Restaurant Funding?

One of the most frustrating parts of starting your own restaurant is getting the funding you need. I've spoken to many, many would-be-restaurateurs who've had a great idea for a restaurant, written out their restaurant business plan, taken it to their local banker, and been rejected. Unfortunately, in most cases, that is the end of their adventure and they give up and move on to something else.

First: your local bank isn't the only (or the best) way to get restaurant funding.
Second: maybe there are really good reasons the bank said "NO!"

How NOT To Get Restaurant Funding

Let's start with your business plan. Many rookie restauranteurs are not realistic with their expectations. Their restaurant has to be "perfect". This usually means overspending on design, build-out and top of the line fixtures and equipment. When the initial budget creeps higher and higher it reduces the chances of getting traditional restaurant funding through a traditional lender.

Imagine, for a moment, that you are a loans officer at a bank:
What would you be looking for? Would you be impressed by the aspiring restaurateur who wanted $800K to try out a new restaurant idea and was looking for funding. Or would you be more interested in looking at a plan to open the same restaurant, with the same profit potential, and had a start up budget of $100K?

Perhaps the second plan was budgeting for used restaurant equipment instead of new restaurant kitchen equipment. That would show the lender that the potential business owner understood the business realities of profit and loss.

Obviously, the lender would be more interested in the low dollar proposal with the same expectation of income. However, the restaurateur is looking to open the ultimate version of their dream. It's very hard to scale down your vision. As the budget goes down, the vision becomes more diluted. However, the chance of getting restaurant funding goes up!

So, Is Restaurant Funding Impossible To Get Through A Bank?

Yes and No. The economic downturn has definitely tighten credit lending qualifications. However, what is most important to a traditional lender these days is Risk/Reward valuations, and the track record of the borrower.

Imagine, once again, you are a lending officer working for a bank. An individual walks in and asks for $200K line of credit in restaurant funding to open a brand new restaurant.

That individual has never owned a restaurant before, and hasn't owned their own business before. Now let's contrast that with another individual who walks in and asks for a $200K line of credit to open a restaurant. They've opened and sold (or still own) 3 other successful restaurants. They have 25 years experience in the restaurant industry. As the lender, who would you grant funding to?

And I'll add one more piece to this restaurant funding equation. Most of the people I've spoken with who've been turned down by local lenders report they were asking for A LOT of money and didn't have a huge stake of equity included in their restaurant funding.

If you are thinking of opening a restaurant and need a total of $400,000 in restaurant funding, you'll find that the tradition lenders want to see 50% of that in your own personal cash as equity.

Many people who get turned down are asking for hundreds of thousands of dollars with very little of their own money invested. The bank says, "if these people haven't accumulated any wealth prior to this, what is their chance of success?" or, "Why aren't they investing more of their own cash?" If you don't have 50% of your proposed budget to put into your new venture as cash, perhaps you should skip applying for a bank loan.

Can you get a traditional bank to provide restaurant funding? Yes, if you have the collateral, budget, business plan and management team (or person) and a history of success.

If I Don't Have That, Can I Still Get Restaurant Funding?

Yes! You'll just have to work harder, and look in other places.

I would be remiss if I didn't mention getting restaurant funding from your family. If you are thinking about doing that PLEASE don't! Unless your family is a restaurant family where everyone has been involved in the business for years, don't jeopardize your family relationships by getting family to become partners or investors in your business. I've seen this situation end up tearing families apart. For every success story I've heard, I know of 20 situations where things didn't work out. Even with success restaurants their seems to be anxiety, frustration, and distrust after a while. Unless you are dealing with an investor who has a history in the restaurant industry you won't have shared expectations. And your uncle, who invested $5K, won't understand why he can't bring his friends for a free dinner and drinks every Friday night!

There are OTHER places to get Restaurant Funding

For the individual who is driven to start a restaurant there are always ways to fund your dream. There are other people (like current owners who are trying to sell), that will be much more motivated to help you get your dream of restaurant ownership financed. There are certain government agencies and programs that you might be able to apply to. They won't fund the majority of your new business, but they can help.

There are also investors that understand the business and are willing to lend money to eager, energetic start-up restaurateurs. Because of the high risk of these types of ventures the investor usually wants a huge percent and massive guarantees.

I found a situation where someone was willing to hold some financing so I didn't need any outside restaurant funding. You can read that whole story here......

One more thing to consider: The reason you are looking for financing for your restaurant is because of assumptions you've made. You think you need a deposit for your lease, new restaurant kitchen equipment, deposits for supplies and a healthy budget to decorate your interior. What if there was a way to eliminate or greatly reduce those initial cash outlays? How would that affect your required restaurant funding? What if you could cut out 80-90% of the opening costs in your restaurant business plan?

Yes, it can be done. Those entrepreneurs who are driven to open a restaurant will figure out a way to do it even if they can't get a traditional bank to give them their restaurant funding.