Many people at one time in their lives dream of opening their own restaurant. They may have a great idea with the energy and devotion to make it happen. However, the one essential ingredient that they do not have is the financial wherewithal.
Here is the typical requirement scenario for traditional bank funding. Begin with the fact that banks consider an independent restaurant startup loan to be highly risky. To the point that they will not even consider financing options for startup restaurants. Which puts us back to square one – and wondering where to turn for financing a startup restaurant.
There are a lot of aggressive lending institutions that are at least willing to consider an independent restaurant startup. Aggressive lending institutions also charge hefty interest rates and normally require a personal guarantee. We recommend skipping these funding options and encourage our clients to look for bank financing.
The chances of getting bank financing are greatly enhanced if the bank is SBA approved and you are a franchisee of a successful national restaurant franchise company that provide proven franchise style operating systems. In all cases, the bank will require the following: Liquid collateral of a dollar for dollar of the amount that you are borrowing. The bank would loan 80% of the project cost only and require you to provide the 20% balance.
A typical bank loan will be for no more than five years but with an SBA guarantee, the bank will normally extend terms to 10 or 12 years. A bank that may be considering the loan will base their decision on three primary factors: 1. Collateral requirements. 2. A comprehensive business plan that makes economic sense. 3. The applicants work history and demonstrated business acumen.
Being able to create a successful business plan has helped a number of startup restaurants get bank financing without being part of a nationally syndicated franchise chain. Other forms of financing could be a combination of bank funding, FF&E (furniture, fixture and equipment) lease financing and private investment. FF&E leasing can be extremely expensive and venture capital investors will demand usurious terms. Therefore the most viable alternative funding for an independent restaurant concept startup will be from family and friends.
Typically the best type of business arrangement for investors will be a Limited Partner structure whereby investors have no contingent liability and only risk the $$ that they have invested. Aggressive pay backs will be needed to make the deal attractive. I.e., the investors receive 80% of all proceeds until they receive double their investment back and then an attractive % profits thereafter.
With 90% of all new restaurants failing during their first year of operation, a proven business plan with a detail towards capitalization of the first year creates a safety net that can help your startup restaurant get through the first year successfully. All financial options should be considered when creating a startup restaurant. Finding the right restaurant financing option depends on the answers to many of the scenarios outlined above.
For more than 40 years, Tom Wilscam has operated and helped others start restaurants. His experience has shown him the importance of having a proven concept and standardized operating procedures can help the new restaurant owner succeed. Wilscam has helped many restaurants get startup financing through the creation of a well-written business plan.
Besides individual restaurants, Wilscam also helped launch the Einstein Bagel Company, Juan’s Mexicali and other restaurants through a well crafted startup restaurant plan. For more information about W&W Restaurant Group and how Tom Wilscam can help your startup restaurant succeed, visit his website at http://www.noroyalties.com.