Is Buying an Existing Restaurant Worth the Risk?” for more information on the risks involved in buying an existing restaurant, as well as things you should keep in mind before making a purchase (location, reputation etc).
The rule of thumb in the restaurant industry is that you must have enough capital to run for the first year, and should have enough resources to cope with unexpected cost increases. After you have tapped into your personal savings and you are still in need of funding, here are four avenues worth exploring:
- Seller financing- This method of financing involves negotiating a loan directly with the seller, along with a customized repayment schedule. This method allows a two way benefit system, where the buyer is given a sense of security knowing the seller has a continued interest in the business, and the seller can ensure continued success of the restaurant he/she founded. However, under this option, the seller is also able to get the highest price possible by funding part of the acquisition.
- Borrowing from retirement- Taking an outright distribution from your 401(k) or IRA could be a risky move as it takes away money that is supposed to be used for your retirement but the good thing is—the money you take out is available immediately for your current needs. However, in most cases you will have to pay taxes on what you take out. If you are under age 59½ you will also be subject to a 10% early withdrawal penalty. One alternative option would be taking a loan against your 401(k) plan, if the plan allows for it. Check with your company’s plan administrator. If allowed to take a loan, you may be able to avoid the taxes and penalty, provided certain conditions are met. Loans are not available for an IRA plan.
- Peer to peer financing networks- If you have not yet established a credit history, or have a poor credit history, this option might be lucrative for your restaurant venture. Unlike traditional lenders, peer-to-peer financing networks do not use an official financial institution as the intermediary/middleman—therefore the loans give borrowers access to financing they might not otherwise get approval for.
- SBA loans- Small Business Association (SBA) loans are funds borrowed from a financial institution. While these loans are notoriously difficult to get because of the reluctance of financial institutions to lend to small start-ups and restaurants in particular, the right project and set of circumstances might persuade a lender to approve funds.
What about borrowing from family and friends?
Keep in mind that whenever high risk of failure is at stake, it is tough to tap into the generosity of family and friends. This might not be the best decision if they are not fully willing to take on the risk that your restaurant might not succeed.
Carefully weighing all financial options is crucial in this industry. While cash is the best option, it is not the only option. Many people dream of opening a restaurant, but hit a stumbling block when it comes to financing their idea. Questions? Contact our Hospitality Services Group.